The impact of VAT charged on the sale or lease of a commercial property should not be underestimated. It could add costs of up to 20% (the standard rate) of the total value of the property. There are also serious penalties for failing to account for VAT when it is due, including incurring interest at a high rate. For a basic guide on whether VAT is chargeable on the sale or lease of a commercial property, you can read my earlier article here.
Special rules apply when a commercial property is sold or leased as part of the transfer of a property rental business. If the transfer qualifies as a “transfer of a going concern” (TOGC), the sale or lease will fall outside the scope of VAT so no VAT will be payable by the buyer or tenant.
Whether or not the sale or lease of a commercial property qualifies as a TOGC is determined by HMRC. To qualify, the property rental business being transferred must be live and/or operating, and the buyer or tenant must intend to carry on the same kind of business as the seller or landlord.
The following are the most common transfers of a property business that are capable of being treated as a TOGC:
- The sale of the freehold of a property with the benefit of an existing lease (there is a tenant in situ that will continue to let the property after the sale)
- The sale of the freehold of a property with an agreement for a tenant to pay rent in the future
- The assignment of a lease of a property with the benefit of a sub-lease
The following transfers of a property business are not capable of being treated as a TOGC:
- The sale of the freehold of a property with no tenant in situ and no agreement for a tenant to pay rent in the future
- The sale of the freehold of a property to an existing tenant who currently leases the whole premises
- The grant of a lease of a property if the landlord retains an interest that has a value greater than 1% of the value of the property (disregarding any mortgage or charge)
If the sale or lease of a property would be subject to VAT if it was not treated as a TOGC (in other words, if the seller or landlord has opted to tax or the building is less than 3 years old), the buyer is required to:
- Opt to tax (see my previous article for what this means)
- Notify HMRC that they have opted to tax
- Notify the seller or landlord that Article 5(2B) of the VAT (Special Provisions) Order 1995 does not apply (this is in reference to complex legislation on capital goods)
The VAT treatment of commercial properties is a complex area and a failed TOGC can result in the seller becoming liable for the VAT due, which could be a significant sum of money. If you require guidance on the VAT implications of the sale or lease of a commercial property, please contact our commercial property team on 01494 893568 or at firstname.lastname@example.org