If you were to buy the freehold interest, you would be able to reclaim the input tax, but the delay will cause a cash-flow problem. What can you do? This post will shed more light on the problems of VAT on commercial property.

You must be charged VAT by your landlord as they have an option to tax the building with HMRC. The first challenge is to ask the landlord if they previously opted to tax their interest in the commercial property more than 20 years ago as it may have been revoked.

Tip: The seller does not need to wait for HMRC’s acknowledgement since the VAT1614J is merely a notification, not a request for authorisation.

Staggered VAT Periods?

If revocation is not possible, it may be that you and the seller can time the deal so that you reclaim your input tax before the seller accounts for output tax. This depends on the return dates of both parties. You will need to establish the best date for the sale, i.e. when a VAT tax point is created.

Example:

Lisa sold the freehold of a commercial building to Restaurant Ron on 1 August 2021, issuing an invoice for £1 million plus VAT on that date.

In Lisa’s case, her VAT period ends at the end of October 2021, so she won’t owe the VAT of £200,000 until 7 December 2021, which is one month plus seven days after the end of her VAT period.

Trap: Lisa and Ron should include a clause in their contract that says they will not pay Ron £200,000 until 30 November 2021. From a legal and commercial standpoint, this could be tricky.

TOGC Option?

Another possibility: if you purchase the property in a separate legal entity from your trading business, say a new limited company, the deal may qualify as a transfer of a going concern because you are assuming an existing lease, i.e. selling a property rental business. In order to complete the deal, your separate entity must register for VAT and choose to tax its interest in the property.

Tip: Remember that stamp duty land tax is payable on the VAT-inclusive price of a deal. By reducing the buyer’s cost of tax, this approach allows you to save on taxes.

Trap: This solution is only available if the business is registered for VAT and has 80% or more taxable sales, i.e. no partial exemption problem. When a trading business has non-taxable sales of over 20% and the landlord and tenant are connected, and the property price exceeds the threshold of £250,000 excluding VAT, then anti-avoidance legislation disallows you to make a tax election.

It may not be possible to revoke the option to tax, however, if you are able to time your purchase in a way that allows you to pay part of the proceeds with a reclaim of input tax. You can also consider buying the property as a separate business, so that you would be able to buy it tax-free as a going concern. This business must be registered for VAT and also taxed.