Doubt about whether VAT should be charged on the sale of commercial property is slowing down property deals, according to a leading commercial property lawyer and a leading VAT specialist.

Black Country law firm George Green and BDO Stoy Hayward, one of the UK's leading accountancy firms, say that when it comes to selling a commercial property, many company directors simply do not know whether VAT should be charged on the sale, and most do not realise the implications of getting it wrong.

"Commercial property transactions are generally exempt from VAT, but it is possible at any time after acquiring a freehold interest in land for the owner to decide to charge VAT, or rather to waive the exemption to VAT," says Ceri Mort, based in the firm's Cradley Heath offices.

"Waiving the exemption, means that VAT should be charged on rents of any part of the property and on any future income in respect of the property, including its sale.

"Companies do this in order to be able to recover VAT paid out on items such as the refurbishment of the property."

According to Ms Mort, when it comes to selling a property - particularly one which has been held by a company for a long time - most companies are initially unaware of whether the exemption has been waived.

"Not knowing the VAT status of the property to be sold slows down the transaction as enquiries have to be made to the company's accountants," she says.

"If they do not know, which can be the case particularly if there has been a change in professional advisers, then one can ask Revenue and Customs, who although they will tell you if there have been VAT payments made, cannot guarantee that the exemption has not been waived.

"This whole process can slow the deal by weeks, if not months. If it then transpires that VAT should be added to the sales price, this can scupper the deal, as some organisations, such as charities and financial institutions cannot recover VAT, and as a result will pull out."

The worst-case scenario is described by Gill Yates, VAT director in the Birmingham office of BDO Stoy Hayward - when VAT is mistakenly not charged on the sale.

"If it transpires, perhaps via an inspection, that VAT should have been charged on the sale of a building, the vendor then becomes liable to pay 17.5 per

cent of the sales price to Revenue and Customs, plus possible penalties and interest for late payment, an unexpected sum which on some multi-million pound property transactions could be enough to bankrupt a company," he says.

"We are aware of one case where a company had waived the exemption to pay VAT on its trading premises, as it wanted to charge VAT on the rent for parts of the building which it leased out.

"The practice of sub-letting stopped many years before the premises were sold and none of the existing directors had been in place when the lettings occurred. They therefore assumed when they came to sell their premises, that VAT need not be charged.

"This oversight came to light some months after the sale had gone through via a VAT inspection and a tax demand from the Revenue and Customs soon followed.

"Fortunately, the sales contract came partially to the vendor's rescue, as it was drafted, so that the vendor was able to charge the VAT to the purchaser.

"The vendor still had to find substantial sums to cover the fines and interest payment, which badly affected the company's cash flow, even having negotiated staged payments with Revenue and Customs."

Mistakes in the payment of VAT, also led to the under-payment of other taxes, according to Ms Mort.

She says: "Because VAT had not been charged in the first place, the original sales price had been understated, and as a result the purchaser had not paid the correct amount of stamp duty land tax.

"VAT on commercial property is a vastly complex area," she concludes.

"For example, different rules apply if the property is sold as part of a business as an ongoing concern, or if it is sold as a fully-rented investment property."