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Property VAT: the option to tax explained

The VAT treatment of property can be challenging. Normally, supplies of land and buildings are exempt from VAT, however there are some exceptions to this.

In this article, Nottingham chartered accountants Clayton & Brewill explains the option to tax and the implications of this, as well as HMRC procedures for dealing with property VAT and how to avoid being caught out.

VAT for property

While land and buildings are usually exempt from VAT, the exceptions include the sale of new residential property (zero-rated) and the freehold sale of new commercial property less than three years old (standard-rated, 20%). In most other cases, when property is sold or rented, no VAT changes hands and the person making the supply is debarred from recovery of VAT on associated expenditure. Where this poses a significant business issue, the option to tax is sometimes useful.

What is the VAT option to tax?

The option to tax is just that – a choice. It effectively turns an exempt supply of property into a taxable supply. It applies to the sale or rent of commercial property, not to residential property. Opting to tax means you are then charge VAT at standard rate on any supplies you make of the opted property and can recover input tax incurred in making the supply.

Buildings used for both commercial and residential purposes

Where supplies are both taxable and exempt, such as where a building is used for both commercial and residential purposes, recovery should be restricted to input tax relating to the taxable supply only. If you rent out a flat over a shop, for example, the rent you receive for the flat will still be exempt from VAT, even if you have an option to tax covering the building as a whole. This may affect the amount of input tax that can be reclaimed.

Implications of the option to tax

It’s a decision with long term implications. Though the option can be revoked, this can usually only be done after twenty years. There are commercial implications, too- opting to tax adds to the cost of your supply, possibly deterring clients unable to recover input tax.

Further along the line, you may need to factor in any interaction with the VAT Capital Goods Scheme and the interaction with Stamp Duty Land Tax on sale. Obtaining expert advice is therefore recommended before any decision is made.

Changes in procedures

HMRC has recently changed its administrative and confirmatory procedures where someone notifies it of the option to tax.

From 1 February 2023, the only acknowledgement it provides is an automated email response. This email becomes part of your VAT records and should be kept appropriately. Additionally, HMRC is no longer responding to requests to confirm the existence of an option to tax except where the effective opted date is likely to be more than six years ago, or in circumstances such as insolvency.

If you have any questions about the VAT option to tax and how it will affect you and your property, please don’t hesitate to get in touch. 

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