UK: VAT, Commercial Property And The Option To Tax

The default position is that commercial properties are exempt from VAT. This means that the purchase or leasing of the property would not attract VAT on the purchase price or rent.

However, it is not as simple as that and an owner of commercial property can elect to waive this exemption from VAT and choose to charge VAT on a property. This is known as the "option to tax". The "option to tax" is a long term commitment as once made it cannot be revoked for 20 years (although there are circumstances where it may be revisited within six months of it being taken). Before making such a commitment it is important to consider the implications. To assist with this some points to consider are:

• Input VAT cannot be recovered on an exempt property. As such exercising the option to tax can make commercial sense if VAT has or will be paid on construction costs, repairs or other works.
• If an option of tax has been exercised over the property then VAT must be charged on any sale or letting (there are few exemptions). Some businesses cannot recover VAT and as such an elected building may be harder to market.
• Stamp Duty is payable on the VAT inclusive rent or purchase price and therefore if VAT is payable on the purchase price it increases the amount of Stamp Duty payable. Again, this may make the property harder to market or lead to concessions on the sale price or rent.
• If potential tenants and purchasers can recover VAT then VAT is less likely to be an issue. The tenant or purchaser may recover the VAT paid as input VAT and the requirement to pay VAT will be a matter of cash flow only.
• An option to tax is personal and does not automatically pass with the building. A buyer of an opted property must also exercise their own option to tax if it wishes to recover the VAT on expenses relating to the property. Again, once the option is made that buyer would need to charge VAT on the rent and on future sale proceeds.

When considering buying or taking a lease of property it is important to find out the VAT status at an early stage. If VAT is payable there could be serious financial implications that you may not have factored into your budget and may test the financial viability of the planned acquisition.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.