There are several issues to watch out for:
Transfer Of a Going Concern (TOGC)
Before you buy a commercial property you will need to find out if the current owner has opted to tax.
Supplies of land and buildings, such as freehold sales, leasing or renting, are normally exempt from VAT. This means that no VAT is payable, but the person making the supply cannot normally recover any of the VAT incurred on their own expenses.
However, you can opt to tax land. For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it. You don’t need to own the land in order to opt to tax. Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard rated, and you will normally be able to recover any VAT you incur in making those supplies. VAT Notice 742A
If an Option to Tax is in place the seller will charge VAT when they sell the property.
If the purchaser is not registered for VAT they get a very large VAT bill to pay, however, if they register for VAT or are registered for VAT before the sale takes place then its possible to use the TOGC rules to avoid having to pay VAT on the purchase.
The main conditions are:
- the assets must be sold as part of the transfer of a ‘business’ as a ‘going concern’
- the assets are to be used by the purchaser with the intention of carrying on the same kind of ‘business’ as the seller (but not necessarily identical) – for example commercial property rental
- where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer
- in respect of land which would be standard rated if it were supplied, the purchaser must notify HMRC that he has opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date
The TOGC rules are compulsory. You cannot choose to ‘opt out’. So, it is very important that you establish from the outset whether the business property is being sold as a TOGC. Incorrect treatment could result in corrective action by HMRC which may attract a penalty and or interest.
Problem areas:
- Gap in trading – for TOGC to apply there must be no significant gap in trading between the sale and purchase
- VAT registration – If the vendor is VAT registered, there can only be a VAT-free TOGC if the purchaser is registered at or before the transfer
TOGC Intended for Residential Use
Schedule 10 para 6 VATA 1994 Notice 742A para 3.4
Your option to tax will not apply if you supply a building or part of a building that is not designed or adapted as a dwelling (or number of dwellings) or for a relevant residential purpose but you receive a certificate (VAT1614D) from the recipient of your supply (by the time described in paragraph 3.4.3 and paragraph 3.4.4) certifying that it is intended for use as a dwelling or number of dwellings or solely for a relevant residential purpose. This can apply where the building, or relevant part, is either intended for such use:
- without conversion work being undertaken
- after conversion
Conversion of Commercial to Residential for Sale – Zero Rating
VAT notice 708 (Schedule 8 Group 5 item 1 VATA 1994)
5.5.1 What ‘person converting’ means
You are a ‘person converting’ a building if, in relation to that building, you are acting as, or have, at any point in the past, acted as:
- a developer – you physically converted, or commissioned another person to physically convert, a building (in whole or in part) that you own or have an interest in
- a contractor or subcontractor – you provided construction services to the developer or another contractor for the conversion of the building, sub-contracting work as necessary
5.5.6 TOGC of converted developments of dwellings, relevant residential buildings
A person acquiring a residential development that has been subject to a qualifying conversion as part of a TOGC inherits ‘person converting’ status and is capable of making a zero rated first major interest grant in that building or part of it as long as:
a) a zero rated grant has not already been made of the converted building or relevant part by a previous owner (not including the grant that gives rise to the TOGC)
b) the person acquiring the building as a TOGC would suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business. This entails the transfer (as a TOGC) of its entire property portfolio of newly constructed or converted qualifying buildings to an associated company, which will make first major interest grants. If these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the Capital Goods Scheme or partial exemption “claw back” provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances – we would consider this to be an unfair disadvantage)
c) that person would not obtain an unfair VAT advantage by being in a position to make zero rated supplies (for example, by recovering input tax on a refurbishment of an existing building)
A recent case suggests the rules even apply to Houses of Multiple Occupancy (HMO’s) and that HMO’s can also be Zero Rated
The case is Capital Focus Limited v HMRC TC05193 Appeal number TC/2015/04891.
Capital Focus purchased Tintern House in Banbury, Oxfordshire in August 1994, it was a commercial building and they intended to create one large residential building so they started work and reclaimed the VAT, however, they changed their mind and decided to create an HMO instead.
Reduced Rate VAT for Conversion from Commercial to Residential
The rules are in VAT Notice 708
Using the reduced rate of 5% is useful for Residential property (exempt from VAT) but is also useful for commercial buildings where there is no option to tax in place.
Conversions into single household dwellings
A qualifying conversion includes the conversion of:
- a property that has never been lived in, such as an office block or a barn
- a multiple occupancy building such as a bedsit block
- living accommodation which is not self-contained, such as a pub containing staff accommodation that is not self-contained
- any dwelling which had previously been adapted in its entirety to another use, such as to offices or a dental practice
It does not include:
- the creation of living accommodation that is not a ‘single household dwelling’, such as most ‘granny’ annexes or additional bedrooms at a care home, and
- the renovation or alteration of living accommodation that had been used for other purposes without the premises being adapted, such as a flat above a shop that has been used for storage. If the living accommodation has not been lived in for two years or more, the reduced rate explained in section 8 may apply
Conversions into multiple occupancy dwellings
A qualifying conversion includes the conversion into a multiple occupancy dwelling of:
- a single household dwelling
- a building used for a relevant residential purpose, such as a care home, and
- a property that has never been lived in
It does not include, for example, the creation of additional bedrooms at a dwelling consisting of bed-sits.
Conversions into premises intended for use for a relevant residential purpose
A qualifying conversion includes the conversion of:
- a single household dwelling
- a multiple occupancy dwelling, and
- a property that has never been lived in
into premises that will be used solely for a relevant residential purpose.
It does not include:
- the remodelling of an existing ‘relevant residential purpose’ building, such as a care home, and
- any conversion where a new qualifying residential ‘home’ or ‘institution’ is not created in its entirety, such as the conversion of outbuildings into additional bedrooms for an existing care home
What services can I reduced-rate?
Other than installing goods that are not building materials, you can reduced-rate any works of repair, maintenance (such as redecoration), or improvement (such as the construction of an extension or the installation of double glazing) carried out to the fabric of the building.
You can also reduced-rate works within the immediate site of the premises being converted that are in connection with the:
- means of providing water, power, heat or access
- means of providing drainage or security, or
- provision of means of waste disposal
All other services are standard-rated. For example, you must standard-rate:
- the installation of goods that are not building materials, such as carpets and fitted bedroom furniture
- the erection and dismantling of scaffolding
- the hire of goods
- landscaping
- the provision of professional services, such as those provided by architects, surveyors, consultants and supervisors
