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Hot Topic - VAT on Commercial Property     

We are seeing a lot of queries in respect of the VAT on commercial property. This can often be a forgotten part of purchasing a commercial property. This affects owners of commercial property whether they are landlords or owner occupied.

If you purchase a commercial property, the purchase price could attract VAT or not attract VAT. If one of the following exists, you will have to pay VAT on the transfer:

  • The commercial property is less than three years old
  • The current owner of the property has elected to register the property for VAT (known as Opting to Tax the property).

If you have a VAT registered company and make taxable supplies, you can usually reclaim the VAT charged to you. There are specific procedures for doing this depending on what you are using the property for. If you do not make VAT-able supplies, the VAT element will be an additional cost to you and cannot be reclaimed. It’s also worth noting that Stamp Duty is also payable on the price plus VAT and not the net price.

If you are not charged VAT on the property at purchase, you can then decide whether you, as the new owner, should elect to Opt the Property to tax. This would enable you to reclaim VAT on repairs etc during your ownership. This does however mean that you need to charge VAT on any future sale of the property and charge VAT on any rent payable by a tenant.

Common pitfalls include:

  • Not charging VAT on the sale of the property, when the property has been opted
  • Charging VAT on the property when no Option to Tax has been put in place
  • Reclaiming VAT on repairs to the property when no Option to Tax has been provided
  • Not getting the treatment of monthly rentals correct

It is crucial that as a business owner, the above is understood or at worst, it could add 20% to your purchase or, at best, require the business to have a temporary 20% cash funding requirement until the VAT can be reclaimed. If you have any doubt on how your commercial property should be treated, please give us a call.

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