This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our Cookie Policy.

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.


Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Where Taxpayers and Advisers Meet

VAT on Commercial Property

Joined:Thu Nov 09, 2023 10:17 am
VAT on Commercial Property

Postby COYG » Thu Nov 09, 2023 10:49 am

Hi all,

I am hoping some of you may be able to give us a bit of advice on VAT on a commercial property as the information online is rather confusing and we are not sure what the best way to approach this is.

Let's start from the beginning. We are running a successful manufacturing business for which we are renting two separate units, around 10 miles apart from each other. As you can imagine, this can be a bit of headache due to traffic and time wasted on daily basis due to travelling and moving stock from one site to another (cannot be avoided). For a while we have been looking for a large enough property to house both operations and we have recently come across an industrial unit which ticks all boxes for us.

However, the building is currently opted for VAT which raises the asking price of £1.4m by a substantial amount of money (not to mention the stamp duty).
Now, the property would need to be purchased through the business itself as that's where the cash sits so agreeing leasing terms and then purchasing via a 3rd party to treat the property as a TOGC is out of question.
Is there any way to avoid the VAT bill simply due to the reason that we will be trading from the property?
If not, and we have to pay it all upfront, as we are VAT registered, would we be able claim all of the VAT back during our quarterly return as I can't really get my head around the capital goods scheme?
Is the VAT paid claimed back over a 10 year period or does CGS simply requires you to adjust for the amount claimed back on yearly basis just in case your circumstances change and this causes differences in the use of capital items?

Trevor S
Joined:Tue Jan 01, 2019 12:37 am

Re: VAT on Commercial Property

Postby Trevor S » Fri Nov 10, 2023 12:11 am

I'm assuming that you'll only be using this new property for the purpose of your manufacturing business (e.g. you're not planning on letting any of it to a tenant), and all of your businesses income is subject to VAT?

If so - then subject to the normal VAT recovery requirements (holding proper VAT invoices, etc.) you will be able to recover the full amount of the VAT charged on your quarterly VAT return. This might mean that the quarter will show an amount payable to you (i.e. the VAT you can reclaim on your expenditure exceeds the VAT you're required to pay over on your income) - if so, HMRC will pay the difference to you.

You may find that the significance of the figure on the VAT return is such that it gets flagged by HMRC's systems for a check. It should be easy to demonstrate that it's a valid claim, but if you're due a repayment from HMRC for the return, this process may delay repayment. There is an automatic process where if HMRC make a late repayment, an amount of interest is calculated and added on. Obviously you'll still have the cashflow issue of having to pay the seller before being able to reclaim the VAT from HMRC.

Capital Goods Scheme

At the start, I checked that your business only generated taxable business (i.e. "vatable") income. That was because businesses generating only VAT-exempt income aren't normally entitled to recover the VAT they incur on their expenditure. Businesses that have a mixture of taxable and exempt income must undertake an apportionment known as "partial exemption".

Were it not for the Capital Goods Scheme, a business whose income was normally VAT-exempt could buy the building, briefly put it to taxable use in order to recover the VAT incurred on purchase, before then putting it to their normal VAT-exempt use. The Capital Goods Scheme prevents this by requiring you to consider the use over a ten-year period. VAT can still be reclaimed in full on purchase if the initial use is taxable business. But if at any point over the first ten years the use changes to VAT-exempt, a proportion of the VAT claimed on purchase must be returned to HMRC. The records that you're required to retain under HMRC's guidance are those which you would need to be able to calculate the VAT repayable to HMRC if your use of the building changed.

Given the significance of this transaction, you may want to seek advice, from your accountant or a VAT advisor - who will have a more detailed knowledge of your business. There are other considerations, including what you should do if you want to let any part of the building to someone else, or sell the building (or entire business) at a later stage. But I hope this gives you some comfort that (apart from the cashflow issue of having to wait for your quarterly VAT return to get the refund), the VAT on the purchase shouldn't be a cost to you.

Trevor S
Joined:Tue Jan 01, 2019 12:37 am

Re: VAT on Commercial Property

Postby Trevor S » Fri Nov 10, 2023 12:19 am

Bear in mind that although you are able to reclaim the VAT from HMRC, it is still part of the "consideration" paid to the seller. So the SDLT that you need to pay on purchase will still be calculated based on the VAT-inclusive amount.

Return to “VAT & Excise Duties”