Saving VAT and SDLT on property deals

In some situations where you're buying or selling a commercial property that's subject to VAT you can avoid having to account to HMRC for this. As a buyer this might reduce the SDLT you pay or improve your cash flow. And as the seller it can make your property more attractive to buyers. What's involved?

Background

On August 1 1989 (remember this date, it's important!) the UK government introduced a major change to the VAT regime forced on it by the EU. The result was that land and buildings became subject to VAT. However, older buildings remained exempt although owners could "waive the exemption". This is usually called an "option to tax". But why would you do this?

Claiming back VAT on costs

If the owner of an older (more than three years) commercial property leases or lets it out and hasn't made an "option to tax", they can't recover any of the VAT they've paid on the costs of running or improving the building. So most commercial property owners were at the head of the queue in 1989 to sign up for an option to tax. This means that VAT is chargeable on the rent they charge their tenants, and the sale price of the property when they sell it. This can cause problems.

Exempt tenants

Many businesses are fully or partially exempt from VAT. That means that they're restricted, or barred entirely, from claiming back VAT on their purchases. So, if you own a building subject to VAT, it could be a big disincentive to potential buyers or tenants. That's bad news in the current market. But there's some better news on the horizon.

New opportunity - important date

The option to tax stays in force until it is revoked. But this can only be done after 20 years. So since August 1 2009 those who opted to tax back in 1989 have the right to cancel it.

Tip 1. Even if the previous owner of your property made the option to tax, you can still revoke it providing it's been in force 20 years from the time they first made the election.

Tip 2. When buying a property ask the seller if it's subject to VAT. If it is, and it's been in force for 20 years (or soon will be) ask them to revoke it. This will save you having to raise finance to pay the VAT. And if your business is exempt, it can save you the entire amount of VAT on the purchase price that, if it were charged, you couldn't reclaim.

Stamp duty savings

Not only are there VAT and timing benefits in buying a property that's not subject to an option to tax, but it can also cut the amount of Stamp Duty Land Tax (SDLT) due.

Tip. SDLT is charged on the purchase cost of a property including VAT. So avoiding it will actually reduce your costs.

Example. John is moving his business to smaller premises. He's negotiated the purchase of an office for £230,000 excluding VAT. The owner made an option to tax on February 1 1993. The total price John will have to pay is £284,280. This includes £46,000 VAT and £8,280 SDLT at 3%. But if John asks the seller to revoke the option to tax on March 1 2013 and delays exchanging contracts on the purchase until then, he'll pay just £232,300. There's no VAT, and the SDLT is now only chargeable at 1%, which equals just £2,300. A real saving of £5,980.

Saving VAT and SDLT on property deals

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