VAT on property, Beware, A Cautionary tale!

by | General, Inside News

Property is a hot topic at present, and in this month’s blog we cover the mistreatment of the Vat on the purchase of a property.

The Purchase

Mrs Smith purchases the freehold to a commercial property in 2015

She registers for VAT and reclaims the VAT charged on the purchase of the property.

VAT is accounted for on the reverse charge basis, so from a cash flow perspective, no payment of VAT is made.

VAT on Lease

Mrs Smith allows a tenant, a very favourable lease and does not charge VAT on the rental.

All VAT returns including RTD’s are filed on the basis that no taxable supply has taken place.

The entitlement to deductibility for any input, including VAT on property, is on the basis that the taxpayer will use the goods or service as part of making a taxable supply.

After 1 July 2008 a lease of property is automatically exempt unless the landlord exercises the option to tax.

The option to tax must be exercised in writing. It is not sufficient simply to put VAT on the invoice.

The exercise in writing can either be in the lease agreement or by separate letter.

The option cannot be exercised retrospectively, although there is a possible window of one year within the capital goods scheme to rectify this.

In the case of Mrs Smith the option to tax is never put in writing, either in the lease or by letter, no VAT is charged on the letting.

Therefore the property is put to an exempt use from the outset. Mrs Smith is not entitled to the input VAT credit on the purchase.

The VAT reclaimed should be repaid in the first VAT period of the tenancy, but remains outstanding.


At this point it is necessary to make a disclosure to rectify the situation and limit the exposure to interest and penalties.

Interest has accrued at 10% per annum, and will form a significant part of the amount paid to Revenue

Note, if within the 20 year VAT life of the property (until 2035), the client sells the building and exercises the joint option to tax, they can reclaim a portion of the input VAT-based of the remaining VAT life.

The joint option depends on the consent of the purchaser who may not be willing to take on the VAT exposure of a new 20 year capital good.

It is important that an accurate picture of the Vat position is ascertained when purchasing a property, Mrs Smith must also be aware of their responsibilities going forward.

We hope you found this blog informative, please feel free to contact us if you have any queries regarding this topic, or indeed, if you require any tax advice.

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