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Disapplying the option to tax on property

Sale to charity

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VAT registered owns a commercial property which was purchased and refurbished 13 years ago, the property has been opted to tax and thus VAT was reclaimed at the time. 

The tenant, a charity, has offered to purchase the property and the question of VAT has come up. Although they have not yet mentioned it, my understanding as per notice 742a. .3.5 is that if the property is intended to be used solely for charitable purposes, that the option must be disapplied. This hasnt been confirmed by the charity yet but before we discussed this with them I wanted to be 100% sure of the VAT position if it is disapplied, otherwise the client will need to find another buyer.

If the option is disapplied, the sale will be exempt and thus any input VAT incurred will not be recoverable, however there will be no clawback of VAT under the CGS as it was purchased and refurbished over 10 years ago?

One further point to add is that the company's only own actitivity is that over the years, it has also purchased some land and developed and sold new build residential properties which of course would have been a zero rate supply, I hope that the new exempt supply would not affect any recoverability of any VAT in respect of the past developments, although it has been around two years since the last one was carried out.

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By Wilson Philips
19th Sep 2019 21:09

It is up to the prospective purchaser to disapply the option - it is not automatic. If they do, the seller has the choice of finding another buyer, or increasing the price.

Negotiate, negotiate, negotiate.

And past input VAT relating to taxable supplies should be unaffected.

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By Les Howard
19th Sep 2019 21:09

Your CGS point is correct.
There is a wider partial exemption issue. Normally one off real estate transactions are excluded from a calculation, but if the business is in property development the transaction will probably need not be a one-off. You will need further advice on that point.

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