Pubs are increasingly sold for conversion into other premises. The seller needs to establish whether the sale is properly chargeable to value added tax (VAT) or exempt, or whether VAT is ignored on the sale under the transfer of a going concern rules.
Where the pub is sold together with a manager's flat, see also our article on VAT on pub sales - New law update.
Two key problems can arise on pub sales:
- The buyer funding the VAT cost, if it has to pay VAT unexpectedly; and
- The seller having to repay to HMRC previously recovered VAT if it sells on an exempt basis, under the Capital Goods Scheme rules.
This note gives some examples of conversions seen in practice, and the VAT issues arising. It is not intended to offer complete guidance or cover every situation, but to offer some pointers as to when VAT should be considered and raised with the potential purchaser at an early stage.
The supermarket chain
For a VAT opted to tax pub property, a sale for immediate conversion to a supermarket or convienience store will be subject to VAT, except on any residential element. However, see note below where the buyer is going to keep the existing business in place for a limited period. See also our article on VAT on pub sales - New law update
The flat developer
We have experiences of a number of VAT outcomes for this kind of purchaser, for example:
- Where the developer intends to demolish the site, VAT is charged (on the basis of a seller option to tax).
- Where they want to keep their options open (to allow them to flip the site to another buyer, or develop themselves), VAT is charged (on the basis of a seller option to tax).
- Where the developer will convert the property and has a right to serve a notice to exempt the sale. When this notice is served, no VAT is charged. However, the seller may have to repay VAT previously reclaimed under the capital goods scheme. Spotting this issue early may prevent a VAT exemption notice being served so that VAT is charged on sale (and potentially recovered by the developer).
The Islamic foundation
Purchases by charities for non-business charitable purposes will be exempt from VAT – this would cover a pub conversion into a mosque for example, but not an Islamic bookstore. Where the objective isn't clear, the seller may need to ask the buyer more questions. It is also possible that a buyer may qualify for charity exemption for offering facilities similar to a village hall (which can include an income-generating element).
The family home
Adventurous DIY'ers are another popular buyer of pubs and with planning permission in place a higher price may be achieved in some areas than an ongoing pub business. A person intending to buy for use as their own home (with or without major conversion works) can exempt their purchase from VAT by sending the seller form VAT 1614D pre-contract. As with other exempted sales though, this can impact on the seller under the capital goods scheme – in which case the seller may want to pass on that cost to the buyer.
What if the buyer is going to keep the business in place, at least for a period?
Where a buyer's immediate intention is to continue the same business operated by the seller at a property acquired, then subject to the buyer giving standard contractual confirmations, the transfer of a going concern rules (TOGC) should apply. This applies even where a buyer may intend, down the line (perhaps after a successful grant of planning permission) to convert the premises to some other use. The effect of the TOGC rules is to have the transaction ignored for VAT purposes and the buyer 'inherits' the seller's VAT position in relation to the property (including any future required adjustments under the capital goods scheme). No VAT is charged and no VAT exemption notice should be served by the buyer.
Is it as simple as that? Well not entirely – the important point is the buyer and seller must carry on the same type of business. If selling a directly managed pub, to a buyer which lets it out to a third party operator, the business of being a publican is not the same business as the buyer's – being a 'landlord' of the other kind.
If you have any questions or would like more information, please contact one of our specialists below.