If you let part of a building rather than the whole property, option to tax it so that you can reclaim VAT on related costs seems like a no-brainer. But it might land you with a problem later on. How can you dodge it?

VAT and property

If you let a property, you don’t usually need to charge VAT unless you’ve elected to waive exemption on it, more often referred to as having opted to tax. Because opting to tax turns an otherwise exempt supply of accommodation into a standard-rated one, you can now reclaim any VAT you incur in relation to the property. Opting to tax seems like a no-brainer, but it’s not so simple.

Selling up

If you opted to tax, you’ll have to charge VAT when you sell your property, but not if it’s being sold with your business as a going concern. If it’s sold separately you might think VAT isn’t too much of a problem because whatever you charge can be reclaimed by the purchaser unless their business is VAT exempt or partially exempt. Therefore, opting to tax can limit the market for your property, but only slightly.

Surplus accommodation

You might think the VAT position described above would hold true where you let just part of your business premises, but you would be wrong.

Trap. An option to tax applies to the whole building and the land it stands on, not just the bit that you let out. An option extends to parts of the same building even if you don’t own them. So if you purchased them later the option to tax would automatically take effect.

What is the problem?

Why does it matter if the option applies to the part of the building your business occupies? It means that when you sell you might have to add VAT to the price of the property but, as we’ve already established, this isn’t a major obstacle – or is it?

The SDLT factor

Stamp duty land tax is charged on the VAT-inclusive sale price. This means because an option to tax applies to the whole building it raises the selling price of your property making it less marketable compared to one where the owner hasn’t opted to tax. You might, therefore, have to reduce your asking price to compete with other sellers.

Tip 1. Don’t opt to tax to recover VAT on running costs, unless the amounts are substantial.

Tip 2. Instead of opting to tax, make the tenant responsible for as much of the running costs as possible. You can lower the base rent to compensate them.

Use the de minimis limits

You might not have a problem reclaiming VAT on running costs even if you haven’t opted to tax if it’s less than the de minimis limits:

• £625 per month on average; and
• 50% of all VAT on purchases all your businesses incur in the VAT return period.

Where the VAT you incur on expenses for a property you haven’t opted to tax is less than the limits above, you can reclaim it in full. So think twice before making that election to waive the exemption.

Disclaimer: Please take advice from your advisors, the above is only for information.