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Tax Tips: VAT and the sale of a commercial property

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20th Jul 2005
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Starting this week AccountingWEB will offer a fortnightly tip on areas of indirect tax. This week Andrew Needham of VAT Solutions (UK) talks about how to avoid the VAT pitfalls involved in selling a commercial property.

It's a common scenario - a full taxable business purchases premises from which to conduct its business and is charged VAT on the purchase. The business claims back the VAT and five years later, after steady growth, decides to move to bigger premises. It sells its existing property and thinks no further about the VAT position.

The VAT problem is created by the 'capital goods scheme' (SI 1995/2518 Regs 112 & 113). This is a method for making sure the VAT claimed on the purchase of certain capital items accurately reflects the taxable use to which it is put over a period of time ' ten years in the case of commercial buildings. If there is a change of use during the ten year adjustment period, for example from taxable to exempt, then some of the input VAT originally reclaimed will have to be paid back to HMRC. The capital goods scheme mainly effects partly exempt businesses (ones that make both taxable and exempt supplies) but can have an unexpected impact on normally fully taxable business.

The main items covered by the capital goods scheme ('CGS') are:

' the purchase or lease of land or buildings where the 'consideration' is more than £250,000 and VAT has been reclaimed (a "new" or opted commercial property);
' a building that has been altered or extended where the floor area is increased by 10% or more and the VAT exclusive costs is more than £250,000; and
' a building where the refurbishment or fitting out costs come to more than £250,000 excluding VAT.

There are other items covered by the CGS but these have little impact in practice.

Using a simple example, a business buys a property for £500,000 plus VAT of £87,500 and uses the building to make parts for the motor industry. As it is fully taxable it claims all the VAT back. After five years it sells the building without considering the VAT position. Without opting to tax the business will be making an exempt supply. Some time later the business has a VAT inspection and the officer spots that the sale of the building was exempt, and that it happened half way through the CGS adjustment period. As a result he issues an assessment for half the VAT on the original purchase - £43,750 plus interest and possibly penalties. If you sell the building as an exempt supply, the remaining years of the CGS adjustment period are all considered to be exempt use.

A similar problem could arise where a commercial building is refurbished or extended and the VATable costs exceed £250,000. If the property is sold as an exempt supply during the ten years following the refurbishment/extension, then an adjustment to the input VAT claimed would be required.

To avoid this problem some basic VAT planning is required. If the business opts to tax the property prior to its sale, it will create a taxable supply from what would have been an exempt supply. Any remaining periods of the CGS adjustment period will be view as being of fully taxable use, and no adjustment to the input tax originally claimed will be required.

In order to opt to tax a property, a form VAT 1614 will need to be completed and submitted to HMRC within 30 days of deciding to opt to tax. The form can be obtained from HMRC National Advice service on 0845 0109000 or from the HMRC website at customs.hmrc.gov.uk.

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