Whether you are taking the big step of buying or renting your first commercial property, purchasing a development site, adding to your buy to let portfolio or purchasing your new home, understanding Value Added Tax (VAT) is an essential part of the world of real estate.
VAT is a sales tax, charged when a VAT-registered business sells goods or services to a customer. For suppliers, it is often the most complex tax to administer correctly, given it must be correctly charged to customers (output VAT) and paid to suppliers (input VAT). Customers, even if able to recover their VAT costs, need to be careful to ensure the VAT they pay was properly charged, otherwise they may be prohibited from recovering it from HMRC.
VAT is complex because, in essence, businesses are delegated the role of tax collectors and burdened with the complexity this brings.
Debunking myths around VAT
“VAT is always charged at a flat rate of 20%”
While some might presume that VAT is always charged at a rate of 20%, there are actually five rates of VAT, and each of them can apply in real estate scenarios. For example:
- 20% is known as the standard rate, it is charged on sales of “new” (built within last three years) non-residential buildings, as well as non-residential land and buildings where the seller has “opted to tax” the property;
- some transactions are exempt from VAT, for example, selling or leasing a residential property that is not new, or selling or leasing non-residential property that is neither new nor “opted to tax”;
- there are also zero-rated supplies. A zero rated supply charges 0% VAT. This is the optimal VAT treatment, allowing the supplier to charge customers no actual cash sum, while still allowing input VAT recovery. The first sale of a newly built residential property is zero rated;
- some transactions are “outside the scope” of VAT (which, like (2) and (3) above, means no cash is charged in addition to the purchase price). An example is a “transfer of a business as a going concern” – most commonly in real estate transactions this might be the sale of a property which is at least partially let out to tenants; and
- finally, some transactions incur 5% VAT. For example, you might be charged 5% VAT by your builders if converting a commercial property to residential.
The above is a brief and simplified summary only, there can be many nuances (for example, if selling an “opted to tax” residential property to a purchaser that does not intend to use the property as a dwelling, the seller must charge VAT despite the fact what is being sold is residential and typically VAT exempt).
“VAT-registered businesses must charge VAT”
Contrary to popular belief, you often have a choice (known as “opting to tax”) as to whether you charge VAT on your (non-residential) property supplies.
“Opting to tax” is a voluntary decision a landowner can make to charge VAT on the sale or letting of certain land or buildings. A landowner would make this decision to allow it to recover its own input VAT connected with the property.
Most commercial land in London, for example, has been “opted to tax” by its owners. This allows the owner to recover their input VAT, while most tenants can recover the VAT they are charged. Certain businesses do not make VATable supplies however and cannot recover their input VAT. For this reason, tenants such as banks often favour properties that have not been “opted to tax” by their owners.
An “option to tax” does not run with the land – each landowner needs to make their own decision whether to opt to tax, and notify it to HMRC.
“A mixed use property is either fully liable to VAT, or not liable at all to VAT”
Where you are buying or selling a property that has both commercial and residential elements, for example, a freehold comprising a ground floor shop with an upstairs flat, assuming the building has been opted to tax, the VAT charged on the property transaction is apportioned according to the makeup of the property.
This is different to the way SDLT works on mixed use buildings (very broadly, a mixed-use building typically incurs non-residential SDLT rates).
To complicate matters, sometimes a mixed supply follows the VAT treatment of the dominant element of the supply, but where the overall price can be apportioned to the different elements, it should be apportioned.
“Only companies can register for VAT and charge VAT”
No, individuals (and partnerships) are equally able to register for VAT, opt to tax, and charge VAT.
“Your input VAT recovery is capped at the output VAT you have charged”
No, the amounts are not important, it is the proportion of your business that matters. For example, a housebuilder might incur £1m VAT buying a parcel of land, they might incur some VAT developing it (though much of the costs they incur should be VAT zero rated) and they might charge £0 VAT to customers on sale (of zero rated newly built homes). The housebuilder can still recover all the VAT they incurred. It is possible to recover more VAT than you have charged.
It is also possible to recover VAT before VAT is charged to customers, based on anticipated future supplies. If plans change and those supplies are ultimately not made, the original VAT reclaim is adjusted.
We hope this addresses a small handful of the many and varied VAT questions that can arise when transacting in real estate. This is a broad summary only, and transaction-specific factors can change the VAT treatment in specific cases. Professional advice should always be sought, to ensure your transaction proceeds smoothly and without unforeseen complications.
further information
If you have any questions regarding this blog, please contact Matt Spencer in our Corporate, Commercial & Finance team or Sacha Jose in our Real Estate & Construction team.
about the auhtors
Matt is a partner within the Corporate, Commercial & Finance team, specialising in tax law, advising on and efficiently structuring a wide range of corporate and real estate transactions including M&A, land transfers, developments and leases.
Sacha is a Trainee Solicitor currently in her second seat with the Real Estate & Construction Team. Sacha joined Kingsley Napley in September 2024.
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