The pros and cons of charging VAT on buildings

You’re buying new premises for your business. VAT is payable on the price, but you’ll only have to fund this until you reclaim it on your next VAT return. However, why do you need to think beyond this?

VAT on land and buildings

As a rule, sales of buildings are exempt from VAT except where it’s been sold for the first time within three years of its construction or the seller has elected to waive their exemption (opted to tax the property). As the purchaser you’re not obliged to opt to tax the property, but there can be financial advantages in doing so (see The next step ).

Get your VAT back

If you’re buying a building for your business on which VAT is chargeable because the owner has waived the exemption and you do the same, you’ll be allowed to reclaim the VAT as you would on other business purchases you make. However, there are a few possible drawbacks to buying a taxable property.

The stamp duty land tax trap

Stamp duty land tax (SDLT) is worked out on the VAT inclusive price. This applies to purchases of freehold or leasehold properties. This increases the real cost to you.

Example. Acom Ltd agrees to buy a freehold building for £220,000. SDLT on this would be at 1%, i.e. £2,200. The trouble is the vendor opted to tax the building meaning the VAT-inclusive price is £264,000 on which SDLT is £7,920, i.e. £264,000 x 3%, because the VAT has pushed the total price into the next SDLT rate band. Acom can reclaim the VAT, but not the extra £5,720 SDLT.

The VAT exemption trap

If your business makes all or some exempt sales, it isn’t allowed to reclaim all or some of the VAT paid on the purchase price of a building. The amount not reclaimable is based on the ratio of exempt to VATable sales. There’s a further wrinkle to this equation that can work for or against you - it’s called the capital goods scheme (CGS).

The CGS variation

Where the VAT-exclusive price payable for land or buildings exceeds £250,000, the CGS applies. Where the type of sales you make, i.e. exempt, standard-rated or a mixture, changes in proportion during the ten years following the purchase of a building, you must review the amount of VAT you reclaimed and make an adjustment to reflect the change in VATable supplies. This might mean reclaiming more of the original VAT paid or handing some back to HMRC (see The next step ).

What’s the answer?

There’s more than one solution to this:

Tip 1. To avoid both traps the obvious answer is to look for property that isn’t subject to VAT. That’s one which is more than three years old and where the seller hasn’t opted to tax.

Tip 2. If you’re interested in a property, but the seller has opted to tax, ask when. If it was more than 20 years ago the option can be withdrawn and the sale will be VAT exempt.

Stamp duty land tax is worked out on the VAT-inclusive price, so where it applies the property will cost you more. Plus, if your business makes exempt sales now or in the ten years following the purchase, you can’t reclaim all the VAT. Look for a property on which VAT isn’t chargeable or the VATable status can be withdrawn.

Please give us a call if you would like further information or advice.

The pros and cons of charging VAT on buildings

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