VAT on Property – caveat emptor?

When it comes to selling property VAT is an issue that must be fully considered, ideally in advance of negotiating the heads of terms of the transaction, particularly because of the potential for VAT conflict between the vendor and purchaser. That conflict can arise because there is a VAT cost to the transaction that neither party may want to bear but ultimately will have to be borne by one of the parties or shared between both.
In relation to property sales, and indeed sales in general, in broad terms if a purchaser can reclaim the VAT charged then he may agree to pay VAT in addition to the sale price and where he cannot reclaim the VAT it is likely that he would resist a VAT charge.

VAT Treatment

However, the VAT treatment of property transactions can be quite complex and it is not simply the case that VAT is either chargeable by the vendor of the property or not. Generally the sale of property would fall into one of three categories, one that the sale is vatable which is relatively straightforward, two that the sale is VAT exempt and three that the sale is subject to the VAT transfer of business relief. Both of the latter two categories of sale can bring complications.

Exempt, but opt to tax?

On the face of it if a property is VAT exempt that means that no VAT is chargeable which, in principle, would be a buyer’s preferred option. However, from a vendor’s perspective the fact that the sale is exempt may generate a VAT liability through a clawback of input VAT for him and to avoid that liability he may want to opt to make the sale vatable. While that would eliminate the vendor’s VAT problem it transfers the responsibility for VAT to the purchaser with a potential risk for him as he would potentially have to use the property for vatable purposes for a full 20 years in order to ensure that no VAT costs will arise for him. Why would a purchaser take that risk and if he took that risk should he be compensated? Alternatively, if the vendor’s VAT liability through claw back of input VAT is significantly less than the VAT that would arise if the sale is made vatable maybe the VAT discussion should centre around who is going to bear the lower VAT cost, the vendor or the purchaser or both.

Do you want to wear those shoes?

Turning now to transfer of business (TOB) relief, which is an automatic relief that can apply to sales in certain circumstances and has become much more prevalent due to a change in Revenue practice. Where the relief applies the vendor will never charge VAT, which, on the face of it, would appear to be the same position that would apply if a sale was simply VAT exempt and from a purchaser’s perspective seems ideal. However, TOB results in the vendor having no VAT risk with the purchaser stepping into the vendor’s VAT shoes (a strange concept in its own right). The consequence of this for a purchaser can be very costly as, unknowingly, he could end up with a VAT liability that he has to pay directly and immediately to Revenue when he thought there was no VAT liability on the property.

Consider implications early

As you can see property transactions can have unusual and costly VAT outcomes. Our strong advice is that VAT is always put on the agenda at the earliest stage possible when buying land or buildings. Whether buying or selling businesses should make themselves aware of the VAT treatment of the sale of the property and the consequences not alone for themselves but also for the other party. When it comes to property transactions and VAT it should be caveat emptor and caveat venditor.  

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