How to Avoid Paying VAT on a Tenanted Commercial Building

Lets look at the VAT position on the purchase of business property.

To recuperate the VAT on costs associated with their industrial residential or commercial properties, the owners of many industrial property rental businesses have decided to tax their portfolios of property and would therefore generally charge VAT on the sale of a business property.

Nevertheless, the transfer of a business as a going issue (TOGC) is dealt with as ‘neither a supply of products nor a supply of services’ for VAT purposes and if the sale meets particular conditions, the supply is outside the scope of VAT and therefore no VAT is chargeable. The TOGC provisions can apply to the sale of a decided business building, provided certain conditions are fulfilled.

• a whole business or a part of business capable of different operation is moved as a going concern;

• the purchaser utilizes the assets in the very same type of business; and

• the purchaser signs up for VAT if not currently signed up or is registerable as a result of the transfer.

Additional conditions are needed to qualify as a TOGC for a property rental business:

• The property must be tenanted.

• The purchaser is signed up for VAT and notifies HMRC of its alternative to tax (using type VAT 1614A) on or before the date of the transfer.

• The purchaser alerts the vendor that the purchaser’s choice will not be disapplied under the anti-avoidance arrangements in Special Provisions Order (SI 1995/1268), art 5( 2A).

• owns the freehold of a property which it lets to a renter and sells the freehold with the benefit of the existing lease. This is a TOGC, even if the property is only partly tenanted. Similarly, if the business owns the lease of a property and it appoints the lease with the benefit of the sub-lease, this is a TOGC;

• sells a building throughout a preliminary rent-free period;

• approved a lease but the renters are not yet in occupation;

• owns a property and has actually found a tenant but not in fact entered into a lease contract when it transfers the property to a third party (with the benefit of the prospective tenancy however before a lease has been signed); or

• is a property designer selling a website as a plan (to a single buyer) which is a mixture of let and unlet, completed or incomplete residential or commercial properties, the entire site can be regarded as a TOGC.

• is a property developer and has constructed a building and it permits somebody to occupy briefly (without any right to inhabit after any suggested sale) or it is ‘actively marketing’ it looking for a tenant;

• sells a property where the lease that has actually been granted is surrendered instantly before the sale– even if occupants under a sublease stay in occupation; or

• sells a property to the existing occupant who leases the whole properties.

This can be an extremely helpful concession, as not just exists a cashflow conserving on funding the VAT costs till the input tax on the property can be reclaimed, but there is an absolute saving on stamp duty land tax (SDLT, in England and Northern Ireland) as SDLT is charged on top of the VAT, so if the VAT is avoided there is less SDLT to pay.

If a business is purchasing a chose industrial property, it can avoid paying VAT if it can get TOGC status for it by registering for VAT, choosing to tax and having a tenant in place at the time of the transfer.