Charitable Company reclaim of VAT on property purchase.

Our local charity has found a property we wanted to buy (price agreed). The sellers wanted to charge us VAT on top of the sales price and insisted that the VAT is to be added. As a charity using the property wholly for charitable purposes, we were told we could claim back the VAT from HMRC. We were also told the best approach to this is to set up a new company which is a subsidiary of the charity and then use this subsidiary (which we would register for VAT to get the refund.). We have a subsidiary company set up already which we can use for this but is not currently trading or registered for VAT (we have never registered for VAT as a small local charity) Question: Can we get the VAT refund back? Is this the right approach in this situation ?.... is there anything else we need to be aware of. Kindly advice. Thanks.

Hi,
Generally the sale of a commercial property is exempt from VAT.
However if the seller has opted to tax the property then they would normally have to charge VAT to the seller.
However there are scenarios where the Option to Tax has no effect and no VAT is charged and a charity buying a property is one of these scenarios.
Please see the guidance below:
Supplies not affected by an option to tax.
We would recommend referring this guidance to the seller of the property.
Thank you.

The exemption that allows a charity to have a sellers/landlord option to tax disapplied relies on the fact the charity intends to occupy the premises for an entirely non-business purpose and cannot use the property as a head office, so that is a very narrow definition and is aimed at charities almost wholly funded by grants and donations with no other business related income such as a charity shop selling donated goods or a charity that charges customers in their charity cafe or charges customers to access services, advice, etc. HMRC have supplied the link to the definitions that are in play here, so do read that guidance as it clearly states the rules. Assuming you meet these conditions for exemption, the landlord/seller should disapply their option to tax, however, many are reluctant to do so because this costs them money, a taxable property suddenly becoming an exempt property means the landlord or seller may have to repay previously reclaimed input tax in the last 10 years (Capital Goods Scheme) or in the last year (Partial exemption) and so they will resist your attempts to make their taxable supply exempt...at the very least they may want to revise their rental/selling price to reflect any loss they may incur if they have to repay previously reclaimed input tax. Who told you "you can reclaim this VAT back from HMRC?" Assuming the charity is not VAT registered (unlikely if it meets the conditions to remove the VAT from a property purchase and you have stated in your question above that you are not VAT registered), it is the vendor/seller who has to remove the VAT from the selling price, it is not the case that the vendor charges VAT and you reclaim it later. HMRC will reject any attempt to reclaim VAT, HMRC's logic will be that if the exemption applied, the landlord should have applied it, you cannot reclaim VAT where it has been wrongly charged by the supplier. Who told you to "setup a NewCo"? This is potentially terrible advice, the NewCo could acquire the property, the NewCo could opt to tax the property but then it would have to charge a market rent to the charity and that rent would be plus VAT. This may work if the value of the property is less than £250k and could see the initial input tax recovery from the purchase but also means the NewCo is charging market rent to the charity, that might be okay if that is the intention but it does mean that VAT is still charged to the tenant. But if the property being purchased is more than £250k then there is specific anti-avoidance legislation which will remove the NewCo's option to tax and in doing so, this will mean NewCo cannot make taxable supplies of rent to the charity and the NewCo is denied input tax recovery on the property purchase. If the "advice" you are getting is free, then suggest you pay for specific advice, speak to an Accountant or tax specialist, as a charity your funds are precious and there is a cost to ensure good governance, if I were a trustee of the charity and taking advice from the internet on what is potentially an expensive property purchase with real life tax consequences, as a Trustee it would be a failure of their duty to just assume they can reclaim the VAT, VAT is complicated and a charity cannot afford to make a mistake that could see it having to lose/repay to HMRC £x amount of VAT. What is the value of the property being purchased, that is a good starting point.