Commercial Property and VAT

Doozergirl

Completely independent to the thread of a similar name

Why is some commercial property subject to VAT and some not?

Alan_M_2

Rent on commercial property is exempt from VAT, however, this means the owner cannot reclaim any input tax on repairs or improvements to the building.

You can elect to opt out of the exclusion, in which case the rent is subject to VAT but the owner can then reclaim input VAT in the normal manner.

Doozergirl

Same with purchasing the property outright?

If I purchase a commercial property with the view to (rebuild) renovate and extend?

Alan_M_2

I think purchasing is different and it might come down to the history of the building. My knowledge is limited to my own experience of commercial leasing, so I'd ask my accountant about the purchase side.

It may come down to something as simple as if the vendor is VAT registered.

Doozergirl

Cheers buddy! :beer:

JasonLVC

As Alan M quite correctly states, rent is exempt in law which means the landlord/owner cannot charge VAT on the rent and therefore as he is not charging VAT, he cannot recover any VAT he incurs on expenditure such as roof repairs, etc.

For commercial properties only, the landlord/owner can opt to tax (or waive exemption as it is also known) which turns the rental charge into a standard rated (17.5%) one. This means the landord/owner is now charging VAT and so can recover any input VAT (expenditure VAT) related to the property. Most commercial properties are opted to tax for this reason.

Now, with regard purchasing it there are two transactions going on here.

The sale of the property to you from the vendor (seller) will either have VAT or not on it depending upon whether the vendor had opted to tax - see above. If the owner opts to tax then he MUST sell the property with VAT on. This means the seller can recover any input VAT on solicitor/estate agents fees as well of course. That's the first transaction. Get your solicitor to confirm the vendor has a valid option to tax in place - HMRC issue a certificate of proof so client should produce one and this crosses the T's in your transaction.

What you do with the property once you've bought it will determine whether you can recover the VAT or not that the vendor has charged you. If you renovate/extend it you will incur input VAT of course. If you intend to rent the property to tenants then you have to decide if you want to opt to tax the property or not. If you do, you charge VAT on the rent and you can recover all input VAT, including the VAT charged on the property sale. If you decide to keep the building for your own use then you can only recover the input VAT if your business occupies the property and your business is VAT registered.

The option to tax is the responsibility of the VAT registered person, so when the vendor sells it, if you do want to rent and charge VAT you must then opt to tax the property as wel. VAT1614 form, see HMRC website for a PDF.

If you intend to convert the commercial property into a residential one then the works may attract a lower rate of VAT at 5% and if you sell the newly built flats outright then these are zero rated (0%) and you can recover all your input tax. If you retain the residential conversions and act as landlord, residential rent is always exempt, you can't charge it and you cannot recover ANY input VAT charged such as costs for renovation or original purchase VAT.

Trust that makes sense. LAnd & Property is a complictaed one when it comes to VAT. But now you know where to come!.;)

Doozergirl

Thanks JasonLVC - I think I got that! My eyes tend to glaze over when my accountant starts talking - I just cannot grasp it at all.

The building I am looking at, we would actually occupy ourselves on a commercial basis. The business would have to become VAT registered anyway; so we could claim it back? How long does that take? Adding 17.5% to the value of a building means taking a bit of a financial kick in the teeth!

It's a Grade II listed building - does this mean we pay a reduced rate of 5% VAT on the works? Can you answer that? If so, do we ask suppliers to bill us at 5% or do we claim back?

(This is moving well away from house prices isn't it! )

benood

If you are adding anything new to a listed building for which you have got listed building consent then the addition is zero rated for VAT which means an instant saving of 17.5% if you are not VAT registered - only applies to new things rather than renovations - ie if you were extending that would be zero rated, but new roof = standard rated.

Also I think that once you've opted to tax on commercial property that's it for 25 years - if someone with a VAT exempt business (or non registered) wants to rent from you then they're stuck with irrecoverable VAT so would generally go elsewhere.

Take professional advice before doing anything.

JasonLVC

Doozergirl wrote: »

Thanks JasonLVC - I think I got that! My eyes tend to glaze over when my accountant starts talking - I just cannot grasp it at all.

The building I am looking at, we would actually occupy ourselves on a commercial basis. The business would have to become VAT registered anyway; so we could claim it back? How long does that take? Adding 17.5% to the value of a building means taking a bit of a financial kick in the teeth!

It's a Grade II listed building - does this mean we pay a reduced rate of 5% VAT on the works? Can you answer that? If so, do we ask suppliers to bill us at 5% or do we claim back?

(This is moving well away from house prices isn't it! )

I glaze over too sometimes and I'm a VAT specialist!.

If you occupy the building then it makes sense to register for VAT (form VAT1, HMRC has PDF), presuming you can. I'm assuming what you sell is a taxable service or product (ie, you're not into insurance/banking or funeral parlours!). You can register for VAT at any time voluntarily and as the processing time is currently around 60 working days (2 months), suggest you get the VAT1 application in sooner rather than later. You can recover any input VAT incurred on capital items or stock going back 3 years provided you still have the asset/stock - so you'll be ok with regard the building. You can also recover any VAT incurred on services going back 6 months from registration - so you'll be ok for legal fees incurred on purchase also.

The trick is to submit the registration for VAT before you make the purchase and tell HMRC the VAT return periods you want (normally qtrly) so if you intend to buy the property in say, November, send the VAT1 in September and you should get a number in November. Ask HMRC for return periods starting December/March/June/Sept and you can reclaim the VAT on your 1st VAT return due in December - only one month from your registration!. You can then write to HMRC and request a change in acounting period to then be inline with your proper accounts April/July/Oct/Jan or whatever they are. A bit sneaky but always works for me.

As for the building. Grade II listing is a complicated area. You have to be sure the approved planning consent is for alterations, not maintenance and repair. Seek advice when you get to that stage as it can be costly if you get it wrong. For example, replacing a sash window with a sash window is a repair (17.5%) but widening the aperture or replacing a sash with a different type of opening is an alteration. A repair to the roof tiles is just that, but making a flat roof ptiched or a pitched roof flat is an alteration.

You would ask the contractor to bill you at 5% and then recover that VAT on your VAT return. This will help cashflow further as you're pying less out in the first place. Contractor may ask you to provide a reduced rate certificate - this is basically a word document you can knock up that says you are liable if HMRC later find the 5% was charged in error and the works are not eligible. HMRC website has example documents for you to use.

Sorry about size of post, but you can't do VAT queries in one line or less!. The 5% only relates to approved works so architect fees, legal fees, furnishings and fabrics, etc are not included - these will all be at 17.5% - but still recoverable of course!.

If you can post here or PM more details of what the extension/redevelopment works consist of when you know nearer the time, then I'll be able to give more refined guidance on what can and can't be at 5%. No charge of course, this is MSE!.

Doozergirl

Thank you! It's actually starting to make sense to me! :eek:

I may well take you up on your offer - it will be nice to have an idea; thanks I've got quite a lot of homework to do on the consents front and then I have to get an offer accepted!