PROPERTY LAWYERS: ARE YOU THINKING ABOUT VAT?
VAT and property transactions is a complex and niche area of Tax Law. VAT must be considered on everything from straightforward purchases to land exchanges, leases, surrenders and even options over land.
This short article flags a couple of common VAT considerations that any property lawyer should have in mind when a client engages on a commercial property purchase.
Firstly, has the property been ‘opted to tax’? In simple and practical terms, this means will VAT be charged on top of the purchase price?
For most businesses VAT charged on the purchase price should not be a problem as it will be recoverable (on the basis that the business that the purchaser carries on is a standard VATable business itself).
However, property lawyers should be aware that if the client buying the land carries on a business which is ‘VAT Exempt’ (because it is a financial services business). For example – the VAT charged on top of the land purchase price will not be recoverable, it will be a real cost. Property lawyers (with help from their tax colleagues) should identify this pitfall at the outset of the transaction so that alternative properties which have not been ‘opted’ for VAT may be considered as more efficient alternatives.
Another possible way to avoid VAT on the purchase of a property is if the sale of the property amounts to the ‘transfer of a business as a going concern’ or ‘TOGC’. In order for a property sale to be classed as a TOGC, it must amount to a ‘property rental business’ which in effect means a building or group of buildings subject to leases, which generate a rent roll. The buyer of such a property is in VAT terms buying a property rental business (rather than a piece of land), so the purchase price is outside the scope of VAT.
In order for a sale to qualify for TOGC treatment, various conditions must be met both in terms of the transaction satisfying certain ‘business tests’ and in terms of technical VAT rules and documentation.
Ensuring that these various requirements are met and properly documented is the responsibility of the tax lawyers. It’s imperative that tax specialists carry out this analysis because a failure to achieve TOGC VAT status can have very costly consequences for a purchaser. Not only would VAT be payable on the purchase price of the property (which may or may not be recoverable depending on the nature of the purchaser’s business) but the Stamp Duty Land Tax (SDLT) that the purchaser would pay on acquisition would be on the price plus VAT rather than just the price. This extra SDLT is a non-recoverable cost for the purchaser. For example, if a commercial property is £5M and fails to qualify for TOGC treatment the price plus VAT will be £6M giving rise to an SDLT increase of £50,000 from £239,500 to £289,500.