A Guide to VAT on Property Transactions

VAT on property is a complex area with multiple factors to consider and numerous possible exceptions to be aware of. While seeking professional advice is always recommended, this guide covers the main points around how VAT applies to property transactions, who is liable for any payments and the record-keeping obligations of involved parties.

How does VAT apply to property transactions?

In most cases, the sale or lease of a commercial property will be exempt from VAT, meaning neither buyer nor tenant will be required to pay the tax. Indeed, the base VAT rate (20%) is only compulsory when purchasing new or incomplete commercial buildings. This means all leases, assignments, licences to occupy or any interest in land or buildings, all sales of freehold commercial property or civil engineering works over three years old, and sales, leases or licences of all residential or charitable property are exempt from VAT. While this is generally seen as a positive as it reduces the cost of buying or selling a commercial property, it does mean that the landlord or buyer cannot recover the VAT on all related costs. There are, however, several exceptions to be aware of.

Property owners can apply VAT at the standard rate for properties older than three years. This may occur if, for example, renovations or refurbishments have occurred within the property and there is a desire to reclaim VAT incurred on expenses associated with the property. Once the option to apply VAT is applied, the owner is generally required to charge VAT on all transactions related to the property, such as rent or sales.

There are several restrictions and procedures that the supplier must abide by when applying VAT, including that they must elect to change the commercial property transaction from 'exempt' to 'taxable' before the transaction takes place, and they must notify HMRC of their intentions in writing within 30 days of deciding to charge VAT. For those already registered for VAT, this can be done by emailing notification to [email protected]. Those not registered for VAT should send their option to tax notification with their application to register for VAT. Once this has been done, the decision lasts for 20 years and can be challenging to revoke – although there is an option to do so during the six-month cooling-off period using form VAT1614C. However, making the right long-term decision is crucial, as applying VAT can reduce a property's marketability. It should also be noted that the option to charge VAT does not follow the property, so the subsequent purchaser or tenant will need to decide whether or not to opt to tax, and this will depend on their use of the building.

VAT can also be applied to commercial property transactions where the property involved is a new build. The freehold sale in an uncompleted or new commercial building will be standard-rated at 20%. Here, the term new build applies to properties under three years old.

Whenever a seller or landlord supplies a property liable for VAT, they must account for this supply to HM Revenue and Customs. This means they must be registered for VAT and pay the relevant amount of tax each quarter. Registration can be done online via www.gov.uk. It's simply a case of submitting key information such as company registration number, business bank account details, and Unique Taxpayer Reference number. Once this has been done, a 9-digit VAT registration number will be supplied that must be included on all invoices raised. At the same time as registering for VAT, HMRC will sign up the business to Making Tax Digital for VAT, unless it is exempt.

Several record-keeping rules must be followed once a business is registered for VAT. The basic rule is that a business must create and keep normal business records, which must be complete and up to date. Ensuring this rule is followed will ensure calculating the amount of VAT that either has to be paid or can be claimed from HMRC is straightforward.

Who is liable for VAT on property transactions?

Regarding VAT on property, it is generally the liability of the supplier, usually the seller or landlord of the property, rather than the buyer. Whenever the supplier makes a VATable supply, it must account to HMRC.

To ensure compliance with tax regulations, both parties must document all property transactions, especially if a property is elected for VAT. This should include retaining invoices, bills of sale and other documents associated with the purchase or sale of any properties. This will help prove the business's status to tax authorities and ensure that any profits are fully accounted for.

To gain from recovering any potential VAT charges that may occur, it can be best to register for VAT voluntarily even if total sales are under the £90,000 registration threshold, as long as some trades involve properties that are not exempt from VAT incurred.

VAT exemption on commercial property

As mentioned, commercial properties, including leases and sales, are typically exempt from VAT by default. If the buyer maintains the exemption, the property remains non-VAT elected.

This is also true with a Transfer of Going Concern (TOGC). When a business, or part of a business, is sold and meets specific criteria, it can be deemed a TOGC rather than a transfer of assets, which means VAT will not be applied to the transaction. A commercial property transaction will be classed as a TOGC if the property is transferred as part of a sale of the whole business or if the property is a business in its own right, for example, if it can be run as a property rental business. The buyer intends to carry on the same type of business. Strict requirements must be complied with when completing a transaction classed as a TOGC. This includes having a contract stating that it will be treated as a TOGC, and both buyer and seller must be VAT registered. It is also essential that the buyer continues to use the property for the same business purpose as before the transaction. Another factor to consider when buying and selling commercial property is the Capital Goods Scheme (CGS). If a property is bought, improved, extended or altered, the CGS will be relevant if the cost is £250,000 or more, excluding VAT, and it could require the supplier to adjust how much input tax it originally reclaimed on the asset.

Where a property is within the CGS, its use must be monitored for 10 years, and annual input tax adjustments must be made to reflect changes in building use between taxable, non-business, and exempt activities.

For example, if a company buys land for £5 million from a seller elected to charge VAT, then £1m will also be payable as VAT. If the company uses the land entirely to make taxable supplies, the whole amount is recoverable as input tax at the end of the first VAT period following the purchase. The percentage of the land used for taxable purposes must be monitored, as any decrease could create a VAT charge.

If a property is sold at the end of year five and is exempt from VAT, the final CGS adjustment will treat all input tax for years five to ten as relevant to exempt supplies. A single calculation is made at the end of year five. In practice, this means that what a business does can impact VAT, which was recovered up to 10 years ago.

Electing to charge VAT

While it may seem like not paying VAT on property sales would be the preferred choice, there are reasons why it could be deemed worth electing to pay VAT. For example, suppliers and landlords can often elect to tax to recover any VAT incurred on goods and services previously supplied to the business. This might include VAT on management and maintenance services, professional fees, development works and, potentially, the purchase itself. Investment landowners may, therefore, want to tax so that they can charge VAT on their property supplies to minimise their overhead costs and improve cash flow. Conversely, those who occupy a property for their own business, rather than to let or sell it to others, are unlikely to need to opt to tax since they would not expect to make supplies of the property itself.

If an option to tax is made, property owners should continue to monitor the VAT treatment of transactions to ensure it remains effective over time. 

In addition, there are some types of property where an option to tax would have no effect, such as those used for residential purposes.

It should be noted that in 2023, HMRC announced it would no longer acknowledge an option to tax notified by a taxpayer. This means that when a business needs to prove that they have notified HMRC of its decision, the only evidence will be an automated email reply from HMRC once it has submitted the relevant form (VAT1614A).  For this reason, it is best practice to put the address and postcode of the property and the effective date of the option in the subject line so it is clear which property the option to tax refers to.

VAT on the sale of new commercial property

The freehold sale of a new commercial property under three years old will be liable to VAT at the standard rate. This protects the developer's right to reclaim VAT on the construction costs. In this situation, if the buyer intends to rent the property out, they are likely to elect to charge VAT on rents going forward and on a future sale of the property to recover the VAT charged on an acquisition. VAT does not apply to newbuild leasehold sales, but the option to tax is still available.

How AccountsPortal helps

As VAT-registered businesses are required to maintain digital records and file tax returns using Making Tax Digital-compliant software, it's important to find an accounting tool that not only ensures a business meets its obligations but also actually simplifies the process of recording, collating and extracting key data.

Read more: How to manage tax in AccountsPortal

AccountsPortal offers a comprehensive and flexible way to manage VAT accounting with the ability to create custom tax rates, run a VAT report in seconds and track transactions in real-time. Reports are formatted so that filling in a return is simple, with automatic submission to HMRC for UK customers via Making Tax Digital. Setting the start and end date for a report takes only a matter of clicks, and reports can be exported or printed to be shared with all relevant parties. This ensures that the correct information is sent to HMRC at the correct time, considering the pressure of filing deadlines.

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Further Reading

Understanding VAT Thresholds: When Do You Need to Register?

Spring Statement 2022: What it means for small businesses

How to manage the final hospitality VAT rate increase in AccountsPortal