Small firms warned to avoid VAT property trap

'Complex' Budget measures could see startups paying out extra tax for premises

A little-publicised measure in the Budget could see thousands of startups unnecessarily pay VAT on the purchase of their premises, an accountancy firm has warned.

PKF said that “complex” new stipulations hidden deep within chancellor Gordon Brown’s announcement could lead to the VAT-free status when buying commercial property come under threat.

The condition is not, in itself, difficult to fulfil for most purchasers and simply requires the buyer to notify the vendor before the completion of the sale that they will not have their tax election disapplied.

However, PKF warned that the disapplication rules were highly complex and apply when the property being purchased will be used for the exempt purposes of the purchaser or a connected party.

If entrepreneurs cannot provide the notification, then the sale will not be VAT-free unless the property is worth less than £250,000.

The revelation of this little-known measure will be an unwelcome surprise for many small firms. Business groups have previously criticised the government for introducing complex rules and ‘stealth’ taxes, claiming businesses are being unfairly hit in the pocket.

Tim Buss, director of VAT at PKF, warned entrepreneurs to be aware of the new requirements.

“This requirement to notify the vendor is not particularly onerous and it is likely that, in the majority of transaction that qualified pre-Budget for VAT-free treatment, the purchasers will be able to give this notification.

“However, VAT will be charged on the sale if the purchasers fail to provide the notification and the parties concerned will suffer the adverse cash-flow consequences, increased Stamp Duty Land Tax and, possibly, penalties for getting it wrong.

“Our advice for anyone about to become involved in a property transaction is to check with their accountant or VAT adviser as soon as possible to ensure they don’t fall into a trap through ignorance of this unpublicised new measure,” he said.


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