Value Added Tax

Introduction

**Value Added Tax ('VAT')** is a consumption tax levied on the value added to goods and services at each stage of production or distribution, and is ultimately borne by the **final consumer**. In property practice, VAT can apply to the sale or lease of **commercial property**, to **construction services**, and to the **transfer of a going concern**. This chapter sets out the **basis of charge** under the **VAT Act 1994**, explains what constitutes a **taxable supply**, distinguishes **standard-rated, exempt and zero-rated supplies**, examines the all-important **option to tax**, and summarises the **VAT treatment of residential and commercial buildings** together with the **documentation requirements** every property solicitor must understand.

Assessment focus

For the SQE1 FLK1 assessment, you must be able to advise a client on the **VAT consequences of a property transaction**. You should be able to distinguish **standard-rated, exempt and zero-rated supplies**, identify when the **sale or lease of commercial property** attracts VAT, and explain the operation and consequences of the **option to tax** — including its effect on **input tax recovery**, on **tenants who cannot recover VAT**, on **SDLT**, and its general **20-year irrevocability**. Questions are single best answer questions (SBAQs) set in **realistic client-based scenarios**: you will be expected to **apply** the VAT rules to facts (for example, choosing the correct **Standard Commercial Property Conditions of Sale ('SCPCs')** for a new commercial building) rather than merely recall definitions. This is a closed-book assessment.

Study tips

1) Memorise the **three rates**: **standard 20%**, **reduced 5%**, **zero 0%**, plus the category of **exempt** supplies (no VAT charged, **no input tax recovery**). 2) The key distinction is **zero-rated v exempt**: both add no VAT to the price, but only a **zero-rated** supplier can **reclaim input tax**. 3) Property is **generally exempt**, but the **sale of a NEW commercial building (under three years old)** is **standard-rated**, and a landlord/seller of an **older commercial building** may **opt to tax** to convert an exempt supply into a taxable one. 4) The **option to tax** unlocks **input tax recovery** but is **generally irrevocable for 20 years** and makes the property unattractive to **VAT-exempt tenants** (e.g. insurers, banks) who cannot recover the VAT on rent. 5) For a **new commercial property sale**, use the **Part 1 SCPCs** (VAT payable); the **Part 2 SCPCs** warrant that VAT is **not** payable.