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Have you fully considered your option to tax position?

Paul Fenner, Lisa Burnside

Making the decision whether or not to exercise the option to tax in relation to property is not always straightforward, and it is essential that the ongoing VAT and commercial implications of any options to tax are continually monitored and reviewed.

For example, if a business exercises an option to tax on a building or piece of land, this will normally remain in place for at least 20 years before it can be reversed. Therefore, all supplies made in relation to the land or building (excepting certain rental or sale proceeds from residential accommodation, or where the option is disapplied) will be subject to the standard rate of VAT. If the person receiving the supply is unable to recover the VAT, this can result in significant costs and can impact the commercial negotiating position for the supplier. It is therefore essential for both the seller and purchaser to know whether or not a commercial property has been opted to tax before a transaction takes place, and if necessary, request confirmation from HMRC.
Making an option to tax is normally a two stage process, and it is necessary to firstly decide to opt to tax, then to formally notify HMRC of the option to tax. In cases where the process has not been correctly followed, but where VAT has been charged on supplies, HMRC can sometimes accept a belated notification of the option to tax, but this is concessionary so cannot be guaranteed. If a business has opted to tax but then sells its interest in the relevant property (with VAT), the option to tax is automatically revoked at the point when the business has held no interest in the opted building or piece of land for a period of at least six years (subject to certain exceptions). If the business subsequently buys back the same piece of land, the previous option to tax will not apply, as the business will have held no interest in the land for more than six years.

Your own position will depend on the precise nature and circumstances of your business. If you wish to discuss this further, please contact your usual VAT contact, or complete our contact form.