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VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Limited, outlines pitfalls and potential savings in the transfer of properties to pension schemes.

Pension scheme

For some time it has been popular for companies to transfer their commercial property into a pension fund for the owner Directors. Most of the time, nobody considers the VAT aspects of the transfer, or what saving can be made.

In most cases, the properties are transferred into the pension fund, and then rented back to the company, thereby generating an income stream to the pension fund. However, the VAT aspects of the transfer and the potential savings and pitfalls are rarely considered.

Potential pitfalls

You first have to decide what VAT liability applies to the property that is being ‘transferred’, as it is, in fact, a sale. Don’t forget that if the property is new (i.e. less than three years old), the sale will be compulsorily standard rated. If the property is not new, it will be exempt from VAT unless you have exercised the option to tax (i.e. notified Customs that you wish charge VAT on rents or the freehold sale). If the property is ‘new’, or the option to tax has been exercised, the pension fund is going to be charged VAT on the full selling price of the property. If it is an exempt sale, the company may not be able to recover all the VAT on the costs of the sale.

If the property cost more than £250,000 and you were charged VAT, or if you have built an extension or refurbished the building at a cost of more than £250,000, you may also have to make an adjustment to any VAT already claimed under the Capital Goods Scheme.

If you do not consider the VAT position fully, the pension fund may be left with a large VAT bill that it cannot recover, or the company may have its own input VAT restricted.

Potential savings

There are ways to minimise any potential costs that are easy to put in place, provided you consider the VAT position at an early stage.

Tip 1 - Firstly, make sure that you do not have a VAT restriction in the company. You can do this by making sure the sale of the property is subject to VAT, so opt to tax if it is not a ’new’ commercial property. You can opt to tax by writing to Customs and giving details of the property you want to opt.

Tip 2 - Now you have made sure you have no VAT costs in the company, you will have to look at the pension fund. First of all, you should register it for VAT as a property rental company, and opt to tax the properties. The pension fund will then be able to recover the VAT on the purchase of the property, and any associated costs.

Remember - Now that the pension fund has opted to tax the property, it will have to charge VAT on the rents to its tenants. The tenants will be able to recover the VAT on the rent, provided they are VAT registered and ‘fully taxable’ (i.e. VAT is charged on all their sales invoices).

Tip 3 - If you are careful, you can also obtain a cash flow advantage by timing your invoice, so that the pension fund is able to recover the VAT it is charged on the purchase of the property before the company has to account for it Customs.

Existing pension funds

If you already have a pension fund that owns the properties the company trades from, it is not too late to improve its VAT position. The pension fund is going to incur costs every year on which VAT is charged (e.g. repairs and maintenance, audit etc). If it is not registered for VAT it cannot recover the VAT. The remedy is to register the pension fund for VAT and opt to tax the property, as this would allow it to recover the VAT on all its ongoing costs – something that could easily amount to a few thousand pounds each year!

September 2004

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc