If you are planning to buy a commercial property at auction, it is important to establish whether the property is elected for VAT. This may also be referred to as the option to tax and is covered by HMRC Reference Notice 742A (June 2010), which is enforceable under Schedule 10 of the VAT Act 1994. VAT is a complex tax and expert opinion should be sought in relation to the rules and implications on your commercial property purchase.
Commercial property and land are exempt from VAT unless a previous election to tax has been submitted.There are circumstances where this exemption may be waived and this will have implications for the buyer. If a property is elected for VAT, tax at the prevailing rate will be due on the purchase price. In some circumstances, VAT is reclaimable by the purchaser providing they are registered for VAT. In most cases this can be done by visiting the HMRC website. Once the necessary documentation has been completed and the applicant has been verified, the applicant will be provided with a VAT registration number and certificate. This process can often take several weeks. Therefore, in addition to the purchase price and Stamp Duty, Sufficient funds should be available to finance the tax on the purchase price. If you are planning to reclaim VAT, this can take several weeks and a physical inspection by a officer from HMRC may be required before a re-claim is sanctioned.
If the property is not elected for VAT then VAT will not be payable. However, if you purchase a property that is not elected for VAT, you can subsequently choose to elect,. This means any future costs in connection to the property, that are subject to VAT, will be potentially reclaimable. Electing for VAT will oblige the property owner to charge tenants on any rental payments. The property will also be subject to tax when the building is sold and therefore VAT will be charged and accounted for on the purchase price.
The auctioneer will establish with the seller whether or not the lot is subject to VAT. If it is, VAT will be due on the deposit paid after the fall of the hammer. The amount due on completion will then be the balance of the price plus VAT.
You should also be aware that VAT is payable on the buyer’s premium payable to the auctioneer (if applicable) whether or not the property is elected for VAT.
Making Financial Arrangements for Auction Commercial Property