VAT on Commercial Freehold Property

Is your Building more or less than three years’ old?

• If it is a new Building, add VAT at the Standard Rate (17.5%) to price
• If old, then the transaction is Exempt (no VAT)

Bare land with no buildings on it is Exempt. Although exempt, you may elect to charge VAT (the Option to Tax)

The same applies to Civil Engineering Works. Those over three yearsâ old are Standard Rated, those under that are Exempt.

In VAT jargon, the sale is a "supply". You can make a mixed supply of Exempt land and buildings and Standard Rated Civil Engineering Works.

Example

You own freehold land, on which you construct roads and install services and then you sell without opting to tax.

• You must apportion the price between the land and the works on a fair and reasonable basis
• You charge VAT at the Standard Rate on the works, but the sale of the land is Exempt

Consequences

Generally, you cannot recover the VAT paid by you, where your supply is Exempt. However, certain expenses can be claimed for VAT purposes, if the VAT is below certain de minimis limits

You may wish to Opt to Tax, so that you can cover all the VAT paid out in respect of the Building. You must notify Customs & Excise and, in certain cases, get prior permission. There are certain circumstances, where you are not allowed to opt to tax.

The VAT treatment can make the difference between a profit and a loss

Example

You buy for £2m plus VAT. You refurbish for £1m plus VAT. You do not opt to tax and so you have just laid out £3.525m. You sell for £3.5m and make a loss

• If you had opted to tax, you would charge VAT on the sale price of £3.5m but claim against it the VAT paid out. You would make £0.5m profit.

Be aware that certain types of potential purchasers cannot recover VAT e.g. banks and insurance companies. If your Building is suitable for them, exercising your Option to Tax makes your Property a lot more expensive for them.

Related topics you may find useful:

VAT on property

Call Michael Breeze on 07900 195 195 or call 0845 270 2511 to set up an appointment