VAT on Commercial Property
Discussion
Just a little 'heads up' email I received today from Kingston Smith....
VAT IMPLICATIONS ON SELLING COMMERCIAL PROPERTY
Law changes often cause problems, so if you are considering selling a commercial property that is subject to an option to tax, make certain you are aware of the new rules. You should be aware of a VAT law change which affects property from 1st June 2008. If you are selling a commercial property that might be converted into residential use, the buyer can now serve you (the vendor) a form which removes your option to tax, which could cause you to repay input tax that you had reclaimed for up to ten years. This can also affect you as a vendor if there is a chain of buyers, where the ultimate acquirer plans to convert it.
It is inevitable with new law, especially in this area, that someone is going to get a nasty shock. An option to tax that unexpectedly gets disapplied can cause some difficult input tax recovery issues.
If your potential buyer serves you such a notice before you have fixed the price (such as the exchange of contracts), you can seek to adjust the price of your building to take into account the tax that you will now be required to repay to HMRC, or in extreme cases consider seeking a new buyer. Most importantly, you should seek good professional advice before making a decision.
Ive already been involved in a situation with 1 property we converted which meant we 'qualified' for the Capital Goods Scheme, under which we pay 10% of the claimed VAT per annum over 10 years, but if Im reading this right, we would now be expected to repay the 100% of it in year 1 under the rule change? (going forward of course)
Eric? What say you?
VAT IMPLICATIONS ON SELLING COMMERCIAL PROPERTY
Law changes often cause problems, so if you are considering selling a commercial property that is subject to an option to tax, make certain you are aware of the new rules. You should be aware of a VAT law change which affects property from 1st June 2008. If you are selling a commercial property that might be converted into residential use, the buyer can now serve you (the vendor) a form which removes your option to tax, which could cause you to repay input tax that you had reclaimed for up to ten years. This can also affect you as a vendor if there is a chain of buyers, where the ultimate acquirer plans to convert it.
It is inevitable with new law, especially in this area, that someone is going to get a nasty shock. An option to tax that unexpectedly gets disapplied can cause some difficult input tax recovery issues.
If your potential buyer serves you such a notice before you have fixed the price (such as the exchange of contracts), you can seek to adjust the price of your building to take into account the tax that you will now be required to repay to HMRC, or in extreme cases consider seeking a new buyer. Most importantly, you should seek good professional advice before making a decision.
Ive already been involved in a situation with 1 property we converted which meant we 'qualified' for the Capital Goods Scheme, under which we pay 10% of the claimed VAT per annum over 10 years, but if Im reading this right, we would now be expected to repay the 100% of it in year 1 under the rule change? (going forward of course)
Eric? What say you?
If you are VAT registered and you are selling something that is "Exempted" from VAT (Exempted DOES NOT mean Zero Rated), then you will not be able to reclaim Input VAT on all of your business costs.
For example, a business makes £200,000 worth of sales in a year. £100,000 of those sales are Standard Rated, £50,000 are Zero Rated and £50,000 are Exempt. That means 1/4 of all the sales made related to VAT Exempt items. Therefore, 1/4 of VAT incurred on business costs cannot be recovered.
Have Google under "VAT Partial Exemption" and see what comes up.
Like everything in VAT, the essential principal is straightforward. Unfortunately, the nitty gritty details are horrendously complicated.
For example, a business makes £200,000 worth of sales in a year. £100,000 of those sales are Standard Rated, £50,000 are Zero Rated and £50,000 are Exempt. That means 1/4 of all the sales made related to VAT Exempt items. Therefore, 1/4 of VAT incurred on business costs cannot be recovered.
Have Google under "VAT Partial Exemption" and see what comes up.
Like everything in VAT, the essential principal is straightforward. Unfortunately, the nitty gritty details are horrendously complicated.
Edited by Eric Mc on Friday 27th June 17:12
Hi Eric (Mrs gopher replying)
Are you referring to "pool input vat" - vat that cannot be apportioned to a specific supply. VAT totally attributable to a taxable supply is fully recoverable as so VAT totally attributable to an exempt supply is irrecoverable. Only the vat in the "pool" would be apportioned on the percentage basis.
So it depends on the original intention on the purchase of the building as to its supply, i.e. if the commercial had been used for a taxable purposes then the VAT totally attributable would be recoverable, if for an exempt purpose then there would be no recovery.
As an aside, there is also the deminimis level to consider, where, if the input relating to the exempt supply plus the irrecoverable portion of the "pool" is under £1875 per quarter and less than 50% of total input vat then is is all allowable. ( With an annual adjustment on the year end quarter, March, April or May). So if there is a particular transaction that would take it over the deminimis with careful planning it could be taken over two years thus taking advantage of £7500 x2.
Cheers Mrs gopher
Are you referring to "pool input vat" - vat that cannot be apportioned to a specific supply. VAT totally attributable to a taxable supply is fully recoverable as so VAT totally attributable to an exempt supply is irrecoverable. Only the vat in the "pool" would be apportioned on the percentage basis.
So it depends on the original intention on the purchase of the building as to its supply, i.e. if the commercial had been used for a taxable purposes then the VAT totally attributable would be recoverable, if for an exempt purpose then there would be no recovery.
As an aside, there is also the deminimis level to consider, where, if the input relating to the exempt supply plus the irrecoverable portion of the "pool" is under £1875 per quarter and less than 50% of total input vat then is is all allowable. ( With an annual adjustment on the year end quarter, March, April or May). So if there is a particular transaction that would take it over the deminimis with careful planning it could be taken over two years thus taking advantage of £7500 x2.
Cheers Mrs gopher
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