However, this general rule may not apply in some limited situations, often where the property is a commercial premise, such as an office, warehouse or shop and where the seller has taken the ‘option to tax’, which we’ll explain shortly.
Commercial sellers who are VAT-registered may potentially be obligated to charge VAT against the transaction; that could include a scenario where the seller is a registered limited company or a developer who trades as a VAT-registered business.
Key Takeaways
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Most residential properties sold at auction do not attract VAT, but commercial properties might incur VAT if they are sold by a VAT-registered business.
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Electing to tax a property allows a VAT-registered owner to reclaim VAT on costs related to the property and requires charging VAT on rents and the sale price.
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This can make commercial properties subject to a 20% VAT charge at the point of sale, which is significant for buyers who are not VAT-registered themselves.
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Buyers interested in properties at auction should verify the VAT status by reviewing the legal pack available prior to the auction.
How Does VAT Work in Property Auctions?
The UK regulations state that any business, whether a self-employed individual or a limited company, is required to register for VAT once its annual turnover exceeds £85,000.
Typically, VAT only applies where a property belongs to a business seller who is already paying VAT, either because its turnover is above the threshold we’ve mentioned or because it has voluntarily opted to become a VAT-paying business.
While that may sound counterintuitive, it is important to remember that VAT works both ways.
If, for example, a business supplies a service that is exempt from VAT but pays VAT on much of its materials and overheads, it might make sense to become VAT registered and claim back the difference from the tax office.
The sale of a property at auction has additional complications since the seller may have to decide whether the premises, residence, or land is elected for VAT, also called the ‘option to tax’.
However, if the property is subject to VAT and the seller decides to opt into VAT treatment, the buyer would pay this - not the seller.
It is also the case that if the buyer is VAT registered they will normally be able to reclaim their VAT.
What Is the Option to Tax on a Property Sold at Auction?
Without delving into the finer details, HMRC introduced a rule back in 2010 that states that, in most cases, a property sold at auction - including commercial properties and land - is not subject to VAT. That position changes if the property was previously filed with an election to tax.
In that scenario, the property may be subject to a VAT charge at the standard rate, currently 20%. There are further complexities since a property elected for VAT normally means:
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Costs associated with the property that include a VAT element may be reclaimable if the owner is VAT-registered.
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Rental premiums charged to tenants living in a buy-to-let property must include the relevant VAT charge.
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When the building is sold, VAT will be calculated against the selling price and charged to the buyer.
Property professionals bidding against a lot at auction may not necessarily have any issue with a property being subject to VAT since, if they are also VAT registered, they will be able to claim back that cost or offset the amount of VAT paid against their next VAT return.
There are also sometimes opportunities for property buyers to register for VAT retrospectively and claim back the VAT, although this can take time, and the buyer would still need to pay the VAT upfront to complete the sale.
If the buyer takes this route, HMRC may request a visit to the property and the chance to review the purchase documentation before approving a refund of the VAT paid.
How Can I Check if a Property Sold at Auction Is Subject to VAT?
If you are a buyer and want to be sure that any property you bid against won't include a supplementary VAT charge, you can check these details well before auction day. There are two options:
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Registering and downloading the legal pack from the Clive Emson website.
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Getting in touch directly to raise any questions you may have.
Our experienced auction team can always advise whether a property is subject to VAT, and although this is a non-standard scenario, it is well worth raising a query if you have any concerns or are unclear about whether VAT is payable.
VAT may also be added to any fees or charges payable to the auctioneer. As we’ve indicated, most bidders interested in a commercial property or business premise being sold by another VAT-registered owner at auction will likely be VAT-registered themselves, in which case the addition of a sales tax is not an issue.
Professional Assistance With Managing an Auction Property Subject to VAT
Most residential homes sold at auction have no VAT considerations whatsoever, and if you are buying as an individual, a landlord, a company or another entity or business structure, this means that the sale price you pay does not incur any VAT liability.
Any property listed for auction that was originally purchased with the option to tax or where the current owner has registered for the option to tax will have this information detailed within the property particulars and clearly shown in the legal pack - a reputable auctioneer will not allow an auction to proceed without all bidders being aware.
If you are keen on selling a commercial property as a VAT-registered business, our team can explain how this works or provide assistance if you are unsure whether the property is currently registered with an option to tax or not.
Likewise, as a buyer, our auction specialists can provide help and guidance if you wish to register your interest as a bidder in an upcoming auction and have any concerns about whether the final purchase price would be exposed to VAT.
Please note that this guidance relates to the general tax regulations; specialist tax advice from your accountant or a tax consultant may be advisable for complex scenarios.
