VAT: Buying commercial property at auction

Auction is a popular mechanism of buying and selling properties in the UK. For landlords looking to purchase commercial properties at an auction, it is important to determine the VAT position on the property, to avoid last-minute surprises and additional costs.

VAT on property purchases is generally a very complex area and it is recommended that you seek professional advice before the transaction. Below is a brief introduction to some key points one should consider when buying a commercial property.

Normally, the sale or lease of a commercial property is exempt from VAT, unless the property is newly constructed (less than 3 years) or the seller has elected to tax it. The election to tax a commercial property is referred to as Option to Tax, the guidance on which is covered in VAT Notice 742A. If the seller of the commercial property has opted to tax it, then all of the supplies from it will normally be standard-rated, which also includes the sale of the property at an auction. When you purchase a property which has been opted to tax, stamp duty land tax (SDLT) is payable on the VAT inclusive price of the property. In certain situations, VAT payable on an opted to tax property can be avoided, thus resulting in substantial VAT and SDLT savings.

Also See: A Short Guide: Buying or Selling a Property in England or Wales

• Avoiding VAT payment on commercial property
• Real estate election (REE)
• Example of SDLT with TOGC
• Option to tax on mixed-use property

Avoiding VAT payment on commercial property

If the sale of the property qualifies as a Transfer of going concern (TOGC), there is no VAT to be paid on the purchase of the property. To qualify as TOGC, the transaction needs to meet the below conditions:

1. The property must be capable of being run as a property rental business, for example - the property has tenants sitting when sold.
2. The purchaser intends to carry on the same business.
3. The purchaser must notify HMRC of the option to tax before the transfer date.

It may not be possible for the purchaser of the property to notify HMRC about the option to tax in time due to the uncertainty of being a successful bidder. HMRC is aware of this problem and they will accept the purchasers application request for an option to tax to qualify as a TOGC if notified in time through e-mail or fax via form VAT 1614A on the auction day.

For TOGC provisions to apply, informing HMRC is not sufficient and the purchaser will also need to notify the seller that their option to tax will not get impacted or disapplied due to anti-avoidance provisions. This can be made using a simple declaration on the date of the auction. For a sale or transfer, of business or assets, to qualify for the “Transfer of going concern (TOGC)” treatment, all of the following conditions need to be met:

1. The assets should be used by the buyer in carrying on the same kind of business as that carried on by the seller.
2. In cases, where the seller is VAT registered, the buyer must already be registered for VAT or immediately become registered for VAT, as a result of the sale.
3. In cases, where only a part of the business is sold, it must be capable of separate operations.
4. There should be no significant break in the normal trading pattern before or immediately after the sale of the business.
5. The business or part of business transferred must be a “going concern” at the time of the sale.
6. There must not be a series of consecutive transfers of the trade and assets.

Tip: You should opt to tax the property before the auction date, even if you are not successful at the bidding, you can cancel the option anytime within 6 months or it will automatically lapse after the tenure of 6 years. By notifying HMRC about the option to tax before the auction date, it will certainly get effective from the purchase date and will be treated as a TOGC.

Also See: Stamp Duty Reduction for First Time Buyer in England UK

One time "Opting to tax" for all future property acquisitions - Real estate election (REE)

Real estate election is a one-time formal decision taken by the buyers for opting to tax all their property acquisitions in future. After making REE, you dont need to notify HMRC every time whenever you acquire a new property and it will be treated as opted to tax from the day you start acquiring assets. It removes the administrative burden of buyers to reach out to HMRC every time for the approval for opting to tax the property, which is particularly useful when you are buying a property at an auction, as it guarantees the option to tax is in place before transfer date to meet the TOGC conditions.

Example of SDLT with TOGC

Suppose, the commercial shop you are planning to buy is worth £220,000 but because the seller has opted to tax the property, you are required to pay £264,000 (£220,000 + 20% VAT) inclusive of VAT.

SDLT in this case will apply to the whole amount including VAT, which means you are required to pay SDLT on the purchase price of £264,000. Due to an increase in VAT, the SDLT payable is £2,700, as shown below:

In addition to the £44,000 payable in VAT, the purchaser also has to pay £2,700 in SDLT.

If the property is sold as TOGC, the purchaser can save £44,000 in VAT and the SDLT payable will be £1,400 ((£220,000-£150,000)*2%) only, thus resulting in a modest savings of £1,300.

Hence, it is important to ensure the property meets the conditions for TOGC relief, so VAT can be eliminated and the stamp duty land tax tariff can be reduced.

Also See: Capital Gains Tax – How to Avoid Paying Tax on Property

Option to tax on mixed-use property

When a property is a mixed-use, for example, a shop below with flats above, the most important thing which you have to concentrate upon is – option to tax is only applicable on the commercial element of the property not residential.

When you bid for a property at auction, you will not be aware of the price beforehand but purchase price between the VAT standard rated commercial element and the VAT exempt residential units will need to be apportioned on the purchase invoice. As per HMRC, the purchase price of the property should be fair and responsible, no matter on what basis the seller apportions the purchase price.

Also See: VAT Capital Goods Scheme

Conclusion

This is only a very brief introduction to what is an extremely complex and technical area, so if you are purchasing a commercial property at an auction, the application of VAT is an issue which needs to be dealt early in the transaction, therefore we recommending taking expert advice.

Disclaimer - “This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction”.

In case you are having any query or want specialist advice on "Buying commercial property at auction", kindly call us on 03330886686 or you can also e-mail us at enquiry@dnsaccountants.co.uk.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.