Q: I own a limited company which purchased a new commercial property in November 2008 for £500,000 + VAT. We have occupied the property since then for its fully taxable trading activity and recovered the VAT charged on its 08/09 return. We did not opt to tax and no work has been done on the property in the last 10 years. The company is now selling it. What are the VAT implications of this sale?
A: As the property was bought, within the last ten years, for more than £250,000 + VAT, you are disposing of an asset that is subject to the Capital Goods Scheme (CGS). You can find detailed information on the CGS in VAT Notice 706/2.
Where a CGS building is sold before the end of the CGS term of ten intervals, then the adjustment for the interval in which the property is sold will be the final adjustment, and would also reflect the deemed use in any remaining complete intervals. An interval is usually the same as a tax year for partial exemption and this is a usually a period of 12 months ending on 31 March, 30 April or 31 May depending upon the business’s VAT periods.
If the sale is exempt, the use in any remaining complete intervals is deemed to be exempt, so there would be some VAT to repay to HMRC. If the sale is standard-rated because an option to tax is made prior to sale, then the remaining use is deemed to be taxable so in your client’s case this would reflect the initial recovery and there would be no adjustment to make.
However, you are already in the tenth interval so there are no remaining complete intervals, and the use in the final interval reflects the fully taxable use during that period, excluding the sale itself. This means that no final adjustment is required.
Assuming you do not make a last-minute decision to opt to tax, the sale of the property will be an exempt supply. Input tax incurred on the selling costs would then be attributable to the exempt supply, and therefore irrecoverable unless one of the de minimis tests is met. These are set out in VAT Notice 706 in paragraphs 11.2 and 11.7.
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