5 common VAT mistakes in commercial property—and how to avoid them

VAT errors in commercial real estate are receiving increasing attention and having greater consequences. Following criticism from the Office of the Auditor General, we see that the Norwegian Tax Administration has intensified its controls, and the real estate industry is among the industries receiving particular attention. In this industry, substantial sums are at stake, and the complexity of the regulations, combined with numerous grey areas, creates a heightened risk of non-compliance. In this article, we take a closer look at five typical VAT errors in commercial property – and what you should do to avoid them.

1. VAT pitfalls in commercial real estate: distinguishing “mixed-use areas” from common areas

A common VAT mistake in commercial real estate arises in the distinction between so-called mixed-use areas and common areas. At first glance, the difference may seem technical. In practice, however, it determines the extent of the landlord’s right to deduct input VAT.

Mixed-use areas are spaces used by a single tenant for both VAT-taxable and VAT-exempt activities. In such cases, the landlord may be entitled to full input VAT deduction. Common areas, on the other hand, are shared by multiple tenants. Here, the right to deduct VAT is limited to the portion of the area that is actually used in VAT-taxable activities.

As a result, the same type of area within a building may be subject to different VAT treatment, depending on who uses it and how. Misclassification is therefore a frequent focus area in VAT audits – and one that can lead to significant financial exposure if handled incorrectly.

2. Incorrect allocation key results in incorrect VAT deduction

When common areas are used for both taxable and exempt activities, the costs must be allocated. The main rule is to use area as the allocation key. In many cases, this works well, but not always.

Challenges arise when wear and tear and usage vary significantly between tenants. A building with restaurants and shops on the ground floor and residential units on the upper floors is a typical example. The number of visitors, opening hours and wear and tear on common areas can vary dramatically, and in such cases, a simple square metre allocation may produce a distorted and inaccurate outcome.

The tax authorities tend to be reluctant to accept distribution keys other than area, but in some cases a more nuanced assessment based on actual use may be both more accurate and better aligned with the regulatory framework.

3. Re-invoicing – an underestimated VAT trap

One of the most risky VAT errors in commercial property relates to re-invoicing. In practice, this often occurs during renovation or refurbishment, where the property owner orders work that wholly or partly concerns the tenant.

Many property owners deduct VAT on the entire invoice and re-invoice the tenant's share afterwards. However, the Tax Administration may refuse the deduction if the property owner has not had actual contractual liability and risk for the part of the work that concerns the tenant.

The key issue is that re-invoicing on its own is not sufficient. If you merely advance costs on behalf of another party and do not act as the actual purchaser with contractual responsibility and risk, the right to deduct input VAT will be denied. In such cases, the Norwegian Tax Administration’s so-called Circular 40 method may offer a solution, allowing cost sharing to be documented through settlement statements rather than treated as an ordinary resale.

4. Delayed spin-off of plots and projects

Many developers wait to spin off plots or projects into separate companies until the tenants are in place. This may seem practical, but often results in a loss of VAT deductions on project costs in the meantime.

If the spin-off takes place before construction starts, it is not possible to transfer the right of adjustment, and any VAT already incurred is lost. The advice is therefore to start the spin-off early and ensure that suppliers invoice the correct company from the outset.

5. Empty premises generally mean zero deductions

Vacant premises are another common source of VAT errors in commercial property. When premises are vacant without a signed lease agreement with a taxable tenant, there is generally no right to deduction – even if the premises have previously been leased to a taxable business.

This also applies to renovation costs during the vacancy period. In addition, many people forget to adjust the deduction for common areas when parts of the building are vacant. During an audit, this can lead to repayment of deducted VAT and the imposition of additional tax.

Minor mistakes can be costly

VAT errors in commercial property are rarely due to deliberate misreporting. Most often, it is a matter of unclear boundaries, old routines and lack of documentation. Nevertheless, the consequences can be significant when the Tax Administration conducts an audit.

If you are unsure whether VAT is being handled correctly in your property portfolio, it may be wise to review it before the authorities do. Small adjustments to agreements, routines and documentation can make the difference between a safe deduction and costly additional assessments.

If you would like an assessment of the risk in your projects, or help with VAT issues related to commercial property, we can assist you.