In some circumstances a business has the choice of whether to charge Value Added Tax (VAT) on the sale, lease or rental of a building or a piece of land. Taking this option allows a business to reclaim any VAT costs that would not normally be reclaimed but any supplies that derive from the building must charge VAT.
The option to tax can cover a plot of land or a building. When a parcel of land is opted to tax, the option will cover a discrete area of land specified in the application this could be a specific site or even part of a site that might be carved out for good commercial reasons. When a building is opted to Tax the option covers the whole building, the land under the build building and anything within its curtilage.
Opting a building or a piece of land allows input VAT (VAT charges that has been incurred in bringing the Land or Property to market) to be reclaimed. If for example, you spend £100k + £20k VAT on renovating a property (see example blow) the £20k cannot normally be reclaimed unless the building has been opted to tax. Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard rated, and you will normally be able to recover any VAT you incur in making those supplies.
It is crucial to note that the option to Tax remains in place until it is revoked and cannot normally be revoked for at least 20 year – although it can be revoked within the first 6 months of the option being taken provided no input VAT has been reclaimed. This can have serious commercial implications within the period the option is in place.
A landlord purchases a commercial property, which has not been opted to tax, with the intention of renting the property to a tenant. The landlord is looking to renovates the property at a cost of £100k plus £20k VAT. If the landlord would like to reclaim the £20k VAT he will need take the option to tax, however, if he does so he will then need to charge his tenant VAT on each quarterly payment for at least the next 20 years.
The landlord holds a board meeting to discuss the commerciality of taking the option and the board agree that it makes commercial sense as they have a tenant lined up who is VAT registered and willing to take the cashflow hit and pay VAT. The decision is ratified by the board, noted in the minutes and an application made to HMRC within the 30 day time frame. As there have been no previously exempt supplies the landlord doesn’t need to seek HMRC’s permission to make the option and simply submits VAT1614A. The landlord can reclaim the input VAT and after renovating the building rents the property to the tenant including VAT on the invoice.
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