VAT on Property Purchases: What Every Buyer Needs to Get Right

Where VAT is being charged on the purchase of a property, getting the VAT treatment right from day one is critical. Revenue can deny a VAT input credit where VAT has not been correctly charged, potentially leaving the purchaser with an unexpected and irrecoverable cost.

Further, where a property purchase is subject to VAT, the purchaser must also consider whether they are entitled to recover that VAT cost. VAT recovery is not automatic – it is directly linked to the intended use of the property by the purchaser over the next 20 years.

If the purchaser intends to use the property for a business with full VAT recovery, then typically they would be entitled to recover the VAT incurred on its acquisition.

However, VAT recovery is not fixed for life. If the purchaser’s VAT recovery entitlement changes during this 20-year period – for example, where the use of the property moves from being fully VATable to partly VATable or exempt – then the purchaser must repay a portion of the VAT originally reclaimed.

Conversely, VAT can work in the purchaser’s favour. If VAT was not recoverable at the time of purchase (for example, where the property is leased under a VAT-exempt lease) and the property is later put to a VATable use within 20 years (such as opting to tax the lease), the purchaser may be entitled to reclaim a portion of the VAT originally incurred.

Joint Option to Tax – More Than Just a Box-Ticking Exercise

Where the sale of a property is not automatically subject to VAT, the vendor may request that the purchaser agrees to enter into a “joint option to tax”. While this can facilitate the transaction, it also brings several important VAT consequences for the purchaser, including:

• VAT Accounting Responsibility: The purchaser becomes responsible for accounting to Revenue for the VAT on the transaction under the reverse charge mechanism.

• VAT Registration: If the purchaser is not already VAT registered, they must register in order to account for VAT on the transaction.

• Creation of a Capital Good: The property becomes a capital good in the hands of the purchaser, triggering the need to maintain capital goods scheme records and to monitor the use of the property for the next 20 years (or until disposal) to ensure ongoing compliance.

Transfer of Business Relief (TOBR) – No VAT Charged Doesn’t Mean No VAT Risk

If VAT is not charged on the purchase, it is important to understand why. In many cases, VAT may not apply because transfer of business relief (TOBR) applies or because the property is old and has not been developed.

Where TOBR applies, the purchaser must carefully consider their obligations under the capital goods scheme. This is often overlooked. For example, if the sale would have been subject to VAT but for TOBR, and the purchaser would not have been entitled to recover all of that VAT, the purchaser may be required to make a payment to Revenue equal to the non-recoverable VAT amount.

From a capital goods scheme perspective, the purchaser must create a new 20-year capital goods record commencing on the date of acquisition. As with other VATable properties, changes in use during this period can give rise to VAT payments or VAT refunds.

In certain TOBR scenarios, the vendor is required to provide capital goods scheme records. In practice, this can be problematic, particularly where records have not been properly maintained.

If a sale is exempt but for TOBR, the purchaser may effectively take over the vendor’s existing capital goods scheme records. This can be a double-edged sword – future changes in use could result in additional VAT costs or, alternatively, VAT refunds.

Particular care should be taken where a purchaser inherits capital goods scheme records, as VAT adjustments are based on historical VAT recovered, not the purchase price paid by the purchaser.

Pre-Contract VAT Enquiries & the Contract for Sale – The Small Print Matters

In property transactions, vendors are required to provide VAT information through the Law Society’s Pre-Contract VAT Enquiries (PCVEs). This information should be carefully reviewed by the purchaser and their tax advisor to identify any hidden VAT exposures or ongoing compliance obligations.

Equally, the VAT clauses in the Contract for Sale must accurately reflect the VAT treatment outlined in the PCVEs. Any misalignment can create real risk for purchasers post-completion.

Final Comment

The purchase of commercial property can give rise to complex and long-lasting VAT implications. Early engagement with tax advisors is essential to ensure purchasers fully understand the VAT treatment, recovery position, and potential future liabilities before contracts are signed. In property transactions, VAT mistakes are rarely quick or cheap to fix.

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When it comes to VAT on property, getting it wrong can be expensive and getting it right can unlock real value. Our expert tax team supports clients through every stage of the deal, ensuring VAT positions are robust, compliant, and future-proofed. If you’re planning a property transaction, now is the time to talk.

Disclaimer: This article does not constitute professional accounting, tax, legal, or any other professional advice. Taxkey accepts no liability for any action taken or not taken in reliance on the information provided in this article. Professional accounting, tax, legal, or other relevant advice should be obtained before taking or refraining from any action based on the contents of this article.