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Opting to tax a commercial property prior to sale

Capital Goods Scheme and whether or not to Opt to Tax a property prior to sale

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We are currently in negotiations to sell our commercial properties that we run our trading business from. Both properties are greater than 3 years old and so the sale of the properties should be exempt for VAT. We purchased the properties less than 10 years ago and we reclaimed the input VAT that was charged to us on the purchase price of the properties. We have also claimed input VAT on significant property improvements over the last 10 years. Am I correct in thinking that if we sell the properties then we will need to repay a proportion of the Input VAT claimed on the properties under the Capital Goods Scheme? Also is it correct that if we Opt to tax the properties prior to sale, then the properties would be standard rated for VAT, but this avoids us having to repay any input VAT - but causes more stamp duty to be paid by the prospective buyer. Does it make any difference to the above situation if we sell the properties but then continue to run our business from them by paying rent to the purchaser? 

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Jason Croke
By Jason Croke
23rd Feb 2021 10:50

You are correct in all your assumptions/post. If each property or each improvement cost more than £250k and you reclaimed the VAT on these at the time, then yes, they are Capital Goods Scheme items.

Disposal of them within the 10 years would trigger a repayment of input tax (on a proportional basis) because the disposal of them would be an exempt supply, unless, as you have stated, you opt to tax the properties. Then their disposal will be plus VAT. As you are not making an exempt supply of the property anymore, then the CGS isn't triggered and no repayment of input tax.

But yes, it does mean the buyer has to pay VAT on top of the selling price plus SDLT is calculated on the VAT inclusive price, so will make the purchase more expensive. It doesn't look like it would be a ToGC (Transfer of a Going Concern) because the properties are not currently rented.

You need to calculate what an exempt disposal will cost you in repaid input tax, set against the impact opting to tax/charging VAT will have on the buyer. If say the input tax you owe back to HMRC is £30k then it may be easier to increase your selling price by £30k, and make an exempt sale/no option to tax, buyer saves on VAT/SDLT.

It all depends upon the numbers, how many years are left of the CGS for each property/improvement, what the buyer intends to do, who the buyer is, advice from your Accountant to ensure all routes and options are explored.

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By Duggimon
23rd Feb 2021 11:02

The last sentence of my learned colleague's post above is the most important one, please do not enter into any transactions without first consulting a professional adviser.

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