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VAT was introduced into the UK on 1 April 1973 and was described by then chancellor, Anthony Barber, as a “simple tax”. Few would argue that over the past 50 years it has become more complex, not least when it comes to the taxation of property, land, and developments – an area where taking professional advice is crucial, says Fiona Phillips of Andrew Jackson Solicitors.
When VAT was introduced, property transactions were either an exempt supply, or were zero rated in the case of new domestic property. In 1989 the sale of new commercial property became standard rated and an “option to tax” was introduced, which allowed businesses to standard rate the sale of otherwise exempt supplies of commercial property.,
Why opt to tax?
Opting to tax a property enables the seller to reclaim any input tax on supplies which related to that property, which would otherwise be a cost to the business. It is therefore usually beneficial to opt to tax, especially when the buyer can reclaim all the VAT charged to them.
Once made, an option to tax becomes binding on any supplies made by the owner of the property. The exceptions to this are during the first six months after the option to tax is made (as long as no supply of the land has been made); if the person making the option has not owned the land for at least six years; or if it has been at least 20 years since the option was made. In these circumstances the option can be revoked.
Disapplying the option to tax
It is possible that the owner of a property has opted to tax but then wishes to sell the property to a business which cannot reclaim input VAT, for example, where they will be making exempt supplies from the property. Unless the seller of the property comes within the revocation rules outlined above, they will have to charge VAT. This will be an absolute cost to the purchaser as they will need to account for an extra 20% of the ex-VAT purchase price.
There is, however, the ability to disapply the option to tax in certain circumstances. This is usually a commercial property, which is intended by the purchaser to be used, adapted or converted as a dwelling or a number of dwellings; where it is going to be used as another residential building such as a care home or student accommodation; and where the sale is to a housing association.
If the purchaser is going to use the property for these purposes (and so will be making exempt supplies) and wishes to apply the disapplication of the option to tax, they must serve a notice on the seller or the seller’s representative. As long as they do this before the price of the property is fixed, the purchaser can serve this notice unilaterally and it must be accepted by the seller. This gives the seller and the buyer an opportunity to adjust the purchase price, as the seller will then be making an exempt supply and will not be able to reclaim the input VAT relating to the sale.
If the buyer wishes to disapply the option to tax after the price has been fixed, the disapplication must be agreed by both parties to the transaction. There is no need for either the buyer or the seller to inform HMRC that the option to tax is to be disapplied.
Benefits of disapplication
We recently advised a client on the disapplication of the option to tax as they intended to convert a recently purchased commercial property into a “relevant residential property”. Without the disapplication the client would have paid VAT in the region of half a million pounds, which it would not have been able to reclaim.
A full suite of indemnities was given to the buyer to safeguard the position of both the buyer and the seller, should the disapplication be found not to be applicable to the purchase, such as if the buyer did not use or convert the building for the residential purposes intended.
The indemnity gave the buyer the ability to charge VAT (as it would need to do as this would be an opted to tax sale); to serve a VAT notice onto the buyer; and for the buyer to be obliged to pay the VAT on the price.
The amounts of VAT involved with land and property transactions are often high, so it’s important to take advice so that you understand the key principles around option to tax procedures, which helps to avoid expensive errors at a later date.
If you would like advice about opting to tax, or for help with other tax issues affecting you or your business, please get in touch with Fiona Phillips by emailing email@example.com or by calling (01482) 325242