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VAT on Commercial Property

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Hi everyone,

I have a new client looking to purchase an old pub, with residential accommodation.

The seller isn't one of the big pub chains, and it isn't a going concern or even usable because most of the fixtures and fittings have been ripped out and the pub has been closed since May.

The estate agent is telling them that because it is a commercial property that there would be VAT on the sale.
My client isn't VAT registered and has no need to be, so they are obviously concerned.

The estate agent has said that there is also the option to purchase the limited company that owns the property which would reduce the stamp duty. Sounds very much like the Tony Blair scheme published a few weeks ago, but I have advised of the risk of buying a company that you don't know full details and history of with the legacy problems that can come with it.
My client isn't keen on doing it this way, they just want to buy the property.

 

It's confusing me a little bit, because I believed the default position was for there to be no VAT on the purchase/sale of properties including commercial unless they have opted to tax.

I don't have a huge amount of experience in this area, so would really appreciate any guidance pointing me in the direction of something I may have missed, questions I may need to ask, or at least just to know that there would only be VAT if the seller has opted to tax.

 

Thank you very much for your time and help. David

Replies (12)

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RLI
By lionofludesch
02nd Nov 2021 17:46

"It's confusing me a little bit, because I believed the default position was for there to be no VAT on the purchase/sale of properties including commercial unless they have opted to tax."

Who are "they" in this instance ?

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Replying to lionofludesch:
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By david_dbu
02nd Nov 2021 17:54

Thanks for your response.

"They" being the current owners of the property looking at selling to my client.

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Replying to david_dbu:
RLI
By lionofludesch
02nd Nov 2021 18:02

david_dbu wrote:

Thanks for your response.

"They" being the current owners of the property looking at selling to my client.

So you're saying the current owners haven't opted to tax ?

Do you know that for sure ?

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Replying to lionofludesch:
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By david_dbu
02nd Nov 2021 18:28

I don't know whether they have opted to tax or not yet, so I know that is a question I need to ask.
I just wanted to make sure that I hadn't missed something else.that may be obvious to accountants with more experience with property transactions.

Thanks again.

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chips_at_mattersey
By Les Howard
02nd Nov 2021 19:20

What is the client going to do with the property?
For example if he wants to convert entirely to residential he will need to confirm the option to tax point so he can disapply it.
I would ask for a clear statement from the vendor, with a copy of HMRC’s acknowledgment of the option, as a starting point.

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Replying to leshoward:
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By david_dbu
02nd Nov 2021 19:35

Perfect, thank you.

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VAT
By Jason Croke
02nd Nov 2021 19:51

The seller should confirm whether they have opted to tax the property, it is common for pubs to be opted to tax because usually the property is held outside of the trade, so PropCo holds the pub, opts to tax and rents to trade plus VAT, trade reclaims the VAT.

Some pubs might not be opted, just depends on the ownership structure. But it is absolutely critical to ensure seller confirms the status by showing their option to tax certificate, else they cannot charge VAT on the sale, so Q1 is to ask seller to confirm option/certificate of option to tax.

If the property is opted, where the pub has accommodation, there is an agreement with HMRC whereby VAT is charged on 90% of the selling price and 10% zero rated to reflect the living space, that ratio can be changed to reflect reality (ie, if the accommodation is greater than the pub), but generally most stick to the 90/10 as it's just easier. So Q2, confirm the 90/10 split will be in play.

You say your client isn't VAT registered, so the next question is Q3, what is your client doing with the property? Converted into dwellings, reopened as a pub? Why aren't they VAT registered? If intention is to convert to dwellings, might be able to disapply the sellers option to tax, else the seller cannot revoke their option to tax and the sale will be with VAT.

Q4, what is the value of the property?

Agree it doesn't sound like a ToGC, also agree buying the shares would reduce the SDLT but risk of taking on historical tax and compliance issues is a big risk.

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Replying to Jason Croke:
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By david_dbu
02nd Nov 2021 19:38

Thank you very much for such a detailed response.
You have confirmed a few bits for me but given me some more detail to look at, especially the scenario examples.
I really appreciate the guidance.

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Replying to Jason Croke:
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By paulwakefield1
03rd Nov 2021 08:15

Jason, Can I just check whether the 10% accommodation element is definitely zero rated as I thought it was exempt?

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Replying to paulwakefield1:
VAT
By Jason Croke
03rd Nov 2021 09:30

Hi Paul

Yes, my mistake, the 10% is exempt not zero rated (zero rated if a new build/new grant) but of course the OP said the pub was old and unused.
https://www.gov.uk/hmrc-internal-manuals/vat-land-and-property/vatlp22340

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By Paul Crowley
02nd Nov 2021 22:41

"The estate agent is telling them that because it is a commercial property that there would be VAT on the sale."
Estate agent may have been advised that there wil be VAT, but his claimed reason is wrong.
As said above by by the resident VAT experts, get the true details

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Replying to Paul Crowley:
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By david_dbu
03rd Nov 2021 08:16

Thank you.
Absolutely agree, which is why I came here to check if there were any questions I hadn't thought of and make sure I get all the details I need and ensure it is done right.

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