Selling commercial property is often more complex than selling a residential home, particularly when VAT is involved. Whether VAT is payable can affect the ultimate amount payable by the Buyer, the buyer’s funding arrangements and the stamp duty land tax payable by the Buyer.
Many buyers and sellers assume that VAT always applies to commercial property, but this is not the case. The VAT position depends on several factors, including the type of property, whether the owner has made an option to tax, and whether the sale qualifies as a Transfer of a Going Concern (TOGC).
At AFG Law, our Commercial Property solicitors regularly advise business owners, landlords and investors on commercial property transactions.
Is VAT Payable on Every Commercial Property Sale?
No, although many people associate commercial property with VAT, the default position is that many sales of commercial land and buildings are exempt from VAT. This means that, unless certain steps have been taken, the seller will generally not charge VAT on the sale.
However, one of the most common exceptions is where the seller has made an option to tax.
Understanding the VAT position at the outset is essential, as it can have a significant impact on the overall cost of the transaction.
What is an Option to Tax?
An option to tax allows a commercial property owner to choose to tax the property for VAT purposes.
Once a property has been “opted”, most supplies relating to that property become subject to VAT, meaning VAT will usually be charged on its sale or rent payable pursuant to the lease.
Property owners often choose to “opt to tax” because it allows them to reclaim VAT they have incurred on development, refurbishment or other property-related expenses. Without an option to tax, recovering VAT on these costs may not be possible.
Why Would Someone Opt to Tax?
For many commercial property owners, the decision to make an option to tax is largely driven by the ability to reclaim VAT.
For example, a landlord carrying out substantial refurbishment works may incur significant VAT on contractors’ invoices and professional fees. By opting to tax, the landlord may be able to reclaim that VAT, provided the relevant conditions are met.
The decision should always be taken with professional tax advice, as it can have long-term consequences for future sales and lettings.
How Do I Know If a Property Has Been Opted?
One of the first questions a buyer should ask is whether the landlord has opted to tax the property. An option to tax generally needs to have been notified to HMRC, and the seller’s solicitor will usually confirm whether an option is in place during the property sale process.
This information is important because it determines whether VAT is likely to be payable and whether the buyer needs to consider the wider tax implications of the purchase.
What Happens if VAT Applies?
If a commercial property sale is subject to VAT, the seller will usually charge VAT at the standard rate in addition to the agreed purchase price. For example, if a property is sold for £500,000 and VAT applies, the buyer may also need to pay VAT on top of the purchase price.
This can have significant cash flow implications, particularly where funding arrangements have already been agreed. Understanding the likely VAT charges before exchange of contracts helps buyers budget accurately and avoid unexpected costs.
Can the Buyer Recover VAT?
VAT can be recovered in some circumstances. Whether a buyer is capable of recovering VAT depends on their individual circumstances and how they intend to use the property.
For example, a VAT-registered business using the property for taxable business activities may be able to recover some or all of the VAT paid. However, every business is different, and specialist tax advice should always be obtained before proceeding with a transaction.
What is a Transfer of a Going Concern (TOGC)?
One of the most important VAT reliefs available on commercial property transactions is the Transfer of Going Concern (TOGC). Where the necessary conditions are met, a qualifying Transfer of Going Concern may allow the sale to take place without VAT being charged, even where the property has been opted to tax.
A TOGC commonly arises where:
- A property is being sold with tenants already in occupation.
- The buyer intends to continue letting the property.
- Other qualifying conditions are satisfied.
If the transaction qualifies, the sale may fall outside the scope of VAT altogether.
Because the rules are technical, professional advice should always be obtained before assuming a transaction qualifies.
What About Commercial Leases?
VAT is not only relevant when buying or selling property. If a landlord has made an option to tax, they will usually also charge VAT on rents payable under a commercial lease. This means tenants should be aware that VAT may be added to:
- Annual rent.
- Service charges.
- Other sums payable under the lease.
The VAT position can therefore affect both landlords and tenants throughout the lifetime of the lease, not just when the property is sold.
Why Does VAT Matter?
The VAT treatment of a commercial property transaction can influence:
- The overall purchase price and stamp duty land tax payable.
- Cash flow.
- Funding arrangements.
- Whether VAT can be recovered.
- Future rental income arrangements.
- The ongoing management of the property.
Understanding the VAT position at an early stage can also help avoid delays during the conveyancing process and reduce the risk of unexpected issues arising before completion.
Why Legal Advice is Important
Commercial property transactions often involve much more than agreeing a purchase price. Solicitors work alongside accountants and tax advisers to identify potential issues, review contracts and ensure that VAT provisions accurately reflect the intentions of both parties.
Obtaining early legal advice can help ensure that the transaction is structured correctly and that any VAT issues are identified before contracts are exchanged.
How AFG Law Can Help
At AFG Law, our experienced Commercial Property solicitors advise businesses, investors, landlords and developers on all aspects of commercial property transactions.
Whether you are buying, selling or granting a sale or lease, we can advise on the legal aspects of the transaction, liaise with your accountant where appropriate and ensure the documentation reflects the agreed VAT treatment.
If you are unsure whether a property is subject to VAT, whether an option to tax has been notified to HMRC, or whether a transaction could qualify as a Transfer of a Going Concern, our team can provide clear, practical advice tailored to your circumstances.
Contact AFG Law today to speak to one of our Commercial Property solicitors about your proposed transaction.