Many commercial properties are elected or opted for VAT. This is a tax at a rate of 20 per cent added to the purchase price and rental of a VAT-opted property.
It is important to know whether a property is opted for VAT before you consider purchasing it or whether you wish to elect a property you already own for VAT.
New commercial buildings have been automatically subject to VAT since August 1989. You may also choose to elect a property for VAT, usually to reclaim the VAT on the cost of development work.
Pension schemes can register for VAT and opt to tax a property, meaning they can reclaim any VAT paid on commercial property purchases. They must then charge VAT on their rent and maintain accurate records to carry out ongoing VAT submissions and payments to HM Revenue & Customs.
The basics
In the case of commercial properties being subject to VAT, the purchase price increases by 20 per cent, which must be paid by the purchaser to the vendor. The vendor then pays the VAT to HMRC.
The pension scheme must then charge VAT on the rental of the property, maintain VAT records and submit quarterly VAT returns where VAT charged on the rent is paid to HMRC. Any VAT paid on expenses for the maintenance of the property can be offset.
If you decide to register your pension scheme for VAT, you will be allowed to reclaim VAT on the purchase price and the registration needs to take place before the property is purchased.
Example 1: Purchase
A light industrial unit is being sold to a pension scheme for £100,000. As it is subject to VAT, the actual amount payable is £120,000.
The pension scheme registers for VAT and following the purchase, when it submits its first quarterly return, it can reclaim the additional £20,000.
The rental of the property is £6,000 a year. which is charged at £1,500 a quarter. As VAT must be included, the amount charged is £1,800 per quarter.
In each quarterly VAT return the pension scheme declares £300 VAT is payable minus any VAT paid on property expenses such as repairs and maintenance costs.
Where a property is not VAT elected, there is no requirement to register the pension scheme. In some circumstances you may choose to elect the property for VAT, particularly when you are spending a significant amount developing the property.
Registration process and timescales
The registration process is similar to registering a company and is conducted by setting up a Government Gateway account for the pension scheme and making an online registration.