How to Get the Best from the Option to Tax

How to Get the Best from the Option to Tax
Normally the renting of commercial property is exempt from VAT so you can’t recover any of the associated input VAT on construction, repairs and maintenance etc.  By opting to tax you have to charge VAT on the rental or sale of the property but can recover all the associated VAT on costs.

Different types of option 

HMRC will accept notifications in respect of:

individual buildings (Form VAT1614A);

all the buildings owned by a business (Form VAT1614E ); or

all buildings with specific named exceptions (Form VAT1614F).

From 1 June 2008, a business may make a real estate election which automatically applies the option to tax to all properties owned and subsequently acquired by the business (and members of its VAT group).

The real estate election will benefit businesses with substantial property portfolios by reducing the required levels of administration. However, newly acquired buildings can be excluded from the option.   

A business must notify the exclusion before the earliest of the following times (which is when the exclusion will take effect): 

when a grant of an interest in the building is first made; 

when the new building, or any part of it, is first used;

when the new building is completed.

Under no circumstances will HMRC accept a late notification. 

If the purchaser/tenant makes exempt supplies it will not be able to recover the VAT charged on the sale price/rent. If a real estate election has been made, it may be too late to revoke the election once the purchaser/tenant has been identified.

Extensions and new buildings 

Changes to a site after a business has opted to tax can complicate matters. 

For example, if, having opted to tax building A, a business buys more land adjacent to it, and builds an extension B, the latter is automatically covered by the existing option.
 However, if the business then builds a separate building, C, on the adjacent land, it is not covered. If it then links C to B, C is still not covered by the option.

From 1 June 2008, if a business constructs a new building on opted land it may exclude the new building from the effect of the option to tax. 

If it decides to do this, the new building will be permanently excluded from the effect of the existing option to tax. But a business may, if it wishes, make a fresh option to tax for the building in the future.

It follows that:

it would be sensible in many cases to attach a site plan to the notification to HMRC;

each time further development occurs, consider whether a fresh notification is required, or whether the existing one covers the new work.

Cooling off period

An initial six-month cooling-off period is allowed, during which a business can withdraw the option (Form VAT1614C) providing it has not claimed back any VAT or made any supplies of it.

Practical Tip:
If you want to opt to tax a building make sure you consider whether you need a real estate option or if you want to opt to tax one building at a time.  Providing you have not made any supplies or claimed VAT on the property you can revoke the option within 6 months.

Andrew Needham