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VAT and property – Opt to tax explained

If you have an interest in 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 property, or dispose of the property, whether or not an option to tax should be made will become a matter requiring consideration. The benefit of opting to tax is that it ensures VAT incurred on costs should be recoverable but, in some cases, deciding not to opt to tax may overall lead to a higher commercial return depending upon the precise facts.

Once made, an option to tax can only be revoked in limited circumstances. As such, deciding whether to opt to tax should be considered in detail. Also, if the property has been the subject of previous exempt use then the permission of HM Revenue & Customs (HMRC) may be required for any future option to tax to have effect – and they may not agree to grant the permission.

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 my future use of the property require a repayment of VAT to HMRC under the Capital Goods Scheme (to be covered in the March edition of Business Tax Matters);

- will the lease I intend to grant be full tenant repairing;

- what other costs will I incur in respect of the property; and

- is my tenant/purchaser’s profile such that it is unlikely to be VAT registered or unable to claim all of the VAT charged on any rent?

Depending upon the responses to such 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’ 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 the option to tax will not apply even if one has been made. These are briefly:

- buildings designed or adapted and intended for use as a dwelling;

- 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 pitch for a residential caravan or mooring for a residential houseboat;

 - 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); and

- where specific anti-avoidance provisions apply which have been implemented to stop mainly exempt businesses from obtaining increased VAT recovery or defer the VAT cost over a number of years.

Where the option to tax does not apply, the supply will be exempt from VAT and there may be implications for the amount of VAT which can be claimed or previously claimed. This can have significant unforeseen financial implications for a vendor who has previously reclaimed VAT on costs relating to the property.

How do I opt to tax?

An option to tax needs to be made (i.e. a decision taken) and then to be notified in writing to HMRC within 30 days. The notification is generally done by submitting Form VAT 1614A for a ‘normal’ option to tax (Form VAT 1614H if HMRC’s permission to opt is required and Form VAT 1614E for a real estate election) and whilst use of the form is not mandatory, HMRC increasingly request that it is completed. If an option to tax is not notified within the 30 day period, HMRC do have discretion to allow a belated notification but this requires additional evidence to be provided such as board minutes recording the decision to opt, copies of VAT invoices issued since the option took effect and details that VAT recovery is consistent with an option to tax being made.

Revoking an option to tax

As outlined above, once made an option to tax can only be revoked in limited circumstances. These are:

- in the immediate 6 months following the option to tax and no VAT has become chargeable since the option to tax took effect or the property has been sold as part of a VAT free going concern;

- no interest in the property has been held for more than six years; and

- at least 20 years have expired since the option to tax first had effect.

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