Selling commercial property

Why might VAT be due on the sale?

By default, the sale or rent of land and property is exempt from VAT. However, most commercial landlords will have exercised the option to tax. This allows them to charge VAT on the rent and service charges issued to their tenants, and thereby recover the VAT they incurred on acquiring and maintaining their building.

Exercising the option to tax invariably was the correct course of action for these landlords at the time. However, often decades later, many are now finding that their properties are underperforming and they are looking to sell them. Having opted to tax, they will normally have to charge VAT on the sale.

The position for those who have used land and property in their business might vary. A business that used its property just in order to carry out its trade would have no reason to opt to tax. However, many businesses will have rented out part of their property to others at some point and may have opted to tax to ensure they did not make any sales that were exempt which, would lead them to suffer restrictions on VAT recovery.

Why is charging VAT an issue?

Due to changes in property needs, especially post-pandemic, inheritance and capital gains tax, and planning rules, we are seeing more commercial property owners looking at selling to residential developers. Potential purchasers will be reluctant to have VAT added to the price because:

• some buyers, such as housing associations, will be unable to recover some or all of the VAT charged
• for housebuilders that can recover the VAT in full, there will be additional lending needed to fund the time lag between paying this VAT to the seller and recovering it from HMRC
• SDLT is calculated on the VAT-inclusive price, adding to the overall acquisition costs.

When might VAT not be due?

Fortunately, there are at least four reasons why VAT may not be due on the sale of an opted property.

Firstly, an option to tax can be revoked after twenty years. Many of these properties have been owned for a long time, so this is certainly worth investigating. There are certain conditions that need to be met, especially if there has been significant expenditure on the property in the last decade, but I find that these conditions tend to be met.

The option to tax can be ‘disapplied’ in certain circumstances, so that the sale reverts to being exempt. These include sales to housing associations, individuals seeking to build their own home, or where the building is going to be converted rather than demolished. Most of these require certificates to be served at the right time, so an early conversation is a must.

Thirdly, VAT is not due if you are selling a viable business rather than just a collection of assets – a ‘transfer of a going concern’ (TOGC). A TOGC includes a property rental business, so if a property is sold with some tenants still in place, it can be VAT-free. This is an area which has a lot of anti-avoidance legislation that can catch innocent transactions, so it is important that the various requirements are met at the right time.

Finally, and perhaps most surprisingly, I sometimes find that these properties are not actually subject to an option to tax at all, despite the owner having charged someone VAT to occupy it in the past. Sometimes these charges were automatically subject to VAT – for instance, a building that was rented as a storage facility, or land that was rented for car parking.  In other cases, a business may have charged VAT on rent simply because it charged VAT on all its other income. An option to tax is required to be notified to HMRC to be valid, and this is meant to happen within 30 days. While HMRC can (and generally do) accept notifications of options to tax that might be many years late in being made, it cannot force an owner to request this.  While this will require an adjustment to the VAT treatment that has been applied in the last four years, it allows a VAT-free sale.

Choosing not to charge VAT on a property sale needs to be considered thoroughly, as it may mean some restrictions on VAT recovery. In some cases, it can require the seller to repay some VAT they have recovered in the past. However, given the potential costs to the buyer, VAT should be part of any sales strategy. It is worth checking files at an early stage for correspondence with HMRC, which confirms when an option to tax was made, as it can take months to establish the position with HMRC if this cannot be found.

For more information, please contact your usual Crowe contact.