If a commercial property owner has opted to tax it, they will normally have to charge VAT on any supplies they make off it, including its sale at auction. When selling an opted property, the stamp duty land tax (SDLT) is added on top of the VAT inclusive price.
However, there are certain circumstances in which VAT can be avoided, giving a cash flow saving (assuming the purchaser can recover the VAT) and can also lead to an absolute saving in SDLT.
Avoid paying the VAT on commercial property
If a sale can be structured as a transfer of a going concern (TOGC), VAT need not be charged on the sale. In order to qualify as a TOGC, the property must be sold with a sitting tenant in place, and the purchaser must have notified HMRC before the date of the transfer. The problem buying at auction is that you don’t know if you are going to be the successful bidder, so it can be difficult to notify HMRC of your option to tax in time.
HMRC are aware of this problem, and they will accept a purchaser’s option to tax as being notified in time to qualify as a TOGC providing it is either faxed or e-mailed to them on the day of the auction (using form VAT 1614A).
If the purchaser has to obtain HMRC’s prior permission to opt to tax, even if the option is accepted, the date the option becomes effective is when HMRC authorise it, not the date the application was made. In that case, even if the option to tax was notified to HMRC on the day of the auction, it would still not qualify as a TOGC, as HMRC would not have authorised until a later date.
For the TOGC provisions to apply, as well as notifying HMRC of the option to tax by the relevant date the purchaser will also need to notify the vendor that their option to tax will not be disapplied by the anti-avoidance legislation. This can be done by a simple declaration to that effect on the day of the auction.
Opt to tax property being sold at auction before the sale date
If you have an interest in buying a commercial property being sold at auction you can opt to tax it prior to the sale date, even though you do not own it. If you notify the option to tax prior to the auction and are the successful bidder, the option to tax will be effective on the date of the purchase and it will be treated as a TOGC. However, if you are unsuccessful, you can revoke the option within six months or it will lapse automatically after six years.
Option to tax on mixed use (commercial and residential) property
Where a property is mixed use (e.g. commercial use on the ground floor and residential accommodation on the floors above), the option to tax only applies to the commercial element of the property.
If you purchase at auction you will not know the price beforehand, but the purchase invoice will need to apportion the purchase price between the standard rated commercial element and the VAT exempt residential units. Whatever basis the vendor uses to apportion, the purchase price should be ‘fair and reasonable’ according to HMRC. This could be simply based on floor area, or on a professional valuation of the property.
Practical tip for buying commercial property at auction:
If you are buying a commercial property at auction you will need to notify HMRC of your option to tax on the day of the auction to secure TOGC treatment. If it is a mixed use property, make sure that VAT is only charged on the commercial element.
