When it comes to buying, selling, or letting, VAT on commercial property is just one of the many types of taxes, fees, and regulations you need to be aware of.
In this blog, we’ll explain everything you need to know about commercial property VAT including when you need to pay the tax, how to pay, and how to avoid paying VAT on commercial property.
What is VAT?
VAT is a type of consumption tax added to the majority of goods and services in the UK. It is included as a percentage of the total cost of an item or service and is usually charged at 20% as standard. There are, however, different exemptions to this rule on products classed as zero-rated goods and services.
VAT is primarily a charge paid by customers to businesses, but businesses that have a taxable turnover of more than £85,000 a year need to pay VAT to HMRC and complete a VAT tax return.
What Are the Rules for VAT on Commercial Properties?
When a commercial property is leased or sold there is no legal requirement to charge VAT and the property is typically exempt from this charge. However, owners can choose to charge the standard 20% VAT rate if they decide to sell or rent out their property.
If a property owner does decide to charge VAT this has to be formally outlined to HMRC and the decision cannot be reversed. Opting to not charge VAT usually reduces the overall cost of a property and in turn encourages buyers to purchase without additional tax charges.
Why Charge VAT on Commercial Property?
In most circumstances, where there is no obligation to pay tax, all parties involved in a transaction usually benefit from this. However, commercial property owners and landlords may benefit from choosing to charge VAT.
If the standard rate of VAT is charged on all sales and leases, it also means that VAT must be charged on any other costs related to a property including maintenance expenses and refurbishments. Although this increases the cost for buyers and renters, this additional tax charge can benefit owners in the long run.
Owners can reclaim any VAT charges incurred on a commercial property and reclaim their input VAT on their own VAT return.
This means owners can receive money back on expenses paid on a property they would have otherwise had to forgo had they opted for a no VAT option.
Tax Planning and Ways to Reduce The Payment of VAT on Commercial Property
There are ways to reduce the payment of VAT on commercial property which are explained below.
Opting out of VAT
As previously mentioned, the easiest way to do this is to simply opt out of charging VAT. Not only will this increase the likelihood of your property being sold or leased, but it also avoids all the stress of managing your own accounting services and lengthy tax reclaims.
Transfer of Going Concern (TOGC)
This is a fairly in-depth process that involves the selling of part of or a whole business where a certain set of criteria apply. This criteria means that the transaction is not deemed a transfer of assets and if the criteria are met there is no VAT charge.
There are several conditions that must be met for a sale to count as a TOGC including the continuation of the same kind of business at the commercial property.
This means that if the business is sold as a coffee shop it can be turned into a bakery as this is within the same industry. If however, the new business were to operate as a clothes shop this would break the terms of a TOGC as it operates within a different industry.
Are There Other Taxes When Selling Commercial Property?
Although it is possible to avoid VAT with commercial properties, there are other taxes you still have to pay.
Income Tax
If you’re renting out your property then you are liable to pay income tax on any rent you receive as this counts as a form of taxable income.
Corporation Tax
When you sell your property, you’ll also be subject to paying corporation tax on the gain if you’re a limited company in the UK.
With taxes like this, the process is fairly complicated and requires detailed accounting records and a lot of documentation. The smoothest way to get through this process is to utilise tax services like those we provide at Williamson and Croft.
Capital Gains Tax
If you are an individual you may need to pay capital gains tax on a commercial property. The rate is based on your personal income with 10% being the basic rate with higher earners paying 20% on commercial property.
Our expert advisers will be able to help you identify how much tax you owe and when as well as keep your accounting records in order.
Get Advice on Commercial Property VAT with Williamson & Croft
If you need more advice or support with managing your commercial property charges, get in touch with a member of our team. Our brilliant accounting specialists will be able to help you manage your commercial property, advise you on VAT charges, and decide if opting in is the right option for your property.
Our Liverpool accountants are also on hand to help with any queries if you’re based outside of Manchester. When you use our accounting and tax services, you’ll be able to manage your commercial property charges and sell or lease your premises as smoothly as possible.
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