Normally if you rent out land (and buildings on it) you do not charge VAT.  Importantly this means that you cannot reclaim input VAT incurred on any costs associated with the land (and building) on it – for example VAT on repairs and maintenance costs.

Read on to find advice on what you can do about this.....

If you are renting the building to a residential tenant it is exempt from VAT and you cannot charge VAT as they can’t reclaim it.    The downside is that you cannot claim VAT back on associated costs.

However, if you are renting to a commercial tenant (say an office or warehouse) who is VAT registered then it makes no difference to them if you charge VAT or not.  In these cases it makes sense for you to charge VAT on your supplies to them.  But how do you do this?  You can make election with HMRC to have VAT applied to the land – ie: an “option to tax”.  The building is on the opted land and therefore you can charge VAT on rents to the commercial tenants.  By doing this you can also reclaim VAT on the opted land costs.

An option to tax election should only be made by the landowner in order to gain an input tax benefit.

When the landowner sells his opted to tax land (and building on it) he normally would have to charge VAT on the sale.  There are two consequences of this:

1. SDLT is higher as it is based on the gross value (including VAT).

2. The VAT raised on the purchase price can cause a cashflow issue for the buyer.

There are special rules to help businesses avoid these issues known as the transfer of a going concern (TOGC).

If you have a tenant in place at the time of the sale and you have opted to tax the property, then the buyer can also opt to tax the property.  If this is done correctly no VAT is chargeable on the the purchase price.

It is still a taxable sale by the seller, but it becomes “outside the scope” of VAT as the transfer of a going concern with no VAT charged. The buyer is simply acquiring a property rental business rather than just a building and therefore there is no VAT.

The SDLT is therefore reduced as there is no VAT. With today’s prices this can save significant sums.

The above are only some of the many aspects to consider when deciding if to make an election to opt to tax your land. Complications can arise if you have mixed-use buildings (such as a flat above a shop).

If you have mixed supplies (commercial and residential) and you register for VAT you can only reclaim VAT on the commercial element.  You should also be able to reclaim a proportion of the VAT on overheads.  You will need to perform a calculation to determine how much you can reclaim.

If you want to find out more please contact us.