Commercial Property

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To tax or not to tax, that is the question....

When buying a commercial property the legislation can seem like a bamboozling quagmire of contradictory information.  One question that often comes up is “what is an Option to Tax?”.

Non-domestic and commercial property is exempt from VAT, however there are exceptions.  The VAT legislation allows for such exempt property to be ‘opted’ and therefore effectively converts the VAT treatment from exempt to taxable. This is known as the ‘option to tax’.

The main advantage of opting to tax a property is the recovery of input VAT on the purchase and refurbishment costs.  The flip side is that VAT will have to be charged on the rental income, which could be a sticking point when renting the property if your prospective tenants are not vat registered.  You could also have to pay output VAT on the eventual sale of the property.

Therefore whether it’s in a buyers interests to opt to tax the property depends on the particular situation.  If an election to opt to tax has been made in the past then it might be possible to revoke it in limited situations.

Depending on the situation a further aspect linked to the option to tax that consideration should be given to when purchasing a commercial property is whether to structure the sale as a transfer of a going concern.  By doing so can remove the VAT liability at the point of purchase, potentially creating a short term cash flow benefit for the purchaser.

The right advice is essential when purchasing a property to navigate the tax pitfalls.  For further information please don’t hesitate to contact us.