VAT and SDLT on Commercial Property: Opting to Tax, TOGC and Reliefs Explained

When dealing with commercial property, understanding how VAT and Stamp Duty Land Tax (SDLT) apply is essential to avoid unexpected costs. You need to know when VAT is charged, especially if the property is new or the seller has opted to tax it. Opting to tax means VAT is added to the sale price, which also affects the SDLT calculation, often increasing the overall tax you pay.

There is a way to avoid paying VAT upfront through something called a Transfer of a Going Concern (TOGC). If the sale qualifies as a TOGC, no VAT is charged, which can be a significant financial benefit. This relief helps buyers by improving cash flow since they don’t have to pay VAT immediately or wait to reclaim it, and you also won’t pay extra SDLT on VAT.

Knowing when relief applies and how to opt to tax can save you money and simplify your tax position, but the rules can be complex. This post will explain the key points and help you see which options suit your situation best.

VAT and SDLT Fundamentals on Commercial Property Transactions

When buying or selling commercial property, you need to understand how VAT and SDLT work together. Both taxes can affect the total costs and tax liabilities of your transaction. Knowing when VAT applies and how SDLT is calculated helps you avoid surprises.

How VAT Applies to Commercial Property

VAT is charged on the sale or lease of most new commercial properties, usually those less than three years old. If the property is over three years old, VAT only applies if the seller has chosen to opt to tax it. This means they have informed HMRC they want VAT to be added, often to recover VAT on costs.

You pay VAT at the standard rate on the purchase price if VAT applies. For leases, VAT depends on the landlord opting to tax the property. If the property is exempt from VAT, you don’t pay VAT but can’t reclaim it on related costs. Understanding whether VAT applies and the seller’s tax status is essential to plan the deal and avoid added costs.

Overview of SDLT on Commercial Property

Stamp Duty Land Tax (SDLT) is charged when you buy commercial property over a certain price threshold in the UK. SDLT rates vary depending on the purchase price and the type of transaction. For non-residential property, rates typically start at 2% for the portion above £150,000.

SDLT is based on the chargeable consideration, which usually means the purchase price including VAT if VAT is payable. This ensures tax is calculated fairly based on the full amount you pay. SDLT must be paid within 14 days after completion of the transaction, so budgeting for this cost is vital.

The Relationship Between VAT and SDLT

When VAT is charged on a commercial property sale, the SDLT calculation includes this VAT amount. This can increase the SDLT you owe since the tax base grows with the VAT added on top of the sale price. However, in some cases, proper planning can reduce this impact.

For example, if you buy a property as a Transfer of a Going Concern (TOGC), VAT might not apply, and only SDLT will be due, often at a lower rate. Knowing how VAT and SDLT interact allows you to structure your purchase carefully and potentially reduce your overall tax burden. Always confirm the VAT status of the property and look for available reliefs early in the process.

Opting to Tax: Principles and Process

You need to understand what the option to tax means for your commercial property and why it matters to your VAT situation. It is important to know when you should make this choice and how to formally notify HMRC to stay compliant and avoid penalties.

What Is an Option to Tax?

The option to tax allows you to charge VAT on the sale or rental of your commercial property. Normally, most commercial land and buildings are exempt from VAT, which means you do not add VAT to these transactions.

By choosing to opt to tax, you make your property taxable for VAT purposes. This means you will charge VAT on rents or sales but also reclaim VAT on costs related to the property, such as repairs or renovations.

You can apply the option to tax to the entire property or just part of it, depending on how the property is used. It is not automatic and requires a clear choice from you as the owner or seller.

When and Why to Opt to Tax

You should consider opting to tax if you expect to recover VAT on expenses connected to the property. For example, if you spend money on maintenance or improving the building, opting to tax helps you reclaim VAT paid on these costs.

Also, if your property deals involve tenants or buyers who can claim VAT themselves, charging VAT may be normal and expected.

However, if you do not opt to tax, the property remains exempt, and you cannot reclaim VAT on related expenses. This can affect your cash flow or overall costs.

Choosing to opt to tax is a key strategic decision that affects both VAT charges and recoveries and should align with how your property will be used in the future.

Notification to HMRC and Compliance

To opt to tax, you must notify HMRC in writing within 30 days of the decision. You use a specific form or letter to make this formal declaration.

Once you make the option, it usually lasts for 20 years unless you cancel it with HMRC’s approval or certain conditions change.

It is important to keep records of your option to tax declaration and ensure all VAT returns and invoices reflect this choice. Incorrect or late notifications can cause penalties or disputes.

Make sure the intended use of the property matches the option to tax to avoid VAT errors. Mixed-use properties require careful attention to this compliance detail.

TOGC: Transfer of a Going Concern Explained

When transferring your commercial property or property rental business, certain conditions allow the sale to be treated as a Transfer of a Going Concern (TOGC). This means you may avoid VAT charges and reduce Stamp Duty Land Tax (SDLT). Understanding which transactions qualify and which do not is essential to apply the correct tax treatment.

Conditions for TOGC Treatment

To qualify as a TOGC, the business or property must be sold as a whole, including everything necessary for it to continue operating.

You must be VAT-registered, and the buyer must also be VAT-registered or required to be VAT-registered.

The property or business must be used by the seller for a taxable business activity, like letting commercial property.

Ownership and control must transfer together, along with any relevant assets, such as leases or contracts.

If you miss any key element, the sale will usually attract VAT, making the transaction more costly.

Typical Scenarios Qualifying as TOGC

Selling a commercial property with an active rental business often qualifies for TOGC treatment.

If you transfer a property lease alongside the business, and the buyer continues the rental operation, this commonly meets the conditions.

A sale where the buyer opts to tax the property too can be treated as a TOGC, avoiding VAT.

You can also qualify if the business involves supplying services or goods connected to the property.

Structuring your sale properly with HMRC’s TOGC rules helps save money by removing VAT charges and reducing SDLT.

Transactions Not Qualifying as TOGC

If you only sell an empty commercial property without a business activity, the sale is likely subject to VAT.

Selling a business without transferring essential assets or control will not meet TOGC conditions.

If either party is not VAT-registered, the transfer cannot be treated as a TOGC.

Partial sales or sales excluding key contracts or assets usually fail the TOGC test.

In these cases, VAT will be charged, and SDLT relief will not apply, increasing your tax costs.

VAT and SDLT Reliefs Upon Opting to Tax and TOGC

You need to understand how VAT and Stamp Duty Land Tax (SDLT) interact when you opt to tax a commercial property or transfer it as a going concern (TOGC). These actions impact the VAT you charge and how much SDLT you pay on the property purchase price.

TOGC Relief: VAT Implications

When you sell a business or property as a TOGC, the sale is outside the scope of VAT. This means you do not charge VAT on the sale price. To qualify, the buyer must be able to continue the business and the transaction must include all necessary assets.

If you have opted to tax the property, you usually have to charge VAT on the sale. However, if the buyer also opts to tax the property and certain conditions are met, the sale can still qualify as a TOGC. This allows you to avoid charging VAT even when you have previously opted to tax.

If VAT is charged in error on a TOGC sale, the buyer cannot recover it as input VAT. This can cause cash-flow issues, so it is essential to apply TOGC rules correctly.

SDLT Savings from TOGC

TOGC relief can reduce your SDLT costs because the transaction does not include VAT in the purchase price for SDLT calculations. Normally, SDLT is charged on the VAT-inclusive purchase price if VAT is due.

By applying TOGC relief, the SDLT is calculated on the price excluding VAT, which usually lowers your overall tax bill. This is particularly important on high-value commercial property transactions where the VAT amount can significantly increase the SDLT liability.

You must ensure the TOGC conditions are fully met to access this SDLT saving. Failing to meet these conditions means SDLT will be charged on the full VAT-inclusive price.

Interaction of VAT Reliefs and SDLT

Opting to tax influences both VAT and SDLT. When you opt to tax, the sale becomes subject to VAT, which usually increases SDLT since SDLT includes VAT in the calculation.

TOGC relief acts as an exception by zero-rating the sale for VAT and excluding VAT from SDLT. Always confirm that both parties agree to opt to tax, if required, and meet TOGC conditions to maximise reliefs.

Use this table to understand the effects:

Scenario	VAT Charged?	SDLT on VAT-inclusive Price?	TOGC Relief Applies?
Property SOLD with option to tax, no TOGC	Yes	Yes	No
Property SOLD as TOGC with option to tax	No	No	Yes
Property SOLD without option to tax or TOGC	No	No	No

Knowing these rules helps you plan your purchase to reduce VAT and SDLT costs effectively.

Practical Considerations and Risks

You need to carefully handle VAT and SDLT when dealing with commercial property to avoid unexpected costs and compliance issues. Proper paperwork, awareness of common mistakes, and understanding your role as an investor or rental business are essential for smooth transactions.

Due Diligence and Documentation

Before completing any deal, check if the property has an active Option to Tax (OTT) in place. This affects whether VAT will apply to your purchase or lease. Confirm the seller’s VAT registration and get written confirmation on the OTT status.

Gather all relevant documents, including VAT invoices and SDLT returns. Ensure these are accurate and reflect the correct values. Any missing or incorrect information can cause HMRC to delay processing or question the transaction later.

If you’re acquiring a property as a Transfer of a Going Concern (TOGC), confirm the transaction meets HMRC rules. This includes having a tenant in place and both parties being VAT registered. Proper documentation here will protect you from unexpected VAT charges.

Common Pitfalls and Errors

A frequent mistake is assuming all commercial property sales are exempt from VAT. If the seller has opted to tax, VAT at 20% will usually apply, increasing your purchase cost.

Failing to check the historic VAT adjustments under the Capital Goods Scheme can lead to unexpected VAT liabilities. If the seller made adjustments, you may become responsible after the sale.

Another risk is incomplete TOGC status. If the business transfer conditions are not fully met, VAT relief may not apply, causing unexpected tax bills.

Always avoid late VAT registrations or missing deadlines for SDLT returns to prevent fines and interest charges.

Implications for Investors and Property Rental Businesses

If you rent out commercial properties, opting to tax can let you reclaim VAT on maintenance and setup costs. However, you must charge VAT on rents and agree with tenants on VAT treatment.

Investors should weigh the benefits of claiming back VAT against the impact on their tenants, who may not reclaim VAT themselves.

Be aware that changes in use or ownership can trigger VAT adjustments. HMRC may require you to correct VAT claims if the property use changes after the purchase.

Your accountant or tax adviser should monitor these adjustments carefully to avoid penalties and ensure you remain compliant with HMRC rules.

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