Latest changes made to the Standard Commercial Property Conditions are reflecting a variation in the VAT trend. Commercial Solicitor Keeley Miller explains.
The Standard Commercial Property Conditions (SCPC) are incorporated into the majority of commercial property contracts for sale. Historically, the SCPC required parties to opt to apply Part 2 of the conditions if the seller had exercised the option to tax the property. This was reflective of the VAT treatment of most commercial property transactions at the time the second edition of the SCPC were published.
The Law Society has now reversed this default position. In the new third edition of the SCPC, the sale of commercial property will be a standard rated taxable supply and the sale not being a standard rated supply is now the optional part of the conditions.
Sellers who opt into the VAT system generally do so in order to recover any VAT associated with maintaining and developing their commercial property during their ownership. Not all commercial property owners will opt into the VAT system if they are looking to attract SME tenants who may not be registered for VAT themselves and would find the additional charge for VAT in addition to their rent prohibitive.
When purchasing a commercial property over which a seller has exercised their option to tax, the buyer must fund the 20% charge for VAT in addition to the purchase price. After completion of the sale, the buyer will include the input tax on their next VAT return, giving rise to a VAT recovery. However, they could wait anywhere between 28 and 150 days for that rebate.
Buyers of property elected for VAT have to pay stamp duty calculated on the total consideration paid for the property – the VAT element on a commercial property can sometimes push the price over £150,000. Buyers are not able to recover Stamp Duty Land Tax attributable to the part paid due to VAT being charged on the purchase price.
|Property or lease premium or transfer value||SDLT rate|
|Up to £150,000||Zero|
|The next £100,000 (the portion from £150,001 to £250,000)||2%|
|The remaining amount (the portion above £250,000)||5%|
It is important for sellers to keep their HMRC Option to Tax correspondence as it is required to be produced with replies to Commercial Property Standard Enquiries. Buyers and tenants are advised to check whether the seller’s or landlord’s property has been opted for VAT as early as possible in any commercial property transaction and to budget accordingly.
If you require further legal advice on the Standard Commercial Property Conditions and VAT implications, please contact our Commercial Property Department – our team of expert solicitors will be able to assist and can offer free initial advice. Call on 01708 229444 or email us using our contact form.This article was written by Keeley Miller, Commercial Property Solicitor at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of October 2017.