What proportion of commercial tenants are put off by VAT being chargeable on rent?

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    What proportion of commercial tenants are put off by VAT being chargeable on rent?

    I am an experienced residential small-scale developer but much less experienced with commercial property.

    I am currently planning the renovation of some commercial space. I am considering opting to tax the building so I can reclaim VAT on my costs, but that'd obviously mean I'd have to charge VAT on rents. Can anyone give any insights as to what proportion of potential tenants I might expect to be put off by that? The types of units are a small retail-type unit and a small office (or specialist usage) type of unit, on the edge of a city centre.

    I cannot imagine that there could be many businesses renting this type of space which have turnovers below the VAT threshold, but might I be surprised? I am aware that some businesses operate in VAT-exempt sectors as well.

    #2
    Hi

    Banks, Building Societies, and Betting shops are examples of tenants for whom VAT would be a real cost. Also small charities. If it is really a lot of money you are spending on the premises that's one thing but VAT and the travails of partial exemption (as the resi would be zero rated) would incline to suggest its just not worth the bother. Once you waive exemption, you cant reverse the decision. You really want to keep away from all avoidable red tape, it will cost you a lot of money to administer over an extended period; and HMRC will only accept a partial refund due to the resi content.

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      #3
      Thank you for your thoughts. I'd be grateful for any further thoughts anyone has.

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        #4
        Forget about commercial property IIWY. I got out of it 18 years ago, and am so relieved I did, with firms not paying rent all year. Is there no chance of residential conversion?

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          #5
          Cant say I agree with JK0. We have quite low default rate with retail tenants albeit it is true that some trades have been very hard hit such as hospitality and dry cleaners.

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            #6
            Originally posted by flyingfreehold View Post
            Cant say I agree with JK0. We have quite low default rate with retail tenants albeit it is true that some trades have been very hard hit such as hospitality and dry cleaners.
            You're still sucking petrol from the bottom of an empty tank. See if you say the same in a year's time.

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              #7
              We've had two commercial tenants vacate since the present crisis struck in March. Both have re-let quickly. Providing correctly priced there is still a good market for retail business space.

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                #8
                Originally posted by JK0 View Post
                Forget about commercial property IIWY. I got out of it 18 years ago, and am so relieved I did, with firms not paying rent all year. Is there no chance of residential conversion?
                Interesting thoughts, but the short answer is that for a number of reasons there is no realistic possibility that this space could be converted to residential.

                JK0 flyingfreehold - do either of you have any thoughts on the opting to tax issue, based on your experience? In case it helps, there would be two commercial units - one would be a retail-type unit with a shopfront measuring around 45 square metres and would let for around £10k a year, and the other would be used as an office or specialist usage (say dentist) and measures around 50 square metres and would let for around £8k a year.

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                  #9
                  dental work is exempt for VAT so if you waived exemption to tax (and thereby elected to charge vat at the standard rate) it would be an irrecoverable cost to the dentist and a negative on rental value.

                  I can only counsel you not to bother because you will be lumbered with doing quarterly VAT returns. If you are buying in a limited company, and say there are residential lettings producing say 36k pa you will only be able to recover a third of VAT for ongoing costs of the company such as professional services.

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                    #10
                    "Banks, Building Societies, and Betting shops are examples of tenants for whom VAT would be a real cost.:

                    Another example is funeral directors whom i understand can only recover part of the VAT. Having said that, a funeral director tenant that had wanted the rent payable to be net of VAT did not object when 20 years later the landlord deregistered. (The decision to opt for tax can be reversed after 20 years).

                    Betting shops are interesting: the large companies are VAT-averse but I used to act for a small (well-known) company which had no issues. Which makes me wonder whether the large companies might be trying it on to assist their cash-flow.

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                      #11
                      Originally posted by flyingfreehold View Post
                      dental work is exempt for VAT so if you waived exemption to tax (and thereby elected to charge vat at the standard rate) it would be an irrecoverable cost to the dentist and a negative on rental value.

                      I can only counsel you not to bother because you will be lumbered with doing quarterly VAT returns. If you are buying in a limited company, and say there are residential lettings producing say 36k pa you will only be able to recover a third of VAT for ongoing costs of the company such as professional services.
                      Unfortunately I have already had to register for VAT anyway due to the need to reclaim a large amount of VAT on another building, so I am already doing VAT returns. Also to be clear a dentist was just a random suggestion.

                      I'd be grateful for any further thoughts on the likelihood of potential tenants being VAT averse. To be clear, I would be spending about £100k+VAT on renovations and associated fees, so I could reclaim £20k straight off by opting to tax the building.

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                        #12
                        If it is all one building the election has to cover the whole building. Charities who do take small office/business space dont much care to pay VAT but charities in my experience dont think like a normal business. Once over a certain size the Board are somewhat motivated to do what suits their staff retention. I showed an extremely cost effective modern office suite to a well known and widely respected charity; they did not reject it because it was too expensive, but rather the opposite, they took space near Sloane Square at twice the rate psf because they thought the shopping amenities would be a plus for their volunteer workforce!

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