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Buying commercial property at auction: Avoid the VAT trap

11 June 2009

Buying commercial property at auction may seem an attractive proposition when there is a bargain to be had. But the joy of purchasing a property cheaply can be short-lived if it triggers an unexpected VAT liability.

Where the property is purchased with the benefit of an existing lease, seller and buyer may automatically assume this would fall within the ‘transfer of a business as a going concern' (TOGC) provisions, with the result that no VAT is payable by the buyer.

Falling within the TOGC provisions, where the seller has made an option to tax over the property - which is likely, as it allows recovery of VAT incurred - can give a valuable saving in ‘real' terms if the buyer is not able to recover all VAT incurred from HM Revenue & Customs (HMRC), or in 'cash flow' terms if all VAT paid can be recovered.

It can also save some stamp duty land tax (SDLT) by not having to pay SDLT on the VAT.

However, where the seller made an option to tax over the property, one of the conditions that must be met for the TOGC provisions to apply is that the buyer must make an option to tax, and this must be done and notified to HMRC by the ‘relevant date'.

This is the date on which the supply of the property for VAT purposes is made by the seller to the buyer. Both parties could be forgiven for thinking it is the date on which the property is transferred to the buyer, and so it may be.

However, where a commercial property is bought at auction, it is likely that a deposit (normally 10%) will have to be paid on the day of the auction, with the remainder of the purchase price due when the property is transferred.

If the auctioneer holds the deposit as ‘agent' for the seller (rather than as ‘stakeholder') then the date of supply - and so the ‘relevant date' - is deemed to be the date the deposit is paid, i.e. the day of the auction.

The buyer is left in a slightly odd situation that: in order to comply with the requirement to make an option to tax before the ‘relevant date', it has to have made an option to tax and notified HMRC before it knows whether it has bought the property.

Although it has been noted that this is a strange result and cannot have been what Parliamentary draftsmen intended, it has been upheld in case law.

HMRC has granted a small concession, which a buyer may be able to use if a property is purchased without the required option to tax having been made.

If the option to tax is made and notification sent to HMRC by mail properly addressed, pre-paid and posted on the date of the auction, this will be sufficient. However, a notification sent even just a day later will not suffice.

Where, after the day of the auction, it comes to light that the purchase will not fall within the TOGC provisions, there is no ideal solution if the buyer is not able to pay the VAT up-front.

However, one possible compromise is for a clause to be inserted in the sale contract stating that the buyer will only pay the VAT element to the seller once it has received it from HMRC.

Whether this is a workable solution will depend on the seller's attitude to the sale and on the buyer being able to recover from HMRC all VAT incurred.

In return for agreeing to this, the seller will often seek an indemnity in case the buyer cannot recover VAT from HMRC. Whilst this solution eases the burden for the buyer, it can potentially give the seller a cash flow issue, as it may have to account to HMRC for the VAT before it receives it from the buyer.

So, check before the date of the auction how the auctioneer will hold the deposit. If it is as ‘agent' and the seller has opted to tax, the buyer will need to make an option to tax and ensure that it is sent to HMRC on or before the day of the auction, or be prepared to pay the VAT and factor this into its costs.

Bear in mind, though, that depending on the circumstances, making an option to tax may not always be the best course of action.

Not considering all of this means your satisfaction at getting a bargain could prove short-lived.

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

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