My client, a small owner-managed company, purchased five-year-old freehold premises to trade from in June 2017. The total cost of the premises and refurbishment was £180,000 plus VAT, which the company reclaimed in full in the 06/17 period, and the company has occupied it since for its engineering business. The business has always been fully taxable. 
Unfortunately, the director/shareholder is very ill and has taken the decision to close the company and dispose of the property. Please, could you advise whether any VAT needs to be repaid as it was only claimed a short while ago? 

Does VAT need to be repaid? 

The freehold sale of commercial property which is over three years old is exempt from VAT unless the vendor waives the exemption by opting to tax. For completeness, the freehold sale of a commercial property less than three years old is automatically standard-rated. 
In certain circumstances where VAT has been recovered on a property purchase and then an exempt sale is made, a repayment of all or part of that VAT is required. These circumstances will vary depending on the facts of each case, but the main reasons are outlined below: 
If no taxable use is made of the property, and the first use is exempt within six years of the original recovery, clawback will apply; 
If taxable use is made but exempt supplies, other than the sale, are made within the same partial exemption longer period an adjustment may need to be made in HMRC’s favour at the end of that longer period, or 
Where the property purchase, plus any refurbishment cost is £250,000 (tax ex) or more, taking the property into the capital goods scheme (CGS) which has an adjustment term of ten years. 
In this case, the VAT was recoverable without any option to tax as it was occupied for the company’s own fully taxable purposes. If it is now sold VAT exempt, there will be no VAT to repay, as 
taxable use has been made of the property – so there will be no clawback; 
the client was fully taxable, and finally, 
the costs incurred were below the capital goods scheme (CGS) threshold. 

Questions or queries? 

Please do let us know if you have any questions or if you need any further help understanding the guidance – please call us on 01932 564098 or message us here. 

Information correct at time of publication 

This tax Q&A was published in August 2018 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice. 
(This content was originally produced by Croner Taxwise Limited and is reproduced with their permission) 
Tagged as: Property, VAT
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