In most cases, when property is sold or rented, no VAT changes hands and the supplier cannot recover VAT on associated expenditure. Where this poses a significant business issue, the option to tax is sometimes useful.
VAT on property – an overview
The VAT treatment of property can be challenging. Normally, supplies of land and buildings are exempt from VAT. There are some exceptions to this, the prime examples being the sale of new residential property, (zero-rated) and the freehold sale of new commercial property, less than three years old (standard-rated).
To charge or not to charge VAT?
The option to tax is just that – a choice. It’s effectively about turning an exempt supply of property into a taxable supply.
It applies to the sale or rent of commercial property, not to residential property. Opting to tax means you then charge VAT at the standard rate on any supplies you make of the opted property and can recover input tax incurred in making the supply. Where supplies are both taxable and exempt, say where a building is used for both commercial and residential purposes, recovery should be restricted to input tax relating to the taxable supply only. If you rent out a flat over a shop, for example, the rent you receive for the flat will still be exempt from VAT, even if you have an option to tax covering the building as a whole. This may affect the amount of input tax that can be reclaimed.
It’s a decision with long-term implications. Though an option can be revoked, this can usually only be done after 20 years. There are commercial implications, too: opting to tax adds to the cost of your supply, possibly deterring clients unable to recover input tax.
Further along the line, you may need to factor in the following:
- any interaction with the VAT Capital Goods Scheme
- the impact on disposals which are treated as the transfer of a going concern, and
- the interaction with Stamp Duty Land Tax on sale.
We recommend you seek tailored advice before making any decision on whether to charge VAT.
Keep an accurate record
HMRC has recently changed its administrative and confirmatory procedures where someone notifies it of the option to tax. From 1 February 2023, the only acknowledgement it will provide is an automated email response. This means that HMRC’s automated email response becomes part of your VAT records, and should be kept appropriately. Additionally, it is no longer responding to requests to confirm the existence of an option to tax except where the effective opted date is likely to be more than six years ago, or in circumstances such as insolvency.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.