VAT on the sale of an opted commercial building under the SCPC (condition 2)
Corvid Investments Ltd is selling a vacant freehold office building in Birmingham, built in 2005, for £2,000,000. Several years ago Corvid exercised an option to tax the building. The buyer is Harbour Mutual Insurance plc, an insurer whose supplies are almost all exempt from VAT. The contract incorporates the Standard Commercial Property Conditions (Third Edition, 2018 Revision). None of the Part 2 conditions is incorporated, and there is no special condition about VAT.
Which of the following best describes the VAT position under the contract?
Choose one answer to see the reasoning.
Worked answer
Correct answer A: Corvid's option makes the sale standard-rated; under the contract Harbour Mutual must pay an amount equal to the VAT on completion against a VAT invoice, and is unlikely to recover it.
THE RULE TO REMEMBER
Under SCPC condition 2 the seller warrants a standard-rated supply and the buyer pays VAT on top of the price; a seller's option to tax makes an otherwise exempt sale standard-rated.
VAT on the sale of an opted commercial building under the SCPC (condition 2)
A sale of the freehold of a commercial building more than three years old is normally exempt from VAT. HMRC's Notice 742A explains, however, that once a person opts to tax, its supplies of that interest in the land are normally standard-rated. Corvid's option therefore makes the sale a standard-rated supply. Under condition 2 of the Standard Commercial Property Conditions, unless a Part 2 condition is used, the seller warrants that the sale will be standard-rated and the buyer must pay, on completion, an additional amount equal to the VAT in exchange for a VAT invoice. The VAT on £2,000,000 is therefore payable on top of the price. Harbour Mutual makes mainly exempt supplies, so it will not normally be able to recover that input tax. That is why a buyer in its position should check the seller's VAT status before exchange and negotiate the price accordingly.
Why B is wrong: A VAT-inclusive price is the position under condition 1.4.1 of the Standard Conditions of Sale, not under SCPC condition 2.
Why C is wrong: The exemption is displaced where the seller has opted to tax; the sale is then standard-rated.
Why D is wrong: The option to tax belongs to Corvid; a buyer cannot revoke the seller's option.
Why E is wrong: A vacant building with no business being carried on in it cannot normally be a transfer of a going concern, and the TOGC condition (Part 2, A2) is not incorporated.
A little more practice done.
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