When buying a commercial building, the price may include VAT if the vendor has opted to tax the property. If the buyer is VAT registered and will be using the building wholly for the purposes of the trade it will be able to reclaim this input tax. However, this can mean that a large amount of money needs to be lodged with HMRC temporarily, which can affect working capital in the short term. In addition, the claim for input tax could be restricted if the business is partially exempt.
As a minimum, the buyer needs to obtain a copy of the letter HMRC will have sent the vendor confirming the option was valid. If it transpires that the vendor should not have charged VAT, the input tax claim will be refused. Obtaining a copy of the letter if the original has been misplaced can take time, and lead to delays in completing the purchase. But it may be possible to sidestep the problem altogether.
Revoking the option
It would be worth asking the vendor when the option was made, as it can be revoked if more than 20 years has elapsed. To do this, the vendor would need to complete Form 1614J and submit it before the date the sale price becomes legally binding. On the face of it this is straightforward, but the vendor may be reluctant if there is a knock-on effect on their own VAT returns, but it is certainly worth the buyer asking the question.
As a bonus, the buyer may also save some SDLT – which is charged on the VAT inclusive price.