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June 4, 2020
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There is Always the Option - Opting to Tax Land and Buildings

Individuals and businesses with land/buildings may benefit from opting to tax the property for VAT. Furthermore, there may be tax implications to consider when acquiring or selling land/buildings that are already opted to tax.

Why Opt to Tax Property?

Typically, property that is rented will be exempt from VAT (subject to certain exceptions). To this end, the the owner/business will not charge VAT on rent and will not be able to reclaim VAT on costs. Where the expenses of letting the property are significant, then the VAT on the expenses may represent a material cost.

However, owners of commercial (non-residential) property have the option to tax the property, meaning:

  • Output VAT will be chargeable on supplies i.e. rent
  • Input VAT will be recoverable on expenses e.g. repairs/maintenance.

Should I Opt to Tax?

Output VAT on Rent

Whilst the ability to recover tax on expenses does offer financial advantages, the requirement to charge output tax should be considered.

At the date of publishing, the standard rate of VAT is 20%. The tenants will therefore need to pay 20% more in rent for properties that are opted to tax.

Where the tenant is VAT registered, this should not pose much of an issue as they will be able to recover this VAT on their own VAT return. However, where the tenant is not VAT registered this could represent a significant cost, so due considerations should be given as to whether opting to tax is the right choice.

Output VAT on Sale

Moreover, if/when the property is sold, VAT will need to be charged on the sale price (except in certain circumstances - see below). SDLT will also be chargeable on the VAT inclusive price. Depending on the value of the property, the higher taxes could be a significant amount which may put off some buyers.

As above, where the buyer is VAT registered, they may be able to recover the VAT on acquisition of the property on their own VAT return, however the higher price could present a cash flow issue in the short term.

It may be possible to disapply the VAT chargeable on sale where there is the transfer of a going concern and the buyer agrees to opt to tax the property.

Can an Option to Tax be Withdrawn?

The option to tax can be revoked in the following circumstances:

  1. Within the first six months after making it, provided that no supplies have been made which are affected by the option.
  2. Where no interest has been held in the property for over 6 years, the option to tax will automatically lapse.
  3. The option can be revoked 20 years after it was made.

Once an option to tax has been made, it must be notified to HMRC within 30 days*.

*Where a decision is made to opt to tax a property between 15 February 2020 and 30 June 2020, the time limit to notify HMRC is 90 days. 

If you require advice or assistance with opting to tax land/buildings, or property tax in general, please contact a member of our team.

Related Articles

VAT: When do I need to register?

New CGT Returns Required From 6 April 2020

Letter from HMRC - Reporting Rental Income

Contact us today to discuss your tax requirements.
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