Avoiding VAT on purchase of commercial property

[Hitman1808]

I'm very interested in buying a commercial property to relocate my business to. The property I have found is perfect for our requirements, but unfortunately VAT is applicable on top of the purchase price. The property is currently a pub and 'opted in' for tax. We are funeral directors and are registered for VAT, however we are only a partially exempt business and always run close to the wire with claiming VAT back each quarter (when working out the deminimis calculation). We would not therefore be able to claim the VAT back on the purchase as well as the costs for converting the building, which will be substantial. I have heard comments about setting up another VAT registered company in order to buy it through or even using a SIPP for the purchase. It is my understanding however that if I used ether of these options the new business / SIPP would have to charge VAT on the rent and therefore take us over the deminimis again! Any suggestions on how we could possibly avoid paying VAT?

 

[JohnGreer]

Hi there,

This is a very common problem and unfortunately to date I haven't come across a viable solution for claiming the VAT back on the purchase. There is also anti-avoidance legislation in place to counteract the various attempts people have used to try and get around/reduce the impact of this problem.

Some larger companies were setting up VAT registered Limited companies in order to purchase opted property and then charging a VAT inclusive market rate rent to their exempt or partially exempt trading company. Whereas this doesn't eliminate the VAT problem, it spreads the burden over a number of years (as the VAT is claimed up front, and then repaid over on the rent over a number of years). HMRC have blocked this plan by preventing the VAT on the property purchase being claimed where the building is being rented to a connected VAT exempt/partial exempt business. Whether this piece of anti avoidance legislation applies, depends on the value of the property, the percentage of your sales that are taxable etc so the value of the pub you are looking to buy would be relevant.

Also, do you calculate your deminimus calculation on the standard method? That is:

a) allocate direct costs
b) Work out the percentage of your sales are taxable and apply that to the non-direct VAT

If you are, you may wish to consider designing a special method.

Basically, you can reclaim input VAT based on any method that is fair and reasonable. So for example, you could reclaim VAT that relates to property costs on a floor area basis (if your premises could be apportioned between areas where taxable and exempt work is conducted).

You could also use:

a) time basis
b) full cost basis
c) units of production
d) any other method

If you can design a method that improves your standard method recovery rate then the impact of the VAT on the rent could be minimised. (I have had some success with agreeing special methods, mainly for optician clients who are also partially exempt).

As an aside, is the commercial property purchase subject to Stamp Duty Land Tax (SDLT)? If it is there are a number of methods of reducing the impact of that tax that may be of interest.

Best regards

John

 

[Hitman1808]

Many thanks for your reply, much appreciated.
The property will sell for between £400k and £500k plus VAT. Yes we calculate the deminimus using the standard method. Currently nearly all of the top floor of the property is a managers flat and this is how we may keep it for sometime, don't know if this could make any difference at all? Yes the property is subject to SDLT.

Thanks again.

 

[Jaydee]

Hitman - I would have thought that any partially exempt business that is about to outlay (assuming it will now be at 17.5%) almost £90,000 in VAT would be well served in getting paid for advice - you seem to have too much to lose by not doing so.

Also, the SDLT is not inconsiderable either and as John Greer has suggested there are a number of mitigation schemes.

A couple of further points are that (a) SDLT (if not mitigated/avoided) is charged on the VAT inclusive cost and so £90k of VAT can cost a further £3,600 in SDLT and (b) if you were to acquire it at the lower end of your range, then the VAT may be sufficient to have the deal stamped at 4% rather than 3%.

A possibility could be to convert the deal into a TOGC so that the vendor has to zero rate, perhaps by having the property tenanted, then sold, then vacated - subject to complying with any anti-avoidance legislation?

As I put above though, the key here is to take paid-for advice from a VAT/SDLT/property specialist.

 

[Hitman1808]

Hi Jaydee,

Thanks for you reply. I will definitely be getting paid advice. The property is currently leased to a tenant (running the pub business). If it does turn out to be feasible to do a TOGC won't the property still be opted in for VAT and therefore VAT will still be applicable on the rent charged?

Thanks again

 

[Jaydee]

Hi Jaydee,

Thanks for you reply. I will definitely be getting paid advice. The property is currently leased to a tenant (running the pub business). If it does turn out to be feasible to do a TOGC won't the property still be opted in for VAT and therefore VAT will still be applicable on the rent charged?

Thanks again

Yes, of course the property will still be opted and so VAT will still be charged on the rent, but if VAT can be avoided on the sale price you do get many benefits:

1. Reduces your closing costs
2. Avoids any partial restriction on your input claim
3. Reduces SDLT by £3,600
4. Will likely ensure that the whole deal is stamped at 3% rather than 4%

So may not necessarily be a "full" solution, but it's a start, and it will certainly save you more than the advice cost!!

 

[3pic]

Based on very general thoughts, the ToGC route may not work.

The vendor is selling a property rental business, not a Pub (the tenant is the pub, the landlord is the property) and so a SIPP or NewCo acquiring the property rental business would certainly tick the ToGC box.

However, for the ToGC to work, one condition is that the acquirer also opts to tax the property (See Notice 700/9, Section 2.4) so if the SIPP/NewCo opt to tax they'd then have to charge a market rent to the tenant (the funeral business) but that monthly VAT on rent may still be better than a one-off hit upon purchase and avoid the initial VAT and higher SDLT cost.

As an aside, the OP's username is HitMan.....you're funeral business isn't a cover by any chance is it?

 

[Hitman1808]

TJust a thought, I've read somewhere that the transfer of going concern only applies for a continuing trade - commercial property rental is classed as investment business. Is this correct?

Thanks

 

[robin*]

Sorry to resurrect an old thread but I am in a similar scenario:


Vat registered Ltd Co purchasing a pub with vacant possession. I may run an associated business from the building after conversion and extension. 90% of the purchase price is Vat able despite the residential area being 50%....

Help...:redface::redface::redface: