Do you pay VAT on a commercial property?

[warp9]

Myself and business partner are looking to purchase a commercial property to rent back to our business. The business is a private partnership, but we would purchase the building as individuals via a SIPP type plan.

A few of questions:

1) Do we pay VAT on the property? If so, can and how could we claim it back?
2) Has anyone already done this and give some comments on the process - what to look out for, pitfalls etc?
3) Any advice over the type of pension vehicle to gain the best long term, tax advantages?

Cheers
Warp

[Eric Mc]

warp9 said:

Myself and business partner are looking to purchase a commercial property to rent back to our business. The business is a private partnership, but we would purchase the building as individuals via a SIPP type plan.

A few of questions:

1) Do we pay VAT on the property? If so, can and how could we claim it back?
2) Has anyone already done this and give some comments on the process - what to look out for, pitfalls etc?
3) Any advice over the type of pension vehicle to gain the best long term, tax advantages?

Cheers
Warp

The defauult seting is that VAT is not charged on transactions involving land and property - including commercial buildings. Such transations are normally "Outside the Scope" for VAT.

However, there is what is called "The Option to Tax" which commercial property owners can exercise if they so wish. This means that the property becomes "VATable". Property owners and landlords do this so that they can recover Input VAT on property repairs or construction costs that they otherwise would not be able to reclaim.
If they do exercise the "Option To VAT", it means -

they must charge VAT on any rental income they charge their tenants IN THAT PROPERTY.

they must charge VAT on the sale price of the property when they sell it.

If you are buying a property wher the VAT Option has been exercised by the previous owners, if you are a registered VAT trader, you can reclaim that VAT.
If you are noty VAT registered, you canot.

Can't say anything abouit pensions as I know very little about such things.

[Oi_Oi_Savaloy]

We buy commercial property and for the most part the owners have elected for VAT. It's important to make sure you know this at the outset as it does bump the total price up a fair bit. Also I think I'm correct in saying that stamp is paid on the VAT figure too? Eric Mc might clarify this.

[Eric Mc]

I think Stamp Duty is charged on the vat INCLUSIVE value.

[Oi_Oi_Savaloy]

So just to clarify: the calculation for the VAT and Stamp would look something like this:

The offices are £1,000,000

£1,000,000 x 20% = £200,000 (VAT.) So add that £200,000 to the £1,000,000 for the purposes of the 4% stamp duty calculation and your calculation will be £1,200,000 x 4% Stamp = £48,000.

[Eric Mc]

I've just checked and can confirm that Stamp Duty is indeed calculated on the VAT Inclusive value.

[warp9]

Hi all, thanks for your responses.

Am I missing something here, because I can't see why you would want to exercise 'the option to tax'. Surely this just increases your costs, particularly as stamp duty applies?

Is there any way as individuals we can be VAT registered?
Thanks
Warp

[Eric Mc]

If you are a landlord you will probably have costs involved in looking after or renovating your property. Because property income (i.e. rent etc) is normally "Outside the Scope" for VAT. This means that no VAT is charged on rents charged by the landlord but it also means that the landlord cannot reclaim VAT on the costs of managing and looking after the property,

They are allowed, however, to exercise an Option to VAT the property. This means that they will have to start charging VAT on the rents they charge (and charge VAT on the sale price when they sell the property). However, it also means that they can now start reclaiming the VAT on the costs of managing, maintaining and renovating that property. Landlords often Opt to VAT the property when they know that they intend to spend large sums on refurbishing or renovating a property as they will want to reclaim perhaps substantial sums of VAT.

[davidjpowell]

warp9 said:

Hi all, thanks for your responses.

Am I missing something here, because I can't see why you would want to exercise 'the option to tax'. Surely this just increases your costs, particularly as stamp duty applies?

Is there any way as individuals we can be VAT registered?
Thanks
Warp

Usually a Landlord will decide to elect for VAT when they need to spend a lot on refurbishment, or even build the property so that they can reclaim the VAT expenditure, particularly as the VAT liability is passed on to the tenant.

Partnerships or individuals can register for VAT. Not sure on what other requirements they are.

Personally I would be wary of putting my own premises in my own SIPP. The rules are quite restrictive on what you can do, and you will find that everything has to be done at 'Market Value' and for the good of the Pension, where you may prefer to be more individual.