Q. Our long-term landlord has offered us the opportunity to purchase the freehold in the office building we work from, which we are keen to do. However, they have opted to tax the building. I’m aware we could recover the input tax but it will still have a short term negative impact on our funds. Is there any way to avoid incurring it in the first place?
A: The most obvious way to avoid the input tax hit is to ask your landlord to revoke the option. This will be possible if it was made more than 20 years ago. This will definitely be worth doing, because you will have to pay SDLT on the VAT-inclusive purchase price, and so this will mean an additional cost for you.
If this isn’t possible, another option would be to structure the purchase as a transfer of a going concern. You would need to create a new legal entity, e.g. another company to do this, and meet the conditions set out in VAT Notice 700/9. There are specific requirements in relation to land and property, so pay particular attention to paragraph 2.3.
If you feel this approach is heavy-handed, you could try to agree that under the sale contract, an amount of consideration equal to the VAT payable will be deferred until it can be recovered. Of course, this leaves you with the SDLT problem, so consider the other options first.