fbpx

VAT, Commercial Property and the Option to Tax

Jul 22, 2022

The default position is that commercial properties are exempt from VAT.  This means that the purchase or leasing of the property would not attract VAT on the purchase price or rent.

However, it is not as simple as that and an owner of commercial property can elect to waive this exemption from VAT and choose to charge VAT on a property.  This is known as the “option to tax”.  The “option to tax” is a long term commitment as once made it cannot be revoked for 20 years (although there are circumstances where it may be revisited within six months of it being taken).  Before making such a commitment it is important to consider the implications.  To assist with this some points to consider are:

  • Input VAT cannot be recovered on an exempt property. As such exercising the option to tax can make commercial sense if VAT has or will be paid on construction costs, repairs or other works.
  • If an option of tax has been exercised over the property then VAT must be charged on any sale or letting (there are few exemptions). Some businesses cannot recover VAT and as such an elected building may be harder to market.
  • Stamp Duty is payable on the VAT inclusive rent or purchase price and therefore if VAT is payable on the purchase price it increases the amount of Stamp Duty payable. Again, this may make the property harder to market or lead to concessions on the sale price or rent.
  • If potential tenants and purchasers can recover VAT then VAT is less likely to be an issue. The tenant or purchaser may recover the VAT paid as input VAT and the requirement to pay VAT will be a matter of cash flow only.
  • An option to tax is personal and does not automatically pass with the building. A buyer of an opted property must also exercise their own option to tax if it wishes to recover the VAT on expenses relating to the property. Again, once the option is made that buyer would need to charge VAT on the rent and on future sale proceeds.

When considering buying or taking a lease of property it is important to find out the VAT status at an early stage. If VAT is payable there could be serious financial implications that you may not have factored into your budget and may test the financial viability of the planned acquisition.

For specific legal advice on commercial lease and any other Landlord and Tenant issues, contact Daniel York in our Real Estate team, or email your query, call us on 01276 686222 or visit our website.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

Daniel York

Daniel York

Partner, Property Law

Sign up

Enter your email address for legal updates on Property & Construction Law.

Please see our privacy policy regarding use of your data.


Latest News & Insights

Top Legal Insights

 

Contract Law

Material Breach of Contract

What is a ‘material’ breach of contract by a party to a commercial contract? This is a critical issue regularly considered by the courts. What constitutes a material breach and what are the remedies?

Property Law

Commercial Lease: The Financial impact on Landlord and Tenant

Coronavirus (COVID-19) and the restrictions now in place to control its spread, are having a significant effect on many business sectors.

Divorce and Family Law

Divorce in Lockdown: Can I get some discreet legal advice?

We have spoken to clients who are unfortunately experiencing some family issues, and would like to obtain expert legal advice, yet don’t know how...

Land & Property Dispute

Restrictive Covenants – The Price of Modification

Having identified that your land is burdened by a restrictive covenant and for the purposes of this article the covenant in question will be that only one residential building can be erected on the land. What do you do next?

Wills, Trusts and Probate

Why is having a will so important?

It is entirely up to you if and when you want to create a Will, but it is important to be aware of the consequences of not having a Will.

Award winning legal advice

We are solicitors in Camberley, Wokingham and London. In 2019, Herrington Carmichael won ‘Property Law Firm of the Year’ at the Thames Valley Business Magazines Property Awards, ‘Best Medium Sized Business’ at the Surrey Heath Business Awards and we were named IR Global’s ‘Member of the Year’. We are ranked as a Leading Firm 2023 by Legal 500 and Alistair McArthur is ranked in Chambers 2022.

Camberley
Building 2  Watchmoor Park, Riverside Way, Camberley, Surrey  GU15 3YL
+44 (0)1276 686 222

Reading (Appointment only)
The Abbey, Abbey Gardens, Abbey Street, Reading RG1 3BA
+44 (0)1276 686 222

Ascot (Appointment only)
102, Berkshire House, 39-51 High Street, Ascot, Berkshire SL5 7HY
+44 (0)1344 623388

London (Appointment only)
60 St Martins Lane, Covent Garden, London WC2N 4JS
+44 (0)203 326 0317

Wokingham (Appointment only)
The Workstation Wokingham, Markham House, 20 Broad Street, Wokingham, RG40 1AH

+44 (0)118 977 4045

Email: info@herrington-carmichael.com

Our Services

Corporate Lawyers
Commercial Lawyers
Commercial Property Lawyers
Conveyancing Solicitors
Dispute Resolution Lawyers
Divorce & Family Lawyers
Employment Lawyers
Immigration Law Services
Private Wealth & Inheritance Lawyers
Startups & New Business Lawyers

© 2022 Herrington Carmichael LLP. Registered in England and Wales company number OC322293.

Herrington Carmichael is authorised and regulated by the Solicitors Regulation Authority with registration number 446245.

Pay Online

Privacy Policy   |   Legal Notices, T&Cs, Complaints Resolution   |   Cookies 
Client Feedback   |  Diversity Data