VAT – Inadvertently Deregistering with Property on Hand

A frequent question asked on VAT often relates to property. 
Although VAT in relation to property can be complex, the situation can be far worse when a change in circumstances or a transaction has already taken place and the client hasn’t taken advice at the right time or realised the implications.
In this series of short articles, we aim to draw attention to some of the common areas of risk so that hopefully it won’t be you or your client having to deal with the fallout in the future.

 

Sometimes a business will transfer its trade as a going concern and transfer the VAT registration number to the new entity thinking it will keep things simple, but this can be a mistake if the old entity wishes to retain land or property.

Take for example the case of a sole trader who bought a property four years ago for £300,000+VAT and claimed the input tax as it occupied the property in its fully taxable business. The building falls within the capital goods scheme (CGS) as the threshold for the scheme is £250,000+VAT.  Under the CGS the use of the building needs to be monitored over a ten-year term.  If the business incorporates and the new company takes on the VAT number the sole trader is left deregistered with a CGS asset on hand.  As the sole trader has not opted to tax the building, there is an exempt deemed supply of the asset on deregistration and a single CGS adjustment would be required to reflect the deemed exempt use over the remainder of the ten year CGS term. In simple terms, this means repaying a proportion of the VAT figure initially recovered.

To avoid this problem, we would advise that the company takes a new VAT number when it registers and that the sole trader remains registered under the existing number, opts to tax the property, and charges rent + VAT to the company.

Or consider a trading company that bought investment properties to let out. One property was acquired with tenants in situ from a seller who had opted to tax, so the company has also opted to tax to meet the TOGC conditions.  Another property it bought freehold when it was two years old, so opted to tax to recover the VAT chargeable on the building because it was ‘new’.

The company then sells its trade but decides to keep the properties; the rent is below the VAT threshold so it deregisters.

Here we have an opted building on which input tax was claimed on the purchase, and an opted building acquired as a TOGC.  In both cases, output tax is due on the value of the properties at the time of deregistration.

This would be avoided by remaining VAT registered; the administration involved in continuing to charge VAT and submit VAT returns would be a small price to pay to avoid having to account for output tax on the value of the buildings

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