Many businesses and individuals own UK properties that contain a mix of residential and commercial property. A common example in large towns and cities is a shop or commercial premises with flats above.

VAT Option to Tax

In the UK, supplies of residential property are exempt from VAT, with the exception of new build properties. Commercial property is normally VAT exempt, but the rules can be different depending on the circumstances.

However, property owners are entitled to “opt to tax” their land and buildings, rendering supplies of the commercial land as taxable at 20%. An option to tax applies to a whole building and the site surrounding it. However, it cannot apply to residential property. Therefore, even in an opted mixed-use building, income from residential property leases (other than holiday lets) is likely to be VAT exempt.

Acquiring Mixed-Use Property

Where a mixed-use property is opted to tax, the option does not affect the residential element of the property. Therefore, the vendor of the property is required to apportion the sale between the taxable and non-taxable elements of the sale. If VAT is erroneously charged on non-taxable parts of the building, the purchaser is not entitled to recover this as input VAT from HMRC. The only recourse is to the vendor, and this can prove extremely difficult to resolve, especially where a property SPV has been struck off.

Any VAT recovery is based on the intended supplies of the properties. Therefore, if the property is mixed-use, the recovery needs to be considered carefully as it will need to be apportioned between the taxable and exempt areas of the building i.e., between recoverable and non-recoverable.

Onward Supplies

The letting and onward sale of opted land and property attracts 20% VAT. However, there are several circumstances in which an option to tax is disapplied because of the specific facts of the transaction. The anti-avoidance rules in this area are complex and it is advisable to take professional advice when selling an opted property.

Oftentimes, a landlord or investment company will sell a property with tenants in situ as a transfer of a going concern (TOGC), with a view to treating the entire transaction as outside the scope of VAT. If TOGC treatment is desired, professional advice is essential to ensure all of the boxes are ticked. Minor oversights can invalidate the TOGC with no ability to correct the position, increasing VAT costs and SDLT.

How We Can Help

Our team of VAT and property tax specialists have a detailed understanding of the possibilities and pitfalls of property VAT and can provide a range of advisory and compliance services. For flexible and cost-effective advice regarding VAT or any other taxes on property, please contact us to discuss in further detail.