My client is a VAT registered charity, which intends to purchase a newly developed property and the vendor intends to charge VAT on the selling price. My client lets a small area of its existing property to another business, which intends to move with it to the new property. As my client is a charity, it may not be in a position to recover this VAT. Is there anything that can be done to make this purchase more VAT efficient?
The sale of a new commercial building (a building less than 3 years old from the date of completion) is standard rate for VAT purposes. Therefore, the vendor is obliged to charge VAT on the sale of this property. The fact that the purchaser is a charity will not prevent VAT being due.
However, depending on the exact circumstance of this transaction it may be possible to treat the purchase as a transfer of a property rental business. Therefore no VAT would be due, as the sale would be outside the scope of VAT. How can a newly constructed building be treated as a transfer of a going concern, I hear you ask?
It may be possible (with the agreement of the vendor) to satisfy the example provided in HMRC’s Notice 700/9 Paragraph 6.2. If the vendor entered into a lease agreement with the charities tenants (with the benefit of a contractual agreement for a lease, but before the lease has been signed), there is sufficient evidence of intended economic activity for there to be a property rental business capable of being transferred.
Not only must the general transfer of a going concern conditions be met, the charity must also notify HMRC in writing of its option to tax the building before the ‘relevant date’ and it must notify the vendor by the relevant date that its option to tax will not be disapplied. The relevant date for VAT purposes is normally the date of the transfer, but will also include receipt of a deposit that may otherwise have created a tax point, E.G exchange of contracts.
Therefore, the transfer of the building is treated as outside the scope of VAT and no VAT is due on the selling price. Also, there is a further saving of Stamp Duty, as this is charge on the VAT inclusive value.
However, whether or not a supply for VAT purposes has, in fact, taken place, will depend on the precise details of the contract and each case will need to be considered on its own merits. Therefore, it is highly recommend that tailored written advice from a VAT consultant is obtained, as the slightest difference in facts could cost your client a substantial amount of money. Taxwise provide a VAT consultancy service at very affordable rates. Please call 0844 892 5470 or email VATadvice@services-taxwise.com for a free no obligation fee quote.