Opt to Tax
Can you reclaim vat on a property transaction?
The default position is that the activity of renting out property is an exempt supply hence no vat is charged, however, this means that you cannot claim vat on the expenses incurred.
Residential Properties
As far as these are concerned, the lettings are always exempt from vat and you will never see vat being charged on any rent. This means that, any vat paid on expenses incurred will also not be claimable. This needs to be taken into account when purchasing buy to let properties or properties that need extensive repairs to bring them to use.
Commercial Properties
With these properties, you have the option to disapply the exemption or ‘opt to tax’ in other words. Once this is applied, any rent charged to the tenant will become vatable. As you would be making taxable supplies, you would be able to reclaim vat on the relevant expenses incurred.
Mixed Use Properties
It is quite common these days where properties would have both the residential and commercial element to it i.e. there will be an office at the bottom with apartments at the top. If this is the case and you have not opted to tax, then you will not be able to reclaim or charge vat. However, if you opt to tax, then the vat incurred on the expenses for the whole property would need to be apportioned and only the commercial element would be reclaimable.
Why ‘Opt to tax’?
Opting to tax on a commercial property has both advantages and disadvantages depending on your situation. It can be very beneficial to be able to reclaim the vat incurred on the expenses as this would reduce the costs incurred by the business. If the tenant is vat registered, then they would be able to reclaim vat incurred on the rents paid. However, if the tenant is not registered for vat then the vat element would be a cost to them and make your property more expensive.
Apart from this, there is also an added administrative burden of preparing and filing vat returns to HMRC.
Buying and Selling
When a property is opted to tax, the seller has to charge vat on the sale. The buyer can reclaim the vat element if they are registered for vat and will use the property in their business. It might cause a cashflow problem for the buyer as they would need to raise finance to pay the vat. Also, when the vat amount is added to the sale price, the stamp duty payable on the property would be payable on the vat inclusive price hence making the property more expensive to buy.
When purchasing a commercial property which has been opted to tax and has a sitting tenant, the buyer has the option to avoid paying vat. This is done via the Transfer of Going Concern (ToGC) VAT provision. As the property has a tenant, the purchase would be treated as a purchase of a ‘rental business’ which is outside the scope of vat. Provided the buyer registers for vat and opts to tax prior to purchase, a joint election can be made to treat the transaction as a ToGC and no vat needs to be charged.
If you require more information and help with any property transactions, please do not hesitate to contact us on 0121 445 8055 or email us at info@harrisaccountancy.co.uk
Office closure and paperwork submission dates for 2019
Reminder to all clients on the deadline of submissions for accounts and tax returns for the New Year (2019). Please email info@harrisaccountancy.co.uk.
Happy New Tax Year
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Seasonal Greetings from Harris Accountancy
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