Understanding VAT for commercial property investments

Understanding the intricacies of Value Added Tax (VAT) is vital when diving into the world of commercial property investments.

By gaining clarity, you can make informed decisions, optimise your finances and sidestep potential pitfalls.

When is VAT applicable on commercial properties?

Commercial property ventures can be classified into four categories – ‘standard rated’, ‘zero-rated’, ‘outside the scope’ and ‘exempt’.

Properties under the standard-rated category have a VAT rating of 20 per cent.

Typically, the purchase or lease of commercial properties is exempt from VAT, sparing both the buyer and seller from any VAT obligations.

However, there are exceptions to this, including:

·         Newly constructed commercial properties (less than three years old) are classified as standard-rated

·         Owners have the flexibility to apply VAT, referred to as ‘opting to tax’, on rental amounts, which then become standard-rated

·         Specific commercial refurbishments might also be under the standard-rated VAT category

The decision to ‘Opt to Tax’

Choosing to ‘opt to tax’ your property implies a decision to levy VAT on its rent.

The primary advantage here is the potential recovery of VAT on correlated costs such as repairs, upkeep or professional fees.

However, this might not always appeal to tenants, particularly those who cannot recuperate the VAT.

Transfers of going concern (TOGC)

In certain scenarios, a commercial property transaction can be classified as a TOGC.

If the property being sold is already set up as a rental business (existing tenants or an ongoing lease), and the potential buyer plans to maintain this model, it might be considered a TOGC.

Properties categorised as a TOGC are classified as ‘outside the scope’ of VAT, eliminating any VAT payment. This can be financially advantageous for buyers in such situations.

To be recognised as a TOGC, the buyer should mirror the seller’s VAT status by the date of transfer.

Essentially, if a seller is VAT-registered and has chosen to tax the property, the buyer should follow suit.

It is crucial that this ‘opting to tax’ decision is communicated to HM Revenue & Customs (HMRC) prior to the transfer cut-off.

Seek expert advice

Due to the intricacies of VAT, it is strongly recommended to liaise with accounting specialists.

The ever-evolving landscape of VAT regulations can be challenging, and any oversight could attract hefty fines.

Each transaction stands on its unique merits and calls for tailored accounting guidance. Collaborating with accounting professionals ensures that you are on the right side of the regulations, protects your financial interests and provides insight into upcoming regulatory changes.

Although VAT rules linked with commercial properties might seem overwhelming, by understanding the basics and recognising areas for savings, you can confidently handle VAT nuances.

For more advice on VAT for commercial property investments, get in touch with our expert team for advice.