VAT and Property Transactions: Navigating Costly Traps

Property VAT is one of the most complex and high-risk areas for businesses. The sums involved are large, the rules are technical, and the penalties for mistakes can be severe.

At ETC Tax, we regularly see avoidable VAT errors that lead to irrecoverable costs, HMRC disputes, or costly deal delays.

With this in mind, we have put together a checklist to help you avoid the most common traps.

 

1. The Option to Tax (OTT), Miss It and Pay the Price

Why it matters:

Opting to tax allows a business to charge VAT on rent or sales and reclaim VAT on associated costs (like refurbishments or legal fees). However, an OTT is only valid if properly made and recorded.

 

Check that:

• The OTT has been formally notified to HMRC.
• The landlord’s position is confirmed in writing.
• Accurate records of the election are kept for future reference.

 

Common mistake: Assuming an OTT was made when it wasn’t. We often see clients who have incurred six-figure refurbishment costs, only to find their VAT claim rejected because no valid OTT was in place.

Tip: Always confirm OTT status before incurring expenditure.

 

2. Transfer of a Going Concern (TOGC), Relief or Risk?

Why it matters:
Where a property sale is part of a wider business transfer, VAT may not apply if the deal qualifies as a TOGC. This saves VAT on the purchase price and reduces SDLT, but only if strict conditions are met.

 

Check that:

• Both buyer and seller are VAT-registered.
• The property will be used for taxable business purposes.
• Any Option to Tax is valid and in place.

 

Common mistake: Assuming TOGC applies without checking the conditions or obtaining VAT registration in time.

Tip: Confirm TOGC eligibility early; structuring errors can add millions to a deal.

 

3. Partial Exemption, Managing Mixed Supplies

 

Why it matters:
If your business makes exempt supplies (e.g. residential lettings, education, health, or finance), you may not be able to recover all input VAT. The partial exemption rules determine how much you can reclaim.

 

Check that:

• The standard method of VAT recovery produces a fair result.
• You’ve considered applying for a special method if the standard one is unfair.
• Any special method is agreed with HMRC in advance.

 

Tip: Specialist advice can help negotiate fairer recovery rates and defend them in HMRC reviews.

 

4. Overlooked Areas, Deposits, Inducements, and Break Payments

 

Why it matters:
Payments such as deposits, lease inducements, dilapidations, and break fees can all have VAT implications. HMRC has become increasingly aggressive in challenging incorrect treatments.

 

Check that:

• You’ve identified all side payments in the transaction.
• You’ve clarified whether each payment is consideration or compensation.
• VAT advice has been sought before contracts are signed.

 

Common mistake: Reviewing VAT treatment after signing agreements, when it’s too late to change the terms.

Tip: Early review avoids disputes and unplanned VAT costs.

 

Why Specialist VAT Advice Matters

Property VAT is too complex to rely on assumptions or generalist advice. Getting specialist input early protects both value and compliance.

 

At ETC Tax, we  have VAT specialists who provide

• Contract and lease reviews to confirm VAT treatment.

• Advice on Options to Tax and TOGC eligibility.
• Support with partial exemption calculations and HMRC negotiations.
• Guidance on complex payments (deposits, inducements, break clauses).
• Representation in HMRC disputes or recovery challenges.

 

Next Steps 

VAT on property can be difficult to navigate, but with the right planning, most risks are avoidable.
Missed OTTs, incorrect TOGC assumptions, poor partial exemption management, or overlooked payments can all cost thousands, but with early specialist advice from ETC Tax we can safeguard VAT recovery and keep your transactions on track. Please get in touch to find out how we can support you.