VAT and Commercial Freehold Property
1. Is your Building more or less than three years’ old?
2. If it is a new Building, add VAT at the Standard Rate (17.5%) to price
3. If old, then the transaction is Exempt (no VAT)
4. Bare land with no buildings on it is Exempt
5. Although exempt, you may elect to charge VAT (the Option to Tax)
6. The same applies to Civil Engineering Works. Those over three years’ old are Standard Rated, those under that are Exempt
7. In VAT jargon, the sale is a "supply"
8. You can make a mixed supply of Exempt land and buildings and Standard Rated Civil Engineering Works
Example
9. You own freehold land, on which you construct roads and install services and then you sell without opting to tax
10. You must apportion the price between the land and the works on a fair and reasonable basis
11. You charge VAT at the Standard Rate on the works, but the sale of the land is Exempt
consequences
12. Generally, you cannot recover the VAT paid by you, where your supply is Exempt
13. However, certain expenses can be claimed for VAT purposes, if the VAT is below certain de minimis limits
14. You may wish to Opt to Tax, so that you can cover all the VAT paid out in respect of the Building. You must notify Customs & Excise and, in certain cases, get prior permission
15. There are certain circumstances, where you are not allowed to opt to tax
16. The VAT treatment can make the difference between a profit and a loss
Example
17. You buy for £2m plus VAT. You refurbish for £1m plus VAT. You do not opt to tax and so you have just laid out £3.525m. You sell for £3.5m and make a loss
18. If you had opted to tax, you would charge VAT on the sale price of £3.5m but claim against it the VAT paid out. You would make £0.5m profit
19. Be aware that certain types of potential purchasers cannot recover VAT e.g. banks and insurance companies
20. If your Building is suitable for them, exercising your Option to Tax makes your Property a lot more expensive for them
Michael Breeze
Leoanrd Kasler & Company