Commercial Properties as a Transfer of a Going Concern
Commercial Property VAT
It is fairly commonplace for VAT to be chargeable on the sale of a commercial property. VAT will generally be chargeable on the sale of a commercial property that is:
- Less than 3 years old or
- Subject to an option to tax
Other than sales of new commercial property, the sale of commercial property will usually be exempt from VAT in the first instance. A person with an interest in a property can however elect to waive the exemption. This is commonly referred to as an option to tax. This has the effect of making future supplies in that property, such as rental or sale, subject to VAT at the standard rate.
Many commercial property owners will make an option to tax in order to secure input VAT recovery on expenses related to the property. This might include input VAT suffered on the purchase, ongoing maintenance or refurbishment/improvement works. In the absence of an option to tax, input VAT on such purchases might otherwise be irrecoverable. This is particularly relevant for property rental businesses.
VAT and SDLT burdens
Notwithstanding issues around recovering input VAT, VAT chargeable on a property sale can be a big burden. In particular, a purchaser will need to finance any VAT payable on the acquisition of a property before they receive any repayments from HMRC – a process that can take 4-5 months. Whilst many lenders offer a bridging facility for such circumstances, these can be expensive or difficult to obtain.
Furthermore, Stamp Duty Land Tax (SDLT) is chargeable on the VAT inclusive price of a property transfer. Whilst a business may, therefore, be able to recover the VAT charged on a property purchase, they will still have to pay SDLT at up to 5% on any VAT charged.
Transfer of a Going Concern
In certain circumstances, it is possible to structure a commercial property sale so that it qualifies as a transfer of a going concern (TOGC). Where the TOGC rules apply, the sale of the property falls outside the scope of VAT; this means that no VAT is chargeable. This removes the cash flow burden and the additional SDLT that might otherwise be due. However, the TOGC rules are very strict. If all the criteria are not met, the sale cannot qualify as falling outside the scope of VAT. It is therefore very important that you seek tax advice for such transactions.
A common problem area surrounds the timing of when an option to tax is made. In order for a property sale to qualify as a TOGC, it is important that the buyer makes their option and notifies the seller before the sale takes place. If this (amongst other criteria) is not met, the transaction will not qualify as a TOGC. This can be problematic in cases where the intention is to structure a transaction in this manner but the relevant documentation and notifications are not obtained before the sale is completed.
Consequences of a Failed TOGC
A failed TOGC can have some serious adverse consequences for a seller. If HMRC determines that a property sale does not qualify as a TOGC after the fact, the seller will be liable for any VAT due. This then leaves the seller in the difficult position of trying to recover the VAT from the buyer. Even where the seller is able to recover the VAT in full, HMRC will almost certainly apply penalties based on a percentage of VAT due. Due to the size of the numbers that can be involved in property transactions, penalties levied can be significant.
There are a number of planning opportunities available to mitigate VAT liabilities on property transactions. However, like most taxes, it is important that all the issues are considered and all relevant criteria are satisfied. It is always advisable to take tax advice on property transactions to ensure the best result possible.