Commercial Property – Should I Opt to Tax?
The sale of a new commercial property (one which is less than 3 years old), is a standard rated supply for VAT purposes. All other supplies involving commercial property are exempt supplies, meaning no VAT is charged on selling or renting a commercial property, and no VAT can be reclaimed on purchases associated with these supplies.
However, you may opt to tax a commercial property and change the supply from being an exempt supply to a taxable supply.
Why would you want to Opt to Tax?
The main benefit of opting to tax a commercial property is the ability to recover input VAT on associated costs.
Businesses that are using the commercial property as their trading premises, and are making taxable supplies in the course of their business, should be able to reclaim all input VAT in any case.
Therefore, you may only wish to consider opting to tax your commercial property where you are renting the property out and would be unable to reclaim VAT on the purchase price and any other associated costs in the absence of an option to tax.
Practical implications of Opting to Tax
Once you have opted to tax a commercial property, you must charge VAT on all supplies, including rent and sale.
Opting to tax a property which you are renting out may limit the potential tenants. If your tenant is a VAT registered business who can reclaim the VAT, there should be no issue but non-VAT registered tenants will be reluctant to pay VAT which they cannot reclaim.
You should note that once you have opted to tax a commercial property, the option cannot be revoked, subject to a six month cooling off period. Once the option has been in place for six months, it cannot be revoked until 20 years have passed.
It is important to be aware that the option stays with the owner, not the property. Therefore, when ownership changes, the new owner would need to notify HMRC of their intention to opt to tax the property to be able to charge and recover VAT.