In the intricate landscape of commercial property transactions, understanding the implications of VAT treatment is paramount. One key aspect that businesses often grapple with is the ‘option to tax’ (OTT), a decision that can significantly impact the financial dynamics of property ownership, rental, and sale. In this blog post, we delve into the basics of the option to tax, its implications, and why seeking expert advice, such as from our team at TaxDigit, is crucial.
The option to tax provides businesses with the flexibility to change the liability of the supply of commercial land and buildings from exempt to standard-rated. This decision is made on a building-by-building basis, allowing traders to choose which properties to opt into the scheme. Once an option is exercised, it applies to all future supplies related to that building by the same trader.
Benefits of Option to Tax:
Opting to tax a building enables the recovery of input VAT in full, turning a previously exempt supply into a taxable one. This becomes especially relevant when renting out a property, as the trader must charge VAT on the rent and any future sale of the building.
Revocation of Option to Tax:
While the option to tax provides flexibility, there are circumstances under which it can be revoked. This includes within six months of making the option, after a property has been unclaimed for over six years, or even 20 years after the initial decision. Revoking an option requires careful consideration, as it involves navigating specific conditions and seeking permission from HMRC.
Commercial Decision and Factors to Consider:
Opting to tax is a commercial decision that requires a thorough analysis of various factors. Businesses must assess whether opting is necessary, consider the VAT incurred in the purchase or refurbishment costs, and evaluate the implications for tenants or future purchasers in terms of VAT recovery. Special attention should be given to the Capital Goods Scheme, tenant responsibilities, and the potential impact on VAT recovery.
A Simple Example:
To illustrate the practical implications of opting to tax, consider Mr. Jones, who purchases a commercial property for £500,000 with the intent to rent it out. By opting to tax, Mr. Jones can reclaim input tax on the property’s cost, benefiting from VAT recovery on associated expenses.
Revoking an Option – HMRC Changes:
Revoking an option to tax involves complex considerations, and recent changes from HMRC add an additional layer of intricacy. HMRC’s acknowledgement process, once a trial, is now a standard practice. While this aims to expedite processing, businesses may face delays in receiving acknowledgments. The importance of careful preparation of the option to tax notification is emphasised, as any inaccuracies may lead to invalid options and potential tax repercussions.
Navigating the world of VAT on commercial properties, especially when it comes to the option to tax, requires careful consideration and expert advice. At TaxDigit, our VAT team specialises in helping businesses understand the implications of opting to tax, providing guidance to mitigate risks and maximize VAT savings. Contact us today for more information and personalized assistance in navigating the complexities of VAT on commercial properties.
