VAT Q&A: property on hand at deregistration

In our regular Q&A, Vivienne Scott, senior VAT consultant at Croner Taxwise, considers the implications of deregistration with property on hand when an owner has invested heavily in refurbishment

Q: One of my clients deregistered recently and has now received a letter from HMRC asking about a property that he bought four years ago for £150,000 and opted to tax. There was no VAT chargeable on the purchase, the property was empty at the time and in quite poor condition as the seller was reluctant to spend money on it, so my client also spent £100,000 doing it up ready to let out.

He opted to tax so that he would be able to recover the VAT on this refurbishment and, until deregistering, has charged VAT on the rent. What does he need to do? As he has already cancelled his registration is he going to receive a huge assessment? The property is now worth around £300,000.

A: Property on hand at deregistration should be considered in the same way as other stock and assets on hand at the time. However, because property could have been acquired with or without VAT; could have subsequently been subject to capital expenditure and may or may not have been opted to tax, it can be difficult to determine whether a deemed supply is created and if so, whether output tax is due on it (a deemed supply can also be exempt). There can also be capital goods scheme (CGS) implications.

Because the implications of having property on hand are dependent on precise details, it is important to establish the facts. We are trying to establish:

  • What is the client’s interest in the property – leasehold or freehold?
  • The age of the building – is it less than three years old?
  • What was the purchase price?
  • Was VAT charged on the purchase/lease premium?
  • Did the client acquire the property as part of the transfer of a going concern?
  • Has the client spent more than £250,000 on a single capital project since purchase, or, if the expenditure was incurred after purchase to make it suitable for its intended use, was the combined VAT bearing cost of purchase and capital works £250,000 or more?
  • Did the client buy land and then develop the building?
  • Has the client opted to tax the property?

Although your client has opted to tax, which would make a deemed supply standard rated, there is no VAT due on the current value of the property in these circumstances. This is because they did not buy the property as part of a ‘transfer of a business as a going concern’ (TOGC), and no VAT was charged on the purchase because the seller had not opted to tax.

Although your client bought the property for £150,000 and then spent a further £100,000 immediately refurbishing it, spending £250,000 in total, only £100,000 had VAT on it; the purchase being exempt. This means that we don’t need to consider the CGS.

On a final note, when a business deregisters, the option to tax remains in place indefinitely unless your client revokes it after 20 years have elapsed. If your client’s taxable supplies including future rent go over the VAT threshold, they will need to re-register. They would also need to re-register (on the forward look) and charge VAT if they sold the property, unless it were to be sold as a TOGC. Unless revoked under the 20 year rule, an option also remains in effect for six years after the client no longer holds any interest in the property, so that in the event of them re-acquiring that property within that time-frame the property would still be opted.

About the author

Vivienne Scott is a tax adviser at Croner Taxwise tel: 0844 892 2470

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