VAT is one of the most complex taxes we have and the Option to Tax rules are no exception.What is the Option to Tax for?
The Option to Tax is a declaration mechanism that allows a business to add VAT to the supply of land or property. By doing so, VAT is charged on any sale/lease of the land and then paid over to HM Revenue & Customs (HMRC). As HMRC is receiving VAT on the sale, it is permissible to claim VAT on expenditure/costs on a VAT return.
An Option to Tax is a voluntary declaration – you do not have to add VAT to the land and property unless you really want to.Why Opt to Tax?
Imagine you were considering selling a piece of bare land. You feel it would be beneficial to get planning permission to build houses on the land so you could sell it at a better price. If you sold the land exempt from VAT, ie no VAT charged on the sale, HMRC would not allow the VAT on your costs to be recovered (unless under a de minimis limit of £7,500 pa). If you incurred a huge expense in obtaining planning permission, the VAT element would be an extra cost to you.
If you declared an Option to Tax, the sale would be made with 20% added to the price which is ultimately paid over to HMRC. Due to the Option to Tax being made, HMRC anticipate receiving the VAT so, in the meantime, you can claim VAT on expenditure/costs.
If you sold the land to a developer, you would charge him VAT which he should be able to recover from HMRC.When might an Option to Tax not apply?
There are occasions when an Option to Tax can be “disapplied” or cancelled. Sales to housing associations, leases to charities, sale of commercial properties destined to be converted to residential properties, sales between connected parties etc.
It is important to examine each case to ensure that, if an Option to Tax is made, it can stay in place to enable VAT recovery on costs.Who makes the Option to Tax?
The freehold owner, the head lease holder, the sub lease holder, the beneficial owner etc – whoever has a legal “interest” in the land or property makes the Option.
Previously, anyone could Opt to Tax any land or property in the UK; Buckingham Palace was the most opted. People did this merely to get a formal letter from HMRC to say that they had Opted the property. Obviously, it had no practical effect unless and until they got to own it. Now you can only opt if you hold an interest and can prove it.How could this affect me?
If you are planning to sell a piece of land or a property, you need to weigh up whether you are going to incur significant VAT on costs. Are you going to apply for planning permission? Are you going to put in a new road access? Are you laying in new infrastructure? Also, who is the potential buyer?
If you are considering selling your property rental business of small industrial units, you need to establish if VAT is due on the sale. Did you get charged VAT on the building of the units? Have you Opted to Tax the units? Are you charging VAT to your tenants? Are the tenants to remain once you sell the entire site? Is the buyer VAT registered? If the answer to these questions is yes, your sale could be entirely VAT free provided the buyer Opts to Tax the site.
Other scenarios that may be relevant surround the construction, renovation and refurbishment of rental properties which may incur significant input VAT. This may not be recoverable unless an Option is in place; but, if an Option is made, any subsequent rental income will be subject to VAT.
The Option to Tax is a complex beast and needs careful consideration if you are buying or selling property – especially commercial property. As the premises of any business may be its most expensive asset, if you get the VAT treatment wrong, HMRC could look to you to rectify any VAT error and pay a penalty. If you are considering Opting to Tax, get it right first time and speak to one of our VAT consultants, Liz Hill
or Rob Geary
on 01603 663300.