Option to Tax for commercial property: What you need to know [Series: What the VAT?]

The default VAT position of Commercial property is Exempt. This means that, as a general rule, owners cannot charge VAT when selling their property, and landlords cannot charge VAT when renting it.

If a property owner wishes to change this, they can make a tax election called the Option to Tax. Essentially, the landowner promises to charge VAT on all rental income, and/or the sale of the property itself, for at least twenty years.

Like any tax election, it has various characteristics and administrative requirements that need to be understood if it is going to be applied to the benefit of a taxpayer.

The problem with VAT Exemption on commercial property

So why would anyone do this? Being exempt from VAT means that, as a general rule, owners cannot charge VAT when selling their property, and landlords cannot charge VAT when renting it.

However, the flipside of this is that property investors cannot reclaim the VAT on any of the costs they incur in managing their investment, or if they do works to refurbish or extend the buildings they own.

In return for promising to charge VAT on their income, property owners are then able to reclaim any VAT they pay on costs related to the property. Typically, therefore, property investors will try to avoid notifying Option to Tax on properties until the point they are faced with a major expenditure for either refurbishment, extension or other development. At the point the VAT on expenditure becomes material, they will notify Option to Tax to HMRC in order to minimise their immediate costs.

The Administrative Process of Option to Tax

Option to Tax: How to notify HMRC

If you decide to notify an Option to Tax to HMRC it is essential you do so in the required format, and keep records to evidence everything. This will provide practical insurance against HMRC being able to unwind the tax election you’ve made, and provide comfort to prospective tenants/buyers of your property when you come to lease/sell it in future years.

Option to Tax should generally be notified to HMRC via Form 1614A. It is essential that all details on the form are correct otherwise the tax election may not be valid. The three most critical aspects to check are: -

• Make sure the name and registration number of the taxpayer are accurately transcribed onto the form (if already VAT Registered)
• Make sure the address of the property is sufficiently comprehensive that it can be identified both from Land Registry and Postal Address. Ideally, a reference to specific title number(s) on Land Registry will ensure there is no confusion over what land has been subject to the Option. A site plan, if available, is also worth including.
• Make sure the signatory is a duly authorised person. For a limited company that might include one of the directors listed at Companies House, and an extract from Companies House evidencing their status should be retained for ‘belt and braces’. If the taxpayer is a more complicated entity like a pension fund or trust, include a covering letter to HMRC explaining who the signatory is and what authority they possess to sign. Evidence like an Authorised Signatory List, or Power of Attorney would also be sensible inclusions where relevant. This can help forestall unnecessary queries from HMRC.

It is worth noting that HMRC will acknowledge receipt of your notification. However, HMRC does not issue anything to acknowledge that an Option to Tax has been notified correctly, or is therefore actually valid.

This means the onus is very much on individual taxpayers to complete forms correctly and retain evidence that they’ve done so. Copies of any submitted forms are a critical part of the evidence you have to support the existence of your Option to Tax.

Does your commercial property need permission to opt?

If you have owned the land in question for some time and have already received VAT Exempt income from the property, you may need permission from HMRC before an Option to Tax is valid.

There are some circumstances where HMRC will automatically grant permission for an Option to Tax, in which case Form 1614A can be used. Other circumstances require a different form, 1614H, be completed to give HMRC details of the property’s history and an outline of future intentions.

Either way, bespoke advice should be sought to maximise the odds of securing HMRC permission and minimising the time spent discussing with them.

Will a belated notification of an Option to Tax be accepted by HMRC?

If you have forgotten to notify HMRC, or made an invalid notification, it is possible that a belated notification of an Option to Tax may be accepted by HMRC. It is not a foregone conclusion that belated notification will be accepted; HMRC can, and do, refuse requests.

Provided you can demonstrate that you have been VAT Registered throughout, that you have accounted for VAT on all income from the property and – crucially – have paid this VAT across to HMRC on time, you will have a case.

An experienced VAT advisor will help determine if HMRC are likely to accept a belated notification and assist with making the case to HMRC.

Revoking an Option to Tax for commercial property

If you manage to retain ownership of an opted property for more than twenty years, you will likely be able to revoke your option to tax. The consequence of this would be to restore your sale/rent of the property to being VAT Exempt. This would mean you could not charge VAT on rent, and be unable to recover VAT on any subsequent direct property costs.

Once twenty years have passed, the most likely barrier to revoking an Option to Tax would be the completion of major refurbishment works within the last ten years. Spending £250,000 on renovations will mean the property becomes a ‘capital item’ for VAT purposes and revoking the Option to Tax will have to wait until a ten year period has elapsed; this is to allow the government time to recoup any VAT reclaimed on the works.

Revoking an Option to Tax is achieved by sending Form VAT1614J to the HMRC Option to Tax National Unit. As with notifying an Option initially, it is essential that the form is signed by someone with the appropriate authority – for example, a director of a limited company.

When is an Option to Tax suitable?

The rules surrounding Option to Tax are some of the most complicated in VAT law. Consequently, if you have notified Option to Tax on a property and are considering any new sale or lease you should consider taking bespoke VAT advice on the transaction. Give our Associate Director, Iain Harris a call if you have any VAT questions. Call him on 0131 364 4191 or email Enable JavaScript to view protected content..

We also debunk the commons myths of Option to Tax in a separate article.

Please note the above commentary is a general guide only, and should not form the basis of specific decision-making.