I am sure you would prefer a vodka and tonic rather than reading this, but if you don’t read this you will probably need a vodka and tonic if you fall into the VAT trap.
VAT on commercial property is a very complex area. Broadly speaking, if commercial premises are elected for VAT purposes, then VAT is payable on the rent the tenant must pay and on the sale price of that property. This point is frequently overlooked by both tenants and, perhaps, first time commercial property investors who are looking to acquire commercial premises. It is imperative that a proper investigation is carried out before the terms of the lease or the purchase of the property are even negotiated, as to whether or not VAT is chargeable on the rent and/or the sale price.
Frequently the commercial agent advertising the property may not have asked the question themselves and, in many cases, the landlord may well not know which will necessitate further investigation from a suitably qualified VAT expert.
Broadly speaking, where a property has been elected for VAT and VAT is chargeable on the rent or the sale price of it, has a knock-on effect not only on cashflow for any tenant or prospective purchaser, but also on stamp duty. The reason for this is because stamp duty on either a tenant taking a commercial lease or a purchaser acquiring commercial premises, is calculated not only on the multiple of the rents or the sale price but also any VAT element which is applicable to it.
Yes, you read that correctly. It is, in essence, a tax on a tax, and although grossly unfair, in many people’s eyes, it is, for the time being, what governments for the last 20 years or so have chosen to do.
Example 1 - You are a tenant of commercial premises taking a lease for 10 years at a rent of £100,000.00 per year with a rent review in year 5. The property has been elected for VAT purposes, which means VAT is payable on the rent. According to the current SDLT calculator, as at October 2019, the SDLT payable by the tenant will be £8,479.00.
If the property had not been elected for VAT purposes, then the SDLT would be £6,816.00.
Example 2 - You are buying commercial premises which have been elected for VAT purposes for £400,000.00. SDLT is calculated on the sale price plus the VAT element, £480,000.00, which means that the SDLT payable would be £13,500.00.
Had the property not been elected for VAT purposes the SDLT payable would be £9,500.00.
VAT is a complex area and, despite the fact that a property is elected for VAT purposes, it may not necessarily be chargeable. Come and speak to us before buying commercial premises or taking a lease of them and … we will supply the tonic!