haysmacintyre: Is your structure fit for purpose? Overview of VAT for property businesses

24th November 2022

The purpose of this article is to give Property businesses who buy and let properties a brief overview of some of the key areas to consider in respect of VAT.

Transfers of a Going Concern (TOGC)

One of the key areas for any business involved in the buying or selling of property is the question of whether a sale or purchase can qualify as a Transfer of a Going Concern (TOGC). If a transfer qualifies as a TOGC there is no VAT chargeable on the sale. This can, in turn, reduce the amount of Stamp Duty Land Tax (SDLT) payable on the transaction.

In order for a transfer to qualify as a TOGC, the following conditions must be met:

  • The property being sold must be intended to be used in carrying on the same kind of business as the Seller
  • Where the Seller is a taxable person, the Buyer must also be a taxable person already or become one as a result of the transfer
  • There must not be a series of immediately consecutive transfers of the business
  • Where the Seller has made an Option to Tax over the property then the Buyer must have made and notified an Option to Tax over the property and confirmed to the Seller that the Option to Tax will not be disapplied under the anti-avoidance provisions

If we put these conditions into practice, the starting point is to determine whether the Seller has made an Option to Tax over the property in question. If so, then in order for the transfer to qualify as a TOGC, the Buyer must also make an Option to Tax over the property and will need to register for VAT if they are not already registered.

A further condition which can cause issues for property businesses is the question of whether the property is intended to be used in carrying on the same kind of business as the Seller. If for example, the Seller has been letting a shop to a tenant and that tenant wishes to purchase the shop then this condition would not be met and the transfer would not be a TOGC. This is due to the fact that the Buyer would not be carrying on the same business as the Seller because they would not be a property rental business. On the other hand, if a separate company was to purchase the shop and they were to then let the shop to the existing tenant then the TOGC conditions would be met because the Buyer would be a property rental business. It is therefore important to consider the use of the property by both the Buyer and the Seller when determining whether the transfer can qualify as a TOGC.

Furthermore, it is important to ensure that there is a business being transferred and not just the property itself. For example, if the property has a tenant in situ, then the property must be transferred with that tenant in situ. Although there is no set guidance on how long a tenant should remain in situ following a transfer, good practice is for the tenant to remain for at least two rent quarters. This is quite a common issue that arises when a property business is purchasing a property which they wish to develop where they will be wanting to remove the tenant in due course.

Capital Goods Scheme (CGS)

If a property transfer does qualify as a TOGC then the Buyer inherits the CGS history of the Seller.

The CGS applies when an asset is purchased, or refurbishment is carried out to an asset and the value is in excess of £250K.

When an asset falls within the CGS then you must consider the use of the asset over a period of ten years and adjust for the VAT accordingly. If the asset is being used only in making taxable supplies, then this is not an issue as no adjustment will be required, however, if there is a change in use of the assets, for example, if the Option to Tax was disapplied in respect of the property, then the fact that a property may be within the CGS could result in a CGS adjustment. It is therefore important to ascertain at the outset whether a property being purchased is within the CGS.

Disapplication of the Option to Tax

Even if an Option to Tax has been made over land and property, the Option can be disapplied under certain circumstances. There are a number of different scenarios when an Option can be disapplied, for example, if a Buyer intends to build a dwelling to live in or if a Housing Association were to buy land to develop houses, if a Buyer intends to convert a building into a dwelling or a building to be used for either a relevant residential or relevant charitable purpose, or simply if a property is being let to a charity who are using it solely for relevant charitable purposes.

In all cases, it is the responsibility of the Buyers or tenants to notify the Sellers or landlords of the disapplication of the Option to Tax prior to a price being legally fixed.

Care needs to be taken around this area as if an Option to Tax is disapplied this can result in input VAT on costs being irrecoverable or significant input VAT adjustments being required under the CGS as noted above.

In conclusion

The above is just a very brief overview of three key areas that Property businesses should be considering when buying or selling properties, but this is a complex area where specialist advice is needed.

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