What is an Option to Tax and Why do it?

Many sales and rentals of land and properties are classed as VAT exempt. This means that VAT on costs for the land/building, such as professional fees, construction, extension and renovation works, cannot normally be claimed. This can be massively costly for a business. Your business will be partially exempt which along with potential VAT claim blocks also creates the need to carry out partial exemption calculations. There is though a way that VAT connected with land and properties which a VAT registered business has an interest in can be recovered. This is to make supplies of the land/property taxable rather than exempt by notifying HMRC of an Option to Tax.

An option to tax can only be applied to supplies involving commercial and other non-residential property and land.

Once an election of an option to tax has been made, any rents, services charges and sales for the land elected, would need to have VAT charged. Where the tenant of a property is VAT registered, they will be able to recover any VAT charged to them on rents etc. They can do this through their VAT returns. However, if a tenant is not VAT registered the VAT charge would be an additional cost to them.

 

Who can make an option to tax?

 

An option to tax is not linked to ownership and will not carry over from a previous owner. You do not need to own the land/building in order to opt to tax. Below are a few example of when an option to tax may be required/beneficial where the opter is not the owner:

  1. A business is renting an office space on which they recover VAT on the office running costs. They then decide to sub-let part of the office. This would normally mean the rent they are charging to sublet would be exempt from VAT. Subsequently, some of the VAT on the running costs may not be recoverable. The business renting and subletting can opt to tax making the rents they are charging for the sub let taxable. They can therefore continue to recover all the VAT on any running costs. Even if the landlord has their own option on the building and is charging rent this option does not cover the sub-let.
  2. You are going to buy a commercial property on which the owner is charging VAT. It is usually necessary to opt before the acquisition to enable you to recover any VAT paid on the acquisition.
  3. Transfer of going concern – if you buy a rental property, for example to carry on the rental trade as a ‘transfer of going concern’ (TOGC) and the vendor has opted to tax it is necessary for the buyer to elect an option before the purchase to qualify for TOGC.

How to notify HMRC of an Option to Tax

As of 1 February, HMRC has changed its procedure for notifying an option to tax (OTT) on properties.

The two stages to making a valid option remain the same:

 

  1. The decision to opt to tax is made
  2. HMRC are notified of the decision in writing within 30 days of the decision being made. This is usually by submission of form VAT1614A but sometimes permission to opt is required from HMRC.

From 1 February, HMRC no longer issue acknowledgement letters. Instead, the notification of the election to the Option To Tax unit should be sent by email. An auto response will be issued by HMRC by email to confirm they have received the election.

 

How does this change impact what I need to do?

 

Due to these changes, it is vital that the email sent to HMRC includes the following:

 

  1. The address and postcode for the property.
  2. The date the election took effect

As the email reply will be the only proof the election was made, both the original email sent and the auto response email must be kept.

A copy of the VAT1614A will also be useful but this only proves the form was filled in, not that it was submitted to HMRC.

If the email does not contain the correct information it will not be bounced back and an auto response will still be issued.

 

Avoiding Issues

 

If the above information is not included, there may be issues when it comes time to sell an opted property. A buyer will need to see proof that an election was made to HMRC. An auto reply from HMRC that does not include these details. So it is likely that it won’t be accepted as evidence. This is because it won’t prove what property the election is on or the date of the election. Therefore, a buyer may not accept any VAT charge and there could be huge implications for the sale.

Normally, if there is no evidence an OTT has been made, a copy could be requested from HMRC. However, this is also changing. Proof can now only be obtained for elections where the effective opted date was more than six years ago or if you’ve been appointed as a Land and Property Act receiver or an insolvency practitioner to administer the property in question.

Does an option to tax affect other properties?

 

Not normally, unless a real estate election has been made. An option is usually made on a property by property basis.

The election actually covers the land a building sits on rather than the building itself. So, if a building is demolished and the land sold, the option would still apply and the land would need to be charged with VAT charged.

Can I revoke an option to tax once made?

 

An option to tax normally will normally be in place for 20 years. It cannot be revoked until 20 years have elapsed. After 20 years have passed, it can be revoked so that the grant of an interest in the land becomes exempt again. Certain conditions must be met and HMRC permission is needed to revoke the option.

It can sometimes be revoked in one of the following scenarios:

 

  1. There is a cooling off period of 6 months after the date of election in which an option can be revoked. There are specific conditions that must be met for this. Any input VAT claimed would be repayable if the option was revoked.
  2. The option will automatically lapse if no interest is held on the land for over 6 years.

 

 

Should I opt to tax?

 

Navigating the intricacies of VAT and property transactions requires a nuanced approach, as solutions vary greatly depending on individual circumstances and prospective plans. The aforementioned details only scratch the surface of this multifaceted topic. Therefore, seeking professional guidance is not just recommended, but essential.

A misstep in this complex process could result in missed opportunities to reclaim VAT or potentially incur significant HMRC liabilities. Ensuring meticulous and timely completion of the necessary paperwork is paramount.

At Lewis Brownlee, we stand ready to assist you with all your queries and facilitate smooth election processes. Don’t hesitate to reach out and let us guide you to the best decision – contact us today!

If you’d like to speak to one of our experts about your accounts, please call 01243 782 423, or email from our contact page and we will be in touch!

We also update our YouTube Channel regularly with new content, see here: Lewis Brownlee YouTube channel.