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Opting to tax land and buildings for VAT – what you need to know

For many businesses, one of the most important stages in their growth is the decision to acquire commercial land and buildings. It’s a big financial decision and one that should be carefully considered, not least because of the implications for VAT.

Normal VAT treatment of supplies of land/buildings

A supply of land/buildings can be a straightforward disposal or a grant of another interest (for example leasehold).

The sale of property, including new residential property, is generally zero-rated for VAT purposes. However, the disposal of new commercial buildings (that includes buildings that are less than 3 years old) is normally subject to the standard rate of VAT unless it is to be treated as a transfer of a business as a going concern (see VAT Notice 700/9).

There may be circumstances where it is more beneficial to opt to tax a sale of land or buildings and this is explored further below.

The effect of an option to tax

Once an election to tax has been made, the disposal is subject to VAT at the standard rate and the purchaser can claim input tax on VAT incurred on making those supplies. If the property is subsequently rented out, then the tenant will have to pay the VAT on the rent (but will be able to claim the input tax if they are VAT registered).

The option becomes effective from the date of the decision, or a later date if specified in the notice.

The notice does not have effect on supplies made by anyone else unless they are a member of the same VAT group.

How do you opt to tax land/buildings?

This is a 2-stage process with the first stage being making the decision to opt to tax. A written note (such as a note of a meeting) of this decision should be made. This note should make it clear which land/buildings are covered by the option to tax.

The second stage is to notify HMRC in writing and this should be within 30 days of the decision. In certain circumstances, HMRC may accept a notification outside this time and this is covered at 4.2.1 of VAT Notice 742A.

The election takes effect from the date of the decision, providing it is notified to HMRC within the relevant time limits.

How to notify HMRC

The notification must state clearly the land and buildings that are being opted to tax as well as the date from which the notification is to take effect. This can be done in writing to HMRC, or by completing form VAT1614A.

This should be sent to the Option to Tax Unit at HMRC, who will acknowledge receipt of the notification although this is not legally required for the option to take effect.

Supplies not affected by Option to Tax

The following supplies are not covered by an option to tax and will remain exempt from VAT. This may also restrict the amount of input tax that can be claimed.

1. Buildings designed or adapted and intended to be used as dwellings

2. Buildings designed or adapted and intended to be used for relevant residential purpose

3. Buildings used for charitable purpose

4. Land sold to a housing association

5. Land sold to an individual for construction of a dwelling

6. Pitches for residential caravans

7. Moorings for residential houseboats

Further guidance on these can be found in VAT Notice 742A (paragraphs 3.1 to 3.11).

Reclaiming input tax

Following an option to tax, input tax will be able to be recovered on anything relating to those supplies as long as they are fully taxable. If there is a combination of taxable and exempt supplies, then only input tax relating to the supply can be recovered.

In what circumstances is an opt to tax election beneficial?

Deciding whether to opt to tax land/building is essentially a commercial decision. There are a number of factors to take into account and these include:

  1. whether VAT is incurred on the purchase;

  2. whether the property subject to the Capital Goods Scheme – see VAT Notice 706/2;

  3. if there are likely to be further standard rated VAT costs incurred on the property (such as repairs or alterations);

  4. whether the tenant or future purchaser is likely to be able to recover any or all VAT charged on any rental or sale.

This is best illustrated by an example:

  • A commercial property is acquired for £1,000,000 plus VAT at 20% £200,000 = £1,200,000

  • The purchaser then rents the property out at £100,000 per year

Without an option to tax, the implications are that there is no VAT chargeable on the rent as it is exempt, and the purchaser would not be able to claim the £200,000 VAT incurred on the acquisition of the building.

An option to tax within the prescribed period would result in VAT being chargeable in respect of the rental income and the purchaser would then be able to reclaim the £200,000 VAT suffered on acquisition. Providing the tenant is VAT registered, they will be able to reclaim the VAT suffered on the rental income.

Revoking an option to tax

A notice can be revoked within 6 months of the effective date of the option to tax, providing all the following conditions are met:

a) It is less than 6 months since the option had effect

b) No tax has become chargeable on the supply of land as a result of the option

c) No transfer of going concern has occurred

d) HMRC have been notified of the revocation

The notice to revoke the option must be made on form VAT1614C.