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VAT in the Real Estate Sector

The real estate sector has experienced dramatic change in recent years. In some ways challenges remain for the sector, yet increasingly there are also significant opportunities. Baker Tilly Hughes Blake’s tax real estate team understand the challenges facing the sector. We guide clients on the tax and financial aspects of buying, selling, developing and asset managing property portfolios.

VAT is one area which can be particularly challenging when it comes to real estate transactions as VAT on property is a complex area of VAT law. Property transactions can have costly VAT consequences for both purchasers and vendors where not dealt with correctly. The VAT treatment of property sales differs greatly from the supply of other goods and services. It is therefore of major importance that all VAT aspects of a transaction are considered from the outset and all related obligations met.  It follows that professional advice should be sought before entering into any construction or property transaction.

VAT on property rules were significantly overhauled in July 2008 which means that there are two sets of rules to deal with. The new rules apply to properties acquired or developed after July 2008 and transitional rules apply to properties acquired or developed prior to July 2008. The below is a high-level summary of just some of the VAT considerations and implications in relation to property transactions –

Acquisition of a property – Depending on the circumstances, the acquisition of a property may or may not be chargeable to VAT. It may also in many cases fall within the VAT Transfer of Business (TOB) provisions, or the purchaser may be required to self-account for VAT on the reverse charge basis, where the Joint Option to Tax is exercised. It is imperative that a purchaser understands the VAT history and resulting VAT implications/obligations of a property being acquired to avoid any costly errors.

VAT recovery – VAT incurred on acquisition is recoverable only to the extent the property is used for vatable purposes. VAT on costs related to an exempt letting cannot be deducted. To get around this, in certain circumstances a landlord can opt to tax a letting.

Sale of a property – The full VAT history of a property must be considered to determine the VAT treatment of a subsequent sale. Potential VAT clawbacks under the Capital Goods Scheme and VAT recovery on related costs need to be considered in this context.

Letting of property – Where entering into a lease, either as landlord or tenant, the VAT implications must be considered. VAT obligations or in some cases a VAT cost can arise in relation to fit-outs under a lease, or on surrender or assignment of a lease. Where dealt with correctly any such VAT costs can often be minimised.

Other practical issues – Ensuring appropriate VAT clauses are included in contracts/leases and reviewing and understanding the VAT history of a property through the responses provided to Pre-Contract VAT Enquiries are of paramount importance. Another key consideration is the operation of the Capital Goods Scheme and the maintenance of Capital Goods Records.

The key to mitigating an unexpected, unwanted and often unnecessary VAT cost in relation to a property transaction is to obtain professional VAT advice prior to entering into any contract or lease.