Opted to Tax Commercial Property and VAT on rental

Opted to Tax Commercial Property and VAT on low rental income

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Hello all.

A new sole trader client on mine bought the commercial property from the landloard for 270k, where he is still trading from.

As the seller was charging VAT so a company was formed, VAT registered and opted to tax the property "saving" on VAT as transfer of going concern. Now he has a lease with his own company and pays VAT on rent who is not register for VAT. 

The rent is only 15,000 a year including VAT, the only source of income of the coompany and submitting quarterly VAT returns for £625 VAT payable.

Question: Reading the link bleow "AT Notice 700/11: cancelling your registration" I see in para 7.4 If you’ve opted to tax any land or buildings, you may have to account for VAT at the time of deregistration.

 https://www.gov.uk/government/publications/vat-notice-70011-cancelling-y...

The company has no intention to sell the property in near future. is there any way to reduce this VAT apart moving to VAT Annual Accounting Scheme plus flat rate that I beleive would be 12% under other activities?

 

any inputs appreciated.

 

regards

Replies (19)

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By mjshort
03rd May 2019 15:10

I think he has saved VAT £54,000 on the purchase and will now be gradually paying it back.

Has your client any other business interests. Is there any chance of using the partial-exemption mentioned by Neil Warren on 30th April?

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RLI
By lionofludesch
03rd May 2019 15:23

I'm guessing that this sole trader isn't registered but the company that owns the property is, even though you say the sole trader bought the property.

Partial exemption won't help. Annual Accounting won't either. It'll just shift the payments around.

Flat rate ? no actual numbers to go on but I think you might be looking at 16½% rather than 12% but, if that's a help, go for that. Should save around £27 a year.

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chips_at_mattersey
By Les Howard
03rd May 2019 15:32

Annual Accounting may not be possible if the tenant is a 'connected' party.

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Replying to leshoward:
RLI
By lionofludesch
03rd May 2019 15:44

Would that be so even if the tenant is unregistered, Les ?

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By alan.rolfe
03rd May 2019 15:41

Why not reduce the rent payable ?

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Psycho
By Wilson Philips
03rd May 2019 15:44

He could always reduce the rent (subject to funds being required to repay borrowings), though be mindful of the possible direct tax consequences of granting a lease at undervalue.

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By sculptureofman
03rd May 2019 16:21

Is this arrangement not caught by the sch. 10 anti-avoidance?

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Replying to sculptureofman:
Psycho
By Wilson Philips
03rd May 2019 16:57

Yes!

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Replying to sculptureofman:
chips_at_mattersey
By Les Howard
03rd May 2019 16:58

At first I thought the anti-avoidance rules will not apply. But a brief look at paras 15-16 gives me some cause for concern. The OP will need to consider this question, as it may disapply his original Option to Tax, and possibly invalidate the TOGC.
(Surely this cannot be the effect of Sch 10!?

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Replying to leshoward:
Psycho
By Wilson Philips
03rd May 2019 22:05

I think it is exactly the effect of Sch 10. Like you perhaps, I originally (and mistakenly) thought that it would catch only occupiers making exempt supplies. But it is clear that the occupier must be either registered or liable to be registered. If he isn't, the rules apply. (Note that although they refer to 'developer' this doesn't mean a developer in the ordinary sense - I'm not sure, though, why they use that term, presumably it's for convenience as a means of referring to the relevant person without having to use cumbersome phraseology.)

And thinking about it further, it makes complete sense in this case. Had the sole trader purchased the property in his own name he would not have been entitled to recover the VAT. He has used the company either to recover or to avoid paying the VAT. OK, so the company may be drip-feeding the VAT back to HMRC, but that could potentially take a very long time indeed depending on rent levels.

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Replying to Wilson Philips:
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By Vile Nortin Naipaan
03rd May 2019 17:13

If you read the Notice (to which Schedule 10 defers) entitlement to be registered is sufficient, I think.

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Replying to Vile Nortin Naipaan:
Psycho
By Wilson Philips
03rd May 2019 17:28

Which part of the Notice (I assume you mean 742A)?

13.9.2 reads

"The following are examples of businesses and organisations that may occupy a property for other than eligible purposes:

•someone who is not, and is not required to be VAT registered"

That seems clear that even if someone is entitled to be registered if they are not then they are occupying the property for other than eligible purposes.

The legislation itself also provides that the occupier must be a taxable person for the eligible purposes test to be met - a taxable person being:

"3(1) A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act"

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Replying to sculptureofman:
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By Vile Nortin Naipaan
03rd May 2019 17:11

We don't know what the sole-trader does, do we? He may be occupying the building for eligible purposes (eg to make supplies that would be taxable supplies, if they were VAT-registered).

The issue would seem to be the deemed self-supply if the company now deregisters.

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Psycho
By Wilson Philips
03rd May 2019 20:12

And it could be the previous owner that has the problem here.

If the option is disapplied the company should be entitled to a refund of the output VAT incorrectly charged (provided it is paid back to the tenant).

However, since TOGC treatment would no longer apply the vendor would be liable for VAT on the sale. Whether they could recover this from the current owner would depend on what protection was provided in the contract for sale. We always ensure that a client vendor has the right to issue a VAT invoice if appropriate and/or is protected by appropriate buyer warranties etc but I have seen plenty of agreements without.

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By nameistaken
05th May 2019 12:55

Thanks for your replies.

Let me clear the situation again.
Sole Trader is NOT vat registered.
Sole Trader has eligible business activity and not required to register for VAT
The Landlord/Seller was VAT registered, the property was opted to Tax and always charged VAT on rent the paid.
The Sole Trader did not want to register for VAT himself just because of the property so he formed a separate company. The company opted to tax the property and no vat was charged by the seller to the company on TOGS basis i.e buying part of his rental business. seller also has other commercial properties.
Sole Trader is now the Tenant of the company paying £15k rent per annum as per lease agreement.

firstly whether this transaction can be treated as a TOGC?
When landlords sells the building with a tenant in place, this could qualify as the sale of a property business and not just the sale of a property, the sale could be treated as a TOGC without VAT being charged.

Legislation snippet
5.—(1) Subject to paragraph (2) below, there shall be treated as neither a supply of goods nor a supply of services the following supplies by a person of assets of his business—

====
(b)their supply to a person to whom he transfers part of his business as a going concern where—
(i)that part is capable of separate operation,
(ii)the assets are to be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part, and
(iii)in a case where the transferor is a taxable person, the transferee is already, or immediately becomes as a result of the transfer, a taxable person or a person defined as such in section 2(2) of the Manx Act.

source http://www.legislation.gov.uk/uksi/1995/1268/made

A proper lease agreement is in place to pay the £15k rent per annum as it was a requirement by the lender bank.
https://www.gov.uk/guidance/opting-to-tax-land-and-buildings-notice-742a...

If anyone still believe this arrangement is caught by the anti avoidance please elaborate. It has been nearly 6 months now so I am sure can warn the client so he can talk to the solicitors who advised him.

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Replying to nameistaken:
Psycho
By Wilson Philips
05th May 2019 14:35

I will defer to the VAT experts to comment on what action HMRC might take, given the passage of time. (Edit - I read it as 6 years not 6 months - so there is indeed an issue here) However, based on the facts presented, the option to tax by the purchaser should have been disapplied, with the result that TOGC treatment should not have applied.

The reason is that the occupier is connected to the landlord and is not registered, or required to be registered. The nature of the tenant’s supplies is largely irrelevant - to reiterate, the test is whether he is registered or required to be registered. If he is neither then the anti-avoidance bites.

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By shan1234
04th Dec 2019 22:38

Hi, can you please advice what was the outcome?
We have a similar case.
Seller is VAT registered with a portfolio of commercial properties in his ltd. company and selling one property with an existing lease.
I am buying the property with existing tenant (brother) who has a limited trading company. I will sign a lease with him to continue renting out the property.
I am buying the property under my newly formed ltd. company which I have VAT registered and opted to tax.
Seller is VAT registered and has opted-to-tax so I am putting this through as TOGC.

A few questions:
1. Is it sufficient to have applied for opt-to-tax for TOGC to apply or do I need HMRC confirmation that they have accepted my opt-to-tax?

2. I will be charging VAT on rent (£19000 inc. VAT) and that is my only activity so I will be paying HMRC a VAT bill of £3,800 per year less any VAT on expenses. As this is clearly below the £85k VAT threshold, can I later on de-register for VAT without invalidating TOGC? Is there a time limit on opt-to-tax or must it remain for the life time I own the property?

3. If lets say after a year I de-register for VAT, will I need to pay the £45000 VAT that I will have saved by not paying VAT on purchase price?

Thank you kindly

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Replying to shan1234:
RLI
By lionofludesch
05th Dec 2019 09:36

If you deregister, you'll need to pay VAT on the value of the company's assets.

Which may or may not be the same as the price you paid.

You need to see a VAT property specialist. These numbers are too big to be taking advice from anonymous folk on tinterweb.

Incidentally, you don't pay £3800 VAT on the £19000 rent. Your tenant pays it. You just send it on to HMRC. If you deregister, you'll get £3800 less from your tenant but, on the upside, you won't need to send it to HMRC.

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By shan1234
05th Dec 2019 16:25

Many thanks for your time and advice

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