Introduction
Welcome to the Winter 2023 indirect tax bulletin. In this edition, we discuss the potential VAT risks when buying or selling commercial property.
We also take a look at any relevant updates in the world of VAT and share with our readers any VAT issues the team are facing internally.
Commercial Property VAT Issues
Option to tax
Land and property transactions are usually exempt from VAT, however tax payers can choose to waive this exemption by opting to tax the land or property and notifying HMRC of this decision.
Once opted, VAT at the standard rate of 20% needs to be accounted for on any associated income.
Given that VAT is paid over to HMRC and not retained by the taxpayer, you may wonder why anyone would want to opt to tax land or property.
The reason is to recover VAT on associated costs (for example, legal fees or building repairs).
Without an option to tax income is exempt from VAT, which means the VAT on costs cannot normally be reclaimed. After opting to tax, the income becomes taxable so it is possible to reclaim this VAT.
Transfer of A Going Concern (TOGC)
When assets are sold, the default position is that VAT is added onto the sale price.
However, if certain conditions are met, the sale may be classed as a TOGC and outside the scope of VAT.
Whilst this article does not discuss the conditions, it is important to note that a TOGC is mandatory if they are met and similar if they are not met, the sale cannot be a TOGC. 
Property rental businesses are capable of being a TOGC, but if buyers can reclaim the VAT in full what benefit is there to a TOGC?
The answer is two fold. The first, is to help cash flow. Consider a commercial property purchase of £1,000,000. If the sale is not a TOGC, an additional £200,000 is added onto the sale price and the buyer needs to reclaim this from HMRC.
The second is Stamp Duty Land Tax (SDLT) because this is based on the VAT inclusive price and cannot be reclaimed from HMRC.
Continuing with the £1,000,000 example, the table below shows a TOGC will save the buyer £10,000 in SDLT.
| TOGC conditions met | TOGC conditions not met | |
| Purchase Price | £1,000,000 | £1,200,000 |
| SDLT payable | £39,500 | £49,500 |
*based on rates applicable at the 12 January 2024
Potential Issues When Buying and Selling
It is common for advice to be sought for the direct tax issues well in advance of a sale or purchase.
In the past, we’ve seen it left until days before completion before the VAT queries are raised, which has occasionally led to delays in completing.
These delays are often significant when we need to request information from HMRC about historic options to tax.
As mentioned above a TOGC is mandatory and understanding the potential risks from both the buyers and sellers perspective is important.
From the seller’s perspective, the risk is VAT should have been charged but wasn’t. HMRC will raise an assessment for the VAT that should have been charged, plus there is the potential for penalties to be added.
From the buyer’s perspective, the risk is VAT shouldn’t have been charged but was. In this situation HMRC won’t allow the buyer to reclaim the VAT and they will need to approach the seller to get this refunded.
An additional point to note is that it is possible to revoke an option to tax once it has been effective for 20 years. This would appeal to buyers who are unable to recover the VAT, either partially or in full.
Given the VAT is usually a significant sum in property transactions it is important to seek advice as early as possible to ensure the correct treatment is applied and avoid unnecessary delays.
Updates
There is good news for anyone wishing to use the DIY house builder scheme and reclaim VAT on associated costs.
The scheme gives individuals constructing their own home the ability to recover VAT on the majority of costs.
Currently anyone wishing to claim needs to complete a paper form along with copies of invoices to HMRC within 3 months of completion, however this is to be extended to 6 months giving claimants more time to collect documentation and submit the claim.
Over recent years, we have seen cases before tribunal that focused on the question ‘when did completion occur?’
At times, this can be before the completion certificate is issued, with claimants living in the property and waiting until receipt of this certificate before making a claim, only to find out they were out of time.
The changes are effective from the 5 December 2023 and apply to any claims made on or after that date. Claims are made on paper form, but claimants now have the option to submit a claim digitally.
The policy paper also states that invoices no longer required at the time the form is submitted. We’d assess HMRC may request specific invoices once they have initially reviewed the claim.