VAT QUESTION OF THE WEEK: Does VAT Recovery On a Building Mean VAT On The Sale?

VAT QUESTION OF THE WEEK: Does VAT Recovery On a Building Mean VAT On The Sale?

Q- One of our clients is selling a property on which he recovered VAT a couple of years ago and has been occupying for his trade, and therefore I assumed that he must charge VAT on the sale. The prospective purchaser is hoping to develop four flats to let out so he won’t be able to recover any VAT, and his accountant believes that there is a way around this because our client purchased the property for less than £250,000. Is it correct that if the buyer gives our client a VAT1614D certificate then the VAT does not need to be paid? Please could you help clarify this situation for us so we can advise our client?

A- The first question is whether the property is less than three years old, as the freehold sale of a new commercial building (“new” meaning less than three years from completion) is always standard-rated.

If the property is

 older than that, the next question is whether your client has, in fact, opted to tax. If he recovered input tax on the property on the basis that he occupied it himself as his trading premises, and he has not opted to tax, then the sale will be exempt.

If your client has opted to tax though, and the buyer provides a VAT1614D, this will dis-apply the option as long as the building is for conversion to flats; the sale becomes exempt. However, if the purchaser intends to demolish the building and build new flats on the site, VAT1614D is not appropriate and VAT remains due.

A purchaser buying a commercial property to convert into dwellings can use VAT1614D to dis-apply the seller’s option to tax whatever the value of the property. However, the reference to £250,000 by the purchaser’s accountant relates to the capital goods scheme (CGS). If the property is not a CGS item in the seller’s hands then an exempt sale will not result in an adjustment to the VAT recovered on the capital expenditure. However, if the seller had spent £250,000 or more + VAT on the purchase, refurbishment etc. of the property, and sold it within the ten year CGS term, there may be a repayment of some of the VAT to HMRC making the deal much less attractive. Should you wish to look at the CGS in more detail, VAT notice 706/2 is your starting point.

On a final point, if the sale is exempt, VAT on the selling costs will be exempt input tax and, if not within the partial exemption de minimis limits, will not be recoverable. The de minimis tests are set out in section 11 of VAT notice 706.