VAT on commercial property from purchase to sale

Do I need to repay (some) fully reclaimed VAT to HMRC when I sell the property without Opt to tax?

Didn't find your answer?

Morning, I really appreciate some help here as I am overwhelmed with amount of information on the VAT treatment when it comes to sell of commercial property.

My client bought a new flat in a residential building in 2018 and turned it to office. The flat has always been used for office purposes by his business with 10-20 staff.

It has never been rented out. Has been refurbished in 2021. The client is VAT registered and reclaimed both VATs on purchase of the flat and refurbishment.

He is now selling the property and trying to establish, if he will NOT ask HMRC to Opt to tax, does he need to repay some or all of the tax he claimed on the purchase? If he go ahead and Opt to tax would it protect him from any repayment?

Any other tips will help as well.

Many thanks Joanne

Replies (10)

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By JB101
11th Jun 2024 12:46

How can he have recovered VAT on purchase of the flat - it was residential?

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Replying to JB101:
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By David Ex
11th Jun 2024 12:58

JB101 wrote:

How can he have recovered VAT on purchase of the flat - it was residential?

Yup. And how do you get planning permission to turn a residential apartment into commercial premises? And how can 10-20 people work in premises designed for residential use?

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By Joanna Bell
11th Jun 2024 13:02

The business is registered there and pays business rates. The flat was purchased as commercial property.

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Replying to Joanna Bell:
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By Jason Croke
11th Jun 2024 13:32

Joanna Bell wrote:

The business is registered there and pays business rates. The flat was purchased as commercial property.


Yes, but does the flat actually have planning consent to be an office or is it still a flat designed primarily for living in?

If you are saying VAT was charged on the purchase of the flat, then I think we need a language sense check here, a flat is what you live in, an office space within a mixed use development is an office space.

The confusion here is that VAT is not charged on residential property, so you saying your client reclaimed VAT on the purchase of the flat makes no sense....so I am presuming you mean the client purchased an office within an apartment complex/mixed use development (ie, ground floor is a coffee shop, next floor is offices and then the remaining floors are apartments, that sort of thing).

Moving on, client refurbished the property and reclaimed the VAT on this. In 2018, client "turned the flat" into an office, how much money was spent on the conversion? What do you mean "turned the flat into an office, I was presuming your client purchased an office, so what do you mean by "converting"?

In 2021, the client further refurbished the property, again, how much was spent on this refurbishment?

The question you ask - does client opt to tax or not - cannot be answered until you establish what the planning consent is for this property and as to whether they need to repay anything is determined by the planning consent position and the value of the 2018 and 2021 conversions/refurbishments.

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Replying to Jason Croke:
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By Joanna Bell
11th Jun 2024 14:19

Apologies for the confusion, yes, the client has a consent to be an office. Yes, it is within apartment complex but ground floor designated area for office.

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Replying to Joanna Bell:
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By Bobbo
11th Jun 2024 15:23

Joanna Bell wrote:

Apologies for the confusion, yes, the client has a consent to be an office. Yes, it is within apartment complex but ground floor designated area for office.

So the client didn't buy a flat and turn it into an office? They bought a commercial property that just happens to be on the ground floor of a development where the upper floors are residential?

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Replying to Jason Croke:
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By FactChecker
11th Jun 2024 14:25

OP: all excellent points (as usual) from Jason ... but to be blunter:
* Your client shouldn't only be concerned with whether or not he'll "need to repay some or all of the tax he claimed on the purchase"; making the wrong decision and then trying to get it corrected will make your current conundrum seem like a walk in the park.

VAT is a precise tax so, as Jason hints, finding out the precise facts as at every key date in the period of ownership must be your first action - without that it's all guesswork and vagueness (which is never a good look with VAT).

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By Jason Croke
11th Jun 2024 14:48

If we assume we are talking about an office, client purchased it in 2018, and reclaimed the VAT. If the price of the property was over £250k then we are in the Capital Goods Scheme (CGS) regime whereby if disposed of within 10 years (2018-2028), then output tax is repaid to HMRC based on a CGS calculation (a proportion of previously reclaimed input tax is paid back to HMRC).

Likewise if the value of refurbishments in 2021 are over £250k, that would start a new sequence of CGS adjustments.

If CGS is in play, then an option to tax would be one way to prevent having to repay historical input tax back to HMRC and negates having to worry about things like facts, but then opting to tax brings new problems such as the additional cost for the buyer.

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Replying to Jason Croke:
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By Joanna Bell
11th Jun 2024 15:04

Thank you so much for all the advice, Jason. Much appreciated.

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By mail.taxperfect.co.uk
20th Jun 2024 10:55

Get professional advice and re-charge it onto your client.

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