Purchasing commercial property at auction can be a great opportunity, but it’s important to understand the potential tax implications, especially when it comes to VAT. Whether VAT applies depends on the type of property and the seller’s tax choices. Here’s what you need to know before you place your bid.
When Is VAT Charged on Commercial Properties?
The sale or lease of most commercial properties is VAT-exempt, meaning VAT doesn’t apply. However, there are exceptions:
- New Commercial Properties: The sale of a property that’s less than three years old is subject to the standard rate of VAT.
- Opt to Tax: If the seller has chosen to “opt to tax,” VAT will apply to the sale or rental of the property.
What Counts as Commercial Property?
HMRC defines commercial property as non-residential buildings, such as shops, offices, warehouses, restaurants, and farms. It also includes some student accommodation, hotels, and care homes (with specific rules for exemptions).
Why Would a Business “Opt to Tax”?
The option to tax allows a business to turn an otherwise VAT-exempt supply into a taxable supply. This means:
- The business can charge VAT on the sale or rent of the property.
- The business can reclaim VAT on associated costs, such as refurbishment, construction, or professional fees.
When Should You Opt to Tax?
Most businesses don’t need to opt to tax their trading premises, as these are used to make taxable supplies. However, opting to tax can make sense if the property is rented out or sold, as it allows VAT on associated costs to be reclaimed.
The Drawback of Opting to Tax
Opting to tax means the landlord must charge VAT on:
- Rent and service charges.
- The sale price when selling the property.
If the tenant or buyer is VAT-registered, this won’t have a major impact, as they can reclaim the VAT. However, for non-VAT-registered tenants (e.g., small businesses, charities, or financial services), VAT becomes an additional cost.
Can You Change Your Mind After Opting to Tax?
The good news is that you don’t need to opt to tax immediately. You can choose to do so later if your circumstances change, such as deciding to rent out the property.
VAT on Mixed-Use Properties
For mixed-use properties (e.g., a shop with flats above), the option to tax only applies to the commercial part of the property—not the residential part. When purchasing at auction, the split between the VAT-rated commercial element and VAT-exempt residential units must be apportioned on the purchase invoice.
Don’t Forget the Buyer’s Premium
VAT is charged on the buyer’s premium payable to the auctioneer, regardless of whether the seller has opted to tax the property.
Practical Tips for Auction Buyers
- Consider Opting to Tax Beforehand:
If you plan to recover VAT on the purchase of a commercial property, make the election to opt to tax before the auction. - What If You Don’t Win the Auction?
If your bid is unsuccessful, the election can be:- Cancelled within six months.
- Automatically lapse after six years.
- Seek Advice:
Auctions can be fast-paced, but the tax implications of your purchase are worth careful consideration. Always seek professional advice to ensure you’re making the most tax-efficient decisions.
Need Help with VAT on Commercial Property?
Buying a commercial property can be a smart business move, but understanding the tax rules is critical. At Jon Davies Accountants, we can help you navigate the complexities of VAT, opting to tax, and more.
Let’s make your next property purchase a tax-efficient success!
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