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VAT on Commercial Property Purchase

jamesm96jamesm96 Experienced MentorRegistered Posts: 523
Hi guys,

I'm doing more 'taking' than 'giving' on this forum this last few weeks!

I have a client that is trying to buy the commercial property which they currently rent; the client came to me and I advised that the first hurdle would be finding the 35% deposit that the bank would want, but they've only gone on blimmin' managed it! SO the next hurdle...

...they mentioned to me today that they pay VAT on their rent which, as far as I know means the current or previous owner has exercised the 'option to tax', and will also mean that VAT will be charged on the sale too, right?

In which case, with a £215k purchase price, there's another £43k which I don't think they've thought about but, before I give them the bad news, I just want to check my understanding: there'll be an invoice for £215k plus £43k VAT on completion, is there any reason why (given that there's no partial exemption issues) they would be prevented from entering the £43k as input tax and, assuming that's fine, what's the quickest way to get HMRC to stump-up with the repayment; £43k is a lot of money to have to find, albeit only temporarily.

Cheers guys!

Now... off to look on other people's thread's to contribute!

Comments

  • T.C.T.C. Experienced Mentor Registered, Tutor Posts: 1,448
    I can't see how you can avoid paying the VAT and then reclaiming it. Could it not be done so it coincided with the end of a VAT quarter, perhaps with a final payment due to the seller after the VAT is reclaimed?
  • jamesm96jamesm96 Experienced Mentor Registered Posts: 523
    T.C. wrote: »
    I can't see how you can avoid paying the VAT and then reclaiming it. Could it not be done so it coincided with the end of a VAT quarter, perhaps with a final payment due to the seller after the VAT is reclaimed?

    Thanks T.C.

    Yeah, as it happens, they are deferring some of the purchase price anyway which I had thought will help.

    My main concern is just making sure that I've not overlooked any rules which will make the input VAT irrecoverable.
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    Usually VAT can be avoided on the sale by structuring it as a TOGC.

    If not, try and set the date of exchange to be the last day of the VAT quarter. Get the VAT return submitted the next day and hopefully the refund will come through prior to completion.

    Don't rely on this for being able to fulfil the contract though. The solicitors will never agree to it and these days HMRC are very likely to withhold the refund pending their enquiry into why such a large refund is due. In fact, I would probably pre-empt that enquiry and send a copy of the exchange to HMRC to explain the situation.
  • jamesm96jamesm96 Experienced Mentor Registered Posts: 523
    Usually VAT can be avoided on the sale by structuring it as a TOGC.

    Thanks Dean, as always. In this case, though the 'going concern' is the business that my client already runs, the vendor is just a property management company.

    If not, try and set the date of exchange to be the last day of the VAT quarter. Get the VAT return submitted the next day and hopefully the refund will come through prior to completion...

    ...In fact, I would probably pre-empt that enquiry and send a copy of the exchange to HMRC to explain the situation.

    Yeah the delay was exactly my concern; timing was the only thing I had up my sleeve to mitigate the issue but I thought there's no way HMRC will just rubber stamp a £40k-ish repayment and I'd really rather not invite the inspectors down; your suggestion is great, though, to pre-empt the question from HMRC, thanks very much!
  • jamesm96jamesm96 Experienced Mentor Registered Posts: 523
    I've just been sent an email by the client (forwarded from the vendor) saying that they intend to sell the building as a TOGC... given that it's a rental property which is being sold and it will be used by my client as trading premises, surely it doesn't meet the TOGC rules?
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    You are right, it doesn't.

    However, is the company going to be buying the property or the directors? It is often beneficial for the directors to own the property and rent it to the company in which case it would be a TOGC..
  • jamesm96jamesm96 Experienced Mentor Registered Posts: 523
    You are right, it doesn't.

    However, is the company going to be buying the property or the directors? It is often beneficial for the directors to own the property and rent it to the company in which case it would be a TOGC..

    Thanks again Dean.

    I've already said to them that it'll only work if they buy through an entity other than their existing company which they then checked with the vendor who now agrees.

    My feeling is that if they buy through another company then when they come to sell they can sell the shares rather than the building, and only pay 0.5% Stamp Duty, and then the debt is also mostly in the company rather than on them personally (albeit secured against the same building either way). Is there a reason for buying personally that I've missed?
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    CGT exemption..
    NIC-free profit extraction from the company..

    Are they buying with a mortgage? Using a 3rd company will have to be cleared by them too. I'm also not sure any future purchaser would want to sit in the dirty bath water of someone else's company. They would probably want the freehold, not the shares.
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