Understanding VAT On Commercial Property Investments

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It’s likely that you understand how VAT affects your daily life, but when it comes to commercial property investment it’s not always as clear cut. In this post we help you understand how VAT affects commercial property investments and what this means for you as an investor.

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VAT explained

VAT, or Value Added Tax is a tax charged on most goods and services.. The standard rate is charged at 20% though there are some exceptions that are charged at a lower, reduced rate (ie: domestic fuel) or are exempt altogether (ie: most foods).

VAT registered entities must also collect and pay (to the HMRC) VAT on all eligible sales. These entities can recover the VAT paid on their expenses, however this must be in proportion to the eligible goods or services they supply, and again there are some exceptions. This process is done via a quarterly VAT return.

VAT and Commercial Property Investment

What does this mean for investors? Generally speaking commercial property investments are exempt from VAT (if they’re freehold and more than three years old), which means that landlords cannot charge VAT on the rent or on sale and equally cannot claim it back on expenses. However, there are exceptions.

Where VAT is applicable on a purchase,the key is to engage your accountant and lawyer early. If you are not VAT registered you risk having to pay VAT on the property purchase (which you can subsequently reclaim), however this will hurt cash flow and result in irrecoverable stamp duty being charged on that VAT amount. The typical solution to this is to have your buying entity VAT-registered and to treat the property purchase as a TOGC (transfer of a going concern). This means no VAT will be charged on the purchase and it will just become a quarterly accounting issue going forward, whereby VAT charged on your rent will be forwarded to the HMRC and VAT paid on any property expenses such as agency fees, legal fees and maintenance costs will be reclaimed.

The potential future downside of owning a VAT property is that if it becomes vacant some tenants (typically smaller independents) may not wish to pay VAT on rent, due to the cash flow implications of this, or the fact that they are simply not registered. For most Blue Chip tenants being VAT registered is normal.  One of the few exceptions are banks, who cannot charge VAT, however, as banks are rarely opening new branches this is not likely to be an issue.

The takeaway

Many investors don’t understand VAT and it often deters them from proceeding with a sale. We see this most commonly in the sub £500k budget category where buyers commonly invest in their personal names and don’t realise they can personally register for VAT – they will completely overlook an opportunity just because of VAT!

The reality is that most of these issues can be sorted out quickly and efficiently with the right professional advice, using both an accountant to get registered, and a lawyer to confirm that the property can be treated as a TOGC.

If the underlying asset is of a high quality and attractive price, VAT should not get in the way. With a number of experienced and reasonably priced accountants and lawyers on our team, we will ensure your focus is on the property being acquired, so that you do not lose out. If you have any questions, or simply want some advice on your commercial property investment, get in touch with one of our friendly team members today on +44 (0)208 954 0878 or via email here. We look forward to assisting you soon.

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