Property VAT – Opt to Tax Explained
If you have an interest in commercial property, whether freehold or leasehold, and use it for your own business purposes and do not rent it to others, it is generally unlikely that you will need to consider opting to tax the property. However, if you wish to generate additional income from the land and/or property, or sublet part or dispose of it altogether, you should consider whether or not an option to tax should be made BEFORE any money changes hands.
There are advantages and disadvantages of opting to tax and in view of the amounts involved in the purchase and sale of commercial property, it is essential to take good VAT advice. Once made, an option to tax can only be revoked in limited circumstances or it remains in place for 20 years. Where the property has previously been leased out as exempt, then permission to opt may be required from HMRC.
Deciding to Opt to Tax
Factors to be taken into account when deciding whether to opt to tax include, for example:
- Was VAT incurred in the purchase price and would you like to recover it?
- Is the property subject to the Capital Goods Scheme? If so, by not opting the property you may be liable to repay HMRC some or all of the VAT recovered on property costs.
- Will the lease you intend to grant be full tenant repairing?
- What other costs will you incur in respect of the property?
- Will your tenant/purchaser be in a position to recover any or all VAT charged on any rent/sale?
Depending upon the responses to the above factors, a commercial decision as to whether to opt to tax can be made. Generally, the option to tax relates to discrete parcels of land and/or specific buildings. However, it is possible to submit a ‘real estate election’ (REE) whereby all future property acquisitions will be subject to an option to tax, unless specifically excluded.
In addition, there are some supplies of property where any option to tax may be dis-applied, such as:
- Non-residential buildings where the purchaser certifies that it is intended for use as a dwelling;
- Non-residential buildings to be used by a charity for a relevant charitable purpose;
- A housing association certifies the land will be used for the construction of dwellings or buildings for a relevant residential purpose (care home, student accommodation etc.).
Where the decision is taken not to opt to tax, any supplies of the building (rent, lease or sale) will be exempt from VAT. This can result in a partially exempt VAT registration leading to possible restrictions on input VAT recovery
How do I Opt to Tax?
This is a two stage process. Firstly, a decision to opt the land/property must be made, after considering all the relevant points. Then that decision should be notified to HMRC within 30 days. Occasionally you are required to notify HMRC before a transaction takes place, such as a sale of tenanted commercial property to be treated as a transfer of going concern (TOGC).
Revoking an Option to Tax
As Options to Tax have now come of age (i.e. they have been available for more than 20 years), it is possible to revoke one which was made more than 20 years ago.
Certain conditions must be met, and advice should be taken in respect of future exempt supplies and how that might impact on input VAT recovery.
The law relating to land and property VAT is complex and does not follow the normal trading rules. VAT is a transaction tax, and once any sale or lease is completed, it can prove difficult, if not impossible, to later correct any VAT errors made. As commercial properties command significant prices, any VAT errors with commercial property can be expensive. It is essential to take VAT advice before any plans are finalised and certainly before any monies change hands.
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If you would like further guidance or to discuss in more detail the impact these challenges are having on your firm, please get in contact
This article originally appeared on the blog of our member firm, MHA Moore & Smalley.