VAT on land and buildings
When you are acquiring a commercial building, you need to know whether the purchase price will include VAT Older non-residential buildings will normally be exempt from VAT, but not if the owner has opted to apply VAT (“opted to tax”) at some point. This option to tax (OTT) is in place it lasts for at least 20 years, so it is important to confirm the correct VAT position. Unfortunately, HMRC has said it will no longer confirm whether VAT on land should be added to the price if the OTT decision was made less than six years ago. Questions regarding an OTT decision recorded over six years ago will be actioned by HMRC. However, not with any urgency.
Going forwards, the building owner is responsible for recording and preserving the OTT decision should HMRC ever ask. A potential purchaser needs proof of the VAT status of the building.
Where you have bought the premises to let out, you may want to charge VAT on the rents, so that you can set off any VAT you pay on costs relating to the building. In this case you need to make an OTT application yourself and inform HMRC. We can help you with this
VAT on Land:
- Generally Exempt: In many jurisdictions, the sale of bare land (without any improvements or buildings) is often exempt from VAT. This is because land is often considered a non-depreciable asset. Therefore is not viewed as a final consumer good or service.
- Development or Zoning: If the land is being sold for development or commercial purposes, VAT may apply to services related to planning, rezoning, and other development activities.
- Transfer of Land: When ownership of land changes hands, VAT is generally not applied to the transfer itself. However, services associated with the sale, such as legal fees or agent commissions, could be subject to VAT.
VAT on Buildings:
- Supply of Goods and Services: The construction or sale of a building typically involves both the supply of goods and services. VAT is often applied to these supplies.
- Construction Services: VAT is commonly charged on the construction services. That are provided by contractors, architects, and other professionals involved in building projects.
- New Construction: The sale of a newly constructed building by a developer is often subject to VAT. This includes both residential and commercial properties.
- Renovations and Repairs: VAT might apply to renovations, repairs, and alterations to existing buildings, depending on the jurisdiction’s rules. In some cases, lower VAT rates may apply to repairs and maintenance compared to new construction.
- Change of Use: When a commercial property is converted into residential use (or vice versa), VAT rules can vary. Some jurisdictions have specific rules for VAT treatment in such cases.
- Partial Exemptions: In some situations, businesses are engage in both exempt and taxable activities. They may need to calculate partial exemptions for VAT purposes.
- Input Tax Deductions: Businesses involved in the construction and sale of buildings may be able to claim tax deductions for VAT paid on materials and services used in the construction process.