Property Rental or Sale: VAT Issues

How Changing Working Practices Are Affecting Office Space

One of the upshots of the Covid pandemic was an increase in office-based personnel working from home. Irrespective of one’s view of whether this is helpful or unhelpful to productivity, it is not likely that this will change in the foreseeable future.

Why Businesses Are Reviewing Their Office Requirements

With less administrative staff permanently working from business offices and rising costs of employment, business rents, rates and power supplies, there is a need to keep the overhead base minimised.

Many businesses are questioning whether they need all the office premises to which they have access. They are looking to reduce office space either by moving to smaller premises or subletting part of their current portfolio of offices.

VAT Can Be Overlooked During Property Decisions

This week’s newsletter looks at some of the VAT aspects of property transactions. This is often overlooked in the decision-making process because it is an area which is not the main trading focus of the business.

Do I Have to Charge VAT on Renting Out Office Space?

It is a common misconception that if your landlord charges VAT on the rent of your offices to your business, then you must automatically charge VAT if you sublet part, or all, of the premises.

The Option to Tax Is Specific to the Taxpayer

As has been mentioned in previous newsletters, a supply of land and property is one area of VAT where the supplier may have a choice whether to charge VAT. When an option to tax is put in place, it makes supplies of land or property subject to standard rate VAT. This is unless the option is automatically disapplied, with one example being the use of property for a residential dwelling.

That option can only be used by the taxpayer who made the election. Any other person with a beneficial interest in the property must make their own option to tax before any supplies they make relating directly to the property are taxable.

An Option to Tax Can Remain in Place for 20 Years

Careful consideration needs to be taken before lodging an option to tax. Once it is in place, it holds for 20 years after the first six-month ‘cooling off’ period. It is important, therefore, to consider possible future uses of the property. This includes whether it might be converted into, or sold for conversion to, residential dwellings.

Subletting Without an Option to Tax

On the other hand, if no option to tax is lodged, then subletting the premises will be an exempt supply if there is a licence to occupy. That, in turn, means considering the partial exemption rules when accounting for VAT.

An Option to Tax Cannot Be Backdated

As an option to tax cannot be backdated, it is important to make sure VAT has been considered at the outset. Advice should be taken to ensure there is no negative financial impact from a wrong decision or wrong timing in respect of lodging an option to tax.

Confirming That a Licence to Occupy Exists

Quite apart from the potential complexities with whether an option to tax is appropriate, there needs to be certainty that a licence to occupy has been granted when letting space.

Converting Premises to Residential Dwellings

It is possible that the commercial premises your business has used as offices, or indeed for any other business purpose, are no longer required for the business at all. They may also be located in a place where planning permission would be granted to convert them into residential dwellings. This could be achieved either by selling the site to a developer or undertaking a project within the business to do the development.

Capital Goods Scheme Implications

There are many areas of VAT to consider if such a route is considered. One consideration is whether VAT has been recovered on the purchase of, or improvement of, the property in the past ten years. It is also necessary to consider whether that means there are Capital Goods Scheme implications.

Selling or Renting the Residential Dwellings

It is necessary to consider whether the dwellings will be sold as dwellings or rented out for residential use.

The Effect of VAT on Stamp Duty

The impact on the cost of stamp duty for the purchaser must also be considered if the site has an option to tax. This is because stamp duty is charged on the VAT-inclusive price – yes, tax on tax!

Input Tax and Construction Services

Other considerations include the impact on recovery of input tax if the sale is exempt from VAT. There are also a host of VAT issues in connection with construction services if the conversion project is undertaken by your business.

Selling Commercial Premises With a Tenancy in Place

If your business owns the office premises, it may be possible that part of them will be sublet. However, use of the premises may then decline further so that the whole premises are let out to a tenant or tenants.

Transfer of a Going Concern VAT Conditions

If you then decide to sell the premises with a tenancy or tenancies in place, the VAT conditions for a Transfer of a Going Concern need to be carefully considered. The sale is effectively the sale of a property letting business.

Strict adherence to timing constraints is needed to ensure that neither the seller nor the buyer ends up with VAT-related costs arising from the sale. Those costs could have been mitigated if the right actions had been taken at the right time.

Summary

This newsletter only briefly touches on some of the possible ways office space that is no longer required may be used by a business, along with some of the VAT implications that may arise.

Property VAT Can Be Complex

It would be impossible to spell out all the VAT issues that might arise, as VAT relating to property transactions has the potential to be complex.

Seek Specialist VAT Advice Before a Property Transaction

We would always recommend taking specialist VAT advice on any property transactions.

Chartergates has experience in dealing with VAT on property transactions, so please do not hesitate to contact us for assistance in this area or on any other VAT topic.

Disclaimer

Chartergate Legal Services Ltd has drafted this email update to provide you with a general overview of the relevant law and developments at the date of sending only. This email is provided as a general overview and should be taken as such. It is not a substitute for professional advice that is specific to your circumstances and should not be relied upon as such.