Disposing of surplus property – should I charge VAT?

Many family businesses are finding themselves with more property assets than they really need, and are receiving attractive offers from residential property developers. But should VAT be charged on the sale? There are several factors to weigh up.

Recent years have seen the acceleration of major changes in the way we live, work, and shop.  As a result, many businesses have seen a significant reduction in the footprint of the property they need. Whether this is office-based staff working at home; the move to online retail; outsourcing of manufacture overseas; or simply modern working practices needing less space, businesses are looking at consolidating their operations onto a smaller site.

At the same time, land for new housing remains at a premium. With homeowners becoming less concerned with commuting times and planners under pressure to approve more developments, many family businesses are finding themselves receiving offers to sell land for residential development

Optional VAT treatment?

When business owners receive these offers, they are often surprised that VAT becomes a thorny issue. Most businesses will have a clear understanding of their general VAT position.  What they sell will be subject to VAT at a certain rate, unless they do something that is exempt from VAT. If their income is taxable, they can recover most of the VAT they incur; if it is exempt, they cannot. What is unusual about commercial property and bare land is that the supplier can usually choose the VAT treatment to be applied to the sale.

The default position is that the sale or letting of commercial property or bare land is exempt from VAT. However, the owner can exercise the ‘option to tax’. They will then have to chargeVAT on their sale or rent of the property, but can now recover VAT on related costs. When a property owner is deciding whether to opt to tax, they should consider the VAT position of potential purchasers and tenants, as well as their own costs.

Why might a vendor want to charge VAT?

If the business does not opt to tax, its property sale remains exempt from VAT. This means it will not be able to recover VAT on directly related costs. That might be acceptable if these are simply some legal and professional fees - in some cases, if these are small enough, this VAT may still be recoverable. However, we often find that a significant ‘promote’ fee becomes due when a successful deal is concluded, which could be a large VAT cost if the sale is exempt.

There are VAT rules known as the VAT Capital Good Scheme. These look at capital expenditure over a ten-year period. If a business had spent £1,000,000 plus VAT on a factory five years ago, and now sells this without charging VAT, the business may find itself owing £100,000 of VAT to HMRC.

Why might a vendor not want to charge VAT?

Not all purchasers will be able to recover VAT. If a business sells land to an individual seeking to build their own home, or to a housing association developing affordable homes for rent, they will not be able to recover VAT. Indeed, if the business has already opted to tax, these purchasers can provide certificates that return the sale to being exempt.

Even those that can recover VAT, such as commercial housebuilders, will likely put up some resistance. Stamp Duty Land Tax (SDLT) is calculated on the VAT-inclusive price, so by opting to tax the vendor is increasing the purchaser’s tax bill.

Does the vendor have a choice?

A business may know it has opted to tax already, in which case it may have no choice but to charge VAT. However, there are a number of situations where the option to tax can be disapplied, as well as those mentioned above. It can also be revoked if twenty years have elapsed since it was first exercised.

However, many businesses simply will not know the position. They may recall that they let a friend store their goods in their warehouse after a flood fifteen years ago for a small fee, but cannot find any records of whether they charged them VAT or not. They may be renting a corner of the office to a third party and charging VAT on the rent, but this may be because they charge VAT on everything else they do and assumed it applied to this, rather than a formal decision to opt to tax.

In these circumstances, there can be no choice but to approach HMRC for confirmation.  HMRC recently announced that they will no longer routinely answer these questions, and even if they do, their answers are rarely definitive. HMRC may only be able to say that they can find no record of being notified of this decision, but that this does not rule out that a decision was sent. This can lead to the need to manage the VAT position with the purchaser to avoid unexpected delays and costs arising.

An approach from a property developer will be a welcome opportunity for family businesses that know they are sitting on too much property, but optimising the VAT position is necessary to ensure any sale achieves the best results.

If you need help with VAT on property disposals please get in touch with Adam Cutler or your usual Crowe contact.

This article was first published in South East Business Online on 21 February 2023.