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Get the Vat Back By Making Your pension Scheme The landlord

 By

SteveAllen

Sadly Steve Allen died in July 2011. His wife Leah would like to thank all those who know Steve and helped contribute to his success. She has recommends Steve's clients and anyone who is interested in this article topic to contact Rob McCann from “The Vat people” on (tel) 0161 477 6600 . Please make reference to Steve Allen.


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Issued July/August 2010

It is common practice for trading companies to transfer their commercial property into a pension fund for the shareholder directors. In most cases, the property is rented back to the trading company to generate income for the pension fund. However, the VAT implications of the transfer, and the potential savings and pitfalls involved are rarely considered.

The first thing to do is to establish the VAT liability of the property being ‘transferred’, as the transfer is effectively a sale for VAT purposes. Remember that if the property is still ‘new’ (i.e. up to three years old), the freehold sale will be compulsorily standard rated. If the property is no longer new, the freehold sale (or any length of leasehold sale) will be exempt from VAT unless an option to tax has been made, which involves submitting a written notification to HMRC that you wish charge VAT on rents or freehold sale. If the property is ‘new’, or the option to tax has been exercised, the trading company will charge the pension fund VAT on the full selling price of the property. If it is an exempt sale, the trading company may not then be able to recover all the VAT incurred on the costs of the sale. The possible impact of an exempt sale is that if the property cost £250,000 or more plus VAT when acquired, or it has been extended or refurbished at a cost of £250,000 or more plus VAT, you may also have to make an adjustment to any VAT already claimed under the Capital Goods Scheme (CGS). The rules for the CGS are complicated to say the least, and proper VAT advice should be sought if the property falls within the scheme. Suffice to say that if you do not consider the VAT position fully, the pension fund may be left with a large VAT charge that it cannot recover, or the trading company may have its own input VAT restricted.

The good news is that there are ways to minimise any potential costs that are easy to put in place, provided you consider the VAT position at an early stage. The first thing to do is to ensure that you do not end up with a VAT restriction in the trading company. You can do this by making sure the sale of the property is subject to VAT, so opt to tax if it is not a ’new’ commercial property. As mentioned above, you opt to tax by writing to HMRC and giving details of the property you want to opt.

Having made sure there will be no VAT costs in the company, you then have to look at the pension fund. First of all, you should register it for VAT as a property rental company, and opt to tax the property. The pension fund will then be able to recover the VAT on the transfer of the property, and any associated costs. As the pension fund has opted to tax the property, it will have to charge VAT on the rents to the tenant trading company. The tenant will be able to recover the VAT on the rents, provided it is VAT registered and ‘fully taxable’ (i.e. it charges VAT on all its sales invoices). As a bonus, if you are to be flexible with the transfer date, you can also obtain a cash flow advantage by timing the transaction so that the pension fund is able to recover the VAT it is charged on the purchase of the property before the trading company has to account for it to HMRC.

Should you have a pension fund which already owns the property tenanted by your trading company, it is still not too late to improve its VAT position. The pension fund is going to incur costs each year on which VAT is charged (e.g. repairs and maintenance, audit fees etc). If it is not registered for VAT, it cannot recover the VAT on these costs. The remedy is to register the pension fund for VAT and opt to tax the property, as this would allow it to recover the VAT on all its ongoing costs – something that could easily amount to a few thousand pounds each year. It must be noted, however, that in these particular cases (i.e. where exempt rents have been previously collected), you have to obtain the formal prior permission of HMRC to opt to tax.


About the Author

STEVE ALLEN is the Managing Director of VAT Advisers Ltd, and has more than 19 years’ experience in VAT. Beginning with HM Customs & Excise in 1990, Steve spent 8 years in the Department in a variety of roles such as VAT Insolvency and VAT investigation in Liverpool, and latterly as a VAT Inspector at Wigan VAT Office.

Steve left the Department in 1998 to become a consultant with Latham Crossley and Davies, before joining Ernst & Young. In 2001, Steve formed VAT Solutions (UK) Ltd with a co-Director, and built up a successful practice over 8 years before setting up VAT Advisers Ltd in September 2009.

Steve advises accountants and individual businesses on all aspects of VAT, but in particular, issues concerned with land and property, charities, cross-border trading, and arrears of VAT.

VAT Advisers Ltd,
1 Dundonald Avenue
Stockton Heath
Warrington
WA4 6JT
(t) 01925 212244
(f) 01925 212255
(m) 07810 433927
www.vat-advisers.com



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Article Published/Sorted/Amended on Scopulus 2010-09-17 18:20:25 in Tax Articles

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