Many people don’t realize that pension funds, such as self-invested personal pension (SIPP) schemes and small self-administered schemes (SSAS), can significantly benefit from investing in commercial properties. By renting out these properties, the rental income can help grow the pension fund. But what happens when it comes to VAT? Can these pension funds register for VAT, and if so, what are the benefits? Let’s explore how this works in simple terms.

Can Pension Funds Register for VAT?

The straightforward answer is yes, pension funds can register for VAT. They are treated just like any other business entity that undertakes commercial activities. This means they can register for VAT, reclaim the VAT they pay (known as input tax), and submit VAT returns, just like any other business.

When a pension fund registers for VAT, it should do so as a partnership between the fund and the beneficial owner. This ensures that all VAT regulations are met and that the fund can benefit fully from VAT registration.

Why Register for VAT?

There are two main reasons why a pension fund might want to register for VAT:

1. Purchasing a VAT-Opted Property: When a pension fund buys a commercial property, if the seller has opted to tax that property, VAT will be charged on the sale price. If the pension fund is registered for VAT and has also opted to tax the property, it can reclaim this VAT from HMRC. This is a significant benefit because it means the fund can recover a substantial amount of money, which can then be reinvested into the pension fund.
2. Carrying Out Development Work: If a pension fund is planning substantial development work on a property, whether it’s being purchased or already owned, the contractors doing the work will charge VAT. The only way to recover this VAT is by registering for VAT and opting to tax the property. This can save a considerable amount of money, which can again be reinvested into the pension fund.

What Happens After Registration?

Once a pension fund has registered for VAT and opted to tax a property, it must charge VAT on all future rental income and any subsequent sale of the property. This might seem like a drawback, but there are important considerations to keep in mind:

Impact on Tenants: If the tenant is not VAT-registered or only makes VAT-exempt supplies, they cannot reclaim the VAT charged on the rent. This effectively increases their rent by 20%, which might make the property less attractive. However, if the tenant is VAT-registered, they can reclaim the VAT, so this won’t be an issue.

Protecting Assets: It’s common for pension funds to purchase the trading premises of the beneficiary’s business. This separation protects the valuable property asset from the trading company’s financial difficulties. If the trading company becomes insolvent, the property remains safe within the pension fund.

The Transfer of a Going Concern (TOGC)

If a pension fund purchases a property that is already being rented out, and both the seller and the pension fund have opted to tax the property, this transaction can be treated as a Transfer of a Going Concern (TOGC).

1. TOGC Advantages: When a property is bought under TOGC rules, no VAT is charged on the sale. This provides a cash flow benefit to the pension fund because it doesn’t need to finance the VAT charge. Additionally, stamp duty land tax is saved because it is calculated on the purchase price, excluding VAT.
2. Continued VAT Charges: After the purchase, the pension fund must continue to charge VAT on the rental income to the trading company.

Registering a property-owning pension fund for VAT can provide significant savings. Here’s what you need to keep in mind:

• Reclaiming VAT: By registering for VAT, the pension fund can reclaim VAT on property purchases and refurbishments. This can save a substantial amount of money, which can be reinvested into the fund, enhancing its value over time.
• Compliance: Ensure that all VAT regulations are followed. This includes opting to tax the property and accurately reporting VAT on all transactions related to the property.

Understanding VAT regulations can be complicated. To make sure you’re getting all the benefits available, it’s a good idea to talk to a tax advisor or accountant who knows about VAT and pension funds. By understanding the benefits of VAT registration, pension funds can get significant financial advantages.

Whether it’s reclaiming VAT on a property purchase or development work or benefiting from TOGC rules, these savings can be reinvested into the fund, helping it grow and providing better returns for the beneficiaries. Remember, while the process might seem complicated, the potential benefits make it worth exploring. With the right advice and careful planning, VAT registration can be a powerful tool for maximizing the value of your pension fund’s commercial property investments.