VAT in relation to commercial property PDF

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Summary

notes on VAT relating to commercial property for LPC real estate....

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VAT: What is VAT? VAT is chargeable in respect of supply of goods or services made in the course of a business. Supplies can be: -

Exempt} not subject to tax Zero Rated} taxable but at 0% Standard-Rated} subject to VAT at the current standard rate which is 20%.

This depends on the circumstances. The effects of VAT on residential properties: i) ii) iii) iv)

Sale of a green field = exempt but subject to option tax Construction and civil engineering works = zero rated Legal and other professional services = standard rated Sale or lease of a new house = zero rated.

Effects of VAT on commercial properties: i) ii) iii) iv)

v)

vi)

Sale of a green field = exempt but subject to option tax Construction and civil engineering works = standard rated Legal and other professional services = standard rated Sale of a new freehold building = standard rated } enables a developer to recover the potentially significant amount of input tax he incurred in developing the site. For these purposes ‘new’ = one completed 3 years prior to the sale. Sale of an old freehold building = exempt but subject to option tax ] if no input tax has been incurred the individual is unlikely to exercise the option to tax because it will make the property unattractive to VAT-sensitive buyers. Grant or assignment of a lease = exempt but subject to option tax

Exempt supply = no input tax can be recovered from HMRC. This is why there is an option to tax which can turn an exempt supply into a taxable one which will enable the individual to recover any input tax incurred. i.e a developer who has incurred VAT on constructing or refurbishing a property may opt to charge VAT on its disposal so that he can recover the VAT he incurred when getting the property ready for sale. Option to tax: When an exempt supply is made, any input tax incurred in connection with that supply cannot be recovered from HMRC. The purpose of the option to tax is to enable an individual to convert an exempt supply into a taxable one, enabling him to recover any input tax incurred. Thus, a developer who has incurred VAT on constructing or refurbishing a property may opt to charge VAT on its disposal so that he can recover the VAT he incurred getting it ready for sale VAT-sensitive buyers:  Buyers who make mainly standard-rated or zero-rated supplies in the course of their business (retail foodstores / solicitors) they will not be adversely affected by a charge to VAT

on the purchase price / rent as they will be able to recover this. The way that people who make standard-rated supplies can do this is by offsetting their input tax against their output tax, or otherwise they can reclaim it from HMRC in the case of those who make zero rated supplies.  Businesses who make only exempt supplies, any VAT they pay on the purchase price will be irrecoverable so they will be reluctant to purchase any ‘new’ freehold properties. TAX MUST BE CHARGED ON ‘NEW’ PROPERTIES – NEWER THAN 3 YEARS, AND CAN BE CHARGED ON COMMERCIAL PROPERTIES OLDER THAN 3 YEARS  Sale of a new commercial property is standard rated } seller needs to ensure that the contract allows him to charge VAT in addition to the agreed purchase price  The contract will likely incorporate one of the two standard sets of conditions: SC 1.4.1= states that the price is inclusive of VAT and so a special condition will have to be incorporated in order to allow the seller to charge VAT in addition to the agreed purchase price. SCP2 states that the VAT at the standard rate will be payable by the buyer.  Buyers solicitor should make the client aware of the obligation to pay VAT at the earliest moment possible. The extra amount payable may affect the buyers financial arrangements.  Sale of old commercial freehold} exempt but subject to option tax -whether VAT is payable on the purchase price depends on whether the seller has opted to tax prior to completion. SC 1.4.1.= the price is inclusive of VAT so a condition will have to be incorporated to allow the seller to charge VAT. SCPC 2 – VAT at the standard rate will be payable by the buyer.  IF SCPC’s are used and the seller opts to tax prior to completion then the buyer is required to pay VAT in addition to the purchase price.  Buyer should be warned of the dangers of the seller opting to tax prior to completion in respect of an old commercial building. This also applies to the sale of green fields.

if VAT is chargeable in a property transaction then it is necessary to ensure that the documentation deals with it adequately. A price is deemed to be inclusive of VAT unless the contrary is stated. Residential property: The sale or lease of a new house by the person constructing it is zerorated. Selling of a buy-to-let property = exempt Purchase of land by developer = exempt unless the seller has opted to charge tax Construction work= zero rated If VAT is chargeable in a property transaction, it is necessary to ensure that the documentation deals with it adequately. Under general principles, a price is deemed to be inclusive of VAT unless the contrary is stated.  The grant of a commercial lease, whether of a new or old building, is an exempt supply, subject to the option to tax. If the option is made after the grant of the lease, s 89 of the VATA 1994 allows the rent to be increased by the amount of VAT, unless there is a clause in the lease making the rent inclusive of VAT. If an election is made before the grant of a lease, s 89 will not apply, and so the landlord will be able to add VAT to the rent only if there is a

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provision in the lease permitting this. From the landlord’s point of view, therefore, there ought to be such a provision in every lease If the option to tax is made, or a standard-rated supply is made and the seller/landlord is unable to charge VAT in addition to the agreed price, the seller is still liable to account for VAT Property Taxation 67 to HMRC out of the agreed price. So, for example (on the basis of the current 20% rate), a price of £750,000 is agreed for a sale of land. If the seller can add VAT, the buyer will hand over £900,000, £750,000 of which will be kept by the seller, the other £150,000 being handed over to HMRC. If the seller is unable to add on the VAT, the buyer need only pay £750,000 on completion. The seller will then have to account for the VAT element of the £750,000 received. As the £750,000 amounts to 120% of the purchase price, the seller will have to account for £125,000 to HMRC: ( × 20). As a result, the seller will keep only £625,000 himself....