VAT on Property – the sting in the tail
When buying land you should always consider the VAT implications. The default position is that supplies of land are VAT exempt. This is why residential sales are VAT free.
Commercial property is more complicated. Commercial owners are able to waive the exemption and choose to charge VAT on a property transaction – the so-called Option to Tax. Voluntarily choosing to charge VAT may seem counterintuitive but doing so allows a property owner to claim VAT back on expenditure. It is very common for example where a building has been let out to tenants for the landlord to opt to charge VAT.
Once this has been done, on the sale of that land, VAT must be charged (subject to the going concern exemption mentioned below). A buyer can only claim this tax back if they are also VAT registered. Stamp Duty Land Tax will be charged on the gross amount (purchase price plus VAT). The buyer will pay tax on a tax. Where a building that would otherwise have to have VAT added to the price is sold as a going concern (because for example it is already tenanted) no VAT will be charged IF the buyer has made its own election to charge VAT. This must always be done before completion. Sometimes it has to be done before exchange of contracts.
Workloads at HM Revenue and Customs are such that it can take weeks before the confirmation of any election is received. If the original application is wrong, VAT must be charged at completion. It is therefore vital to look at the VAT implications at the earliest possible stage of a deal.
This is a summary of the main principles only and the facts of each case will differ.