Selling a VATable property can cost you dear
Basic VAT rules for buildings
Where you buy a property on which the seller has “opted to tax”, VAT is payable on the purchase price. But as long as you’re registered you can reclaim this. Then, when you sell the property you must charge VAT to the buyer, who in turn can reclaim this, and so on. It’s a straightforward pay-and-reclaim cycle, but if you sell to the “wrong” type of buyer you might break the cycle and land yourself with a VAT bill you can’t reclaim.
Example. Keith bought a warehouse several years ago for £300,000 plus VAT. He now plans to sell it. The buyer is a developer who intends to convert the property into residential apartments. Keith doesn’t mind what the buyer does with the property as long as he pays the £325,000 plus VAT sale price agreed on. The deal is set to go through, but at the last minute the buyer sends Keith a Form VAT 1614D, and tells Keith this means he doesn’t have to charge VAT on the sale.
Change of use means no VAT
Because there’s to be a change of use from commercial to residential the buyer is within his rights to insist Keith doesn’t add VAT to the sale price. But this doesn’t trouble Keith too much. He’ll lose out a little because the VAT he would have collected from the buyer could have remained in his bank until it was due to be paid over with his next VAT return. It’s hardly a deal breaker, but Keith is missing the point.
The effect of a VAT 1614D is to make the sale of the property an exempt supply, and you can’t reclaim VAT on costs relating to an exempt supply. Keith will have to swallow the VAT he pays on his legal and agent’s fees. This is still not a deal breaker.
Trap. Because the property cost Keith more than £250,000 it falls within the Taxman’s capital goods scheme (CGS) (see The next step). This means where a property changes from being VATable to exempt within ten years of purchase a corresponding fraction of the VAT reclaimed when the property was bought is repayable to the Taxman. This might well be a deal breaker.
Example. The property cost Keith £300,000 plus VAT at 17.5% (£52,500). He owned the building for six of the ten-year CGS period as a VATable commercial property, but the status will change to exempt residential when he sells it. Therefore, 4/10ths of the VAT Keith reclaimed on purchase must be repaid to the Taxman, i.e. £21,000.
Tip 1. If you’re selling a VATable property, for which you paid more than £250,000, find out if the buyer intends to change its use and issue a 1614D. If so, you can take account of any VAT clawback in your price negotiations. Or...
Tip 2. Ask the buyer not to exempt the sale with Form 1614D. To compensate them for having to pay VAT, agree to wait for this element of the sale price until they’ve reclaimed it from the Taxman. Plus, as the VAT increases the price of the property the Stamp Duty Land Tax goes up accordingly. The buyer will expect you to meet this cost. Even factoring this in you might be better off than paying a VAT clawback, but check the figures first.