In most cases, rental income is an exempt supply for VAT unless there is an option to tax in place. An option to tax stays with the property in question, so when a landlord purchases a property, the option to tax moves to the new owner. In certain conditions, removing the option to tax can be more beneficial.
An option to tax enables landlords to charge VAT and recover input tax on their rental income on costs such as repairs and maintenance. Landlords are not permitted to charge VAT without obtaining an option to tax and, therefore, cannot claim input tax or benefit from any VAT savings.
In this post, we look at how you can revoke an option or why you may opt to tax a property.
What is an option to tax on a property?
An option to tax is an election made on non-residential property to be able to charge VAT on the rent and recover VAT on related costs. Without an option to tax in place, the rent or sale of a property is a VAT exempt supply.
An option to tax can be made over land which would cover all the buildings on that land or over a building, which covers the land on which the building stands. When looking at opting to tax or revoking an option, we always recommend getting specialist VAT advice, as the wrong decision could be costly.
Why would you opt to tax a building?
Using the example of a landlord that owns commercial property on a business park, without an option to tax, they can not claim the associated VAT for any expenditure on that property. So, if they had to resurface the communal car park at a cost of £60,000, if there were an option to tax in place, the VAT benefit would be £10,000, as the landlord can recover the VAT charged on the repair.
Whilst the landlord would be charging VAT on the rent, in most cases, the tenants would be VAT registered, so they would be able to recover the VAT on the property.
When can you make an option to tax?
An option to tax can be made at any time on an unopted property. The effective date of the option to tax is the date that the decision was made. Once the decision has been made, the taxpayer needs to notify HMRC within 30 days of the decision. Unless the circumstances require HMRC’s permission to opt to tax, no acknowledgement is required from HMRC.
Can you backdate an option to tax?
You can not backdate an option to tax. HMRC will, in some circumstances, accept a belated notification, with evidence that the decision was made at the time and that the landlord has charged VAT and claimed VAT in relation to the property.
How do I know if my property is opted to tax?
If an option to tax is in place, VAT would have been charged on the purchase price. If the property has been held for several years, then you can write to HMRC, and they can provide a copy of the original option to tax.
How do I notify HMRC about the option to tax?
HMRC can be notified using the form VAT1614C. This form needs to be signed by an authorised signatory.
Can I revoke an option?
You can revoke an option to tax in limited circumstances:
- Within a 6 month cooling-off period from the date the decision is made to opt to tax the property (providing no VAT has been charged or there is no input VAT recovery)
- 20 years after the option to tax has been in place
In most cases, this is done by completing a form (VAT1614J). However, in certain conditions, you will need to seek HMRC’s permission to remove the option to tax.
An option to tax is automatically revoked when the ‘opter’ has no interest in the property after six years. This could be where an application was made to opt to tax when purchasing a property, but after six years, the purchase was unsuccessful.
Why would I revoke an option to tax?
There are a number of circumstances where it can be beneficial to remove an option to tax.
These can include:
- Where a commercial property has non Vat registered tenants
- Stamp Duty Land Tax (SDLT) savings when selling a commercial building with an option to tax in place for over 20 years. Revoking the option will reduce the amount of SDLT payable, as SDLT is due on the selling price, including VAT
- For cashflow when selling a property, revoking the option will avoid the buyer having to find the VAT to purchase the property
Once a business revokes the option to tax, it can no longer recover input tax on costs.
Get in touch with Spotlight Accounting
At Spotlight Accounting, we work with our clients to advise if revoking the option to tax or making an application to opt to tax is beneficial to them. Every situation is different, and we have experience working with landlords with part of an industrial estate opted, revoked options for clients purchasing properties and assisting those who have previously purchased properties with an option to tax on.
If you are unsure if having your option to tax revoked is tax beneficial for you, why not get in touch to see how we can help.
Opting to tax land and buildings can be a valuable tool in certain conditions. However, once an option is in place, it can not be removed for 20 years after the six-month cooling-off period. Therefore this initial benefit of input tax recovery should be outweighed by a future tax loss.
If you are looking to opt to tax property, it is essential to seek professional advice to ensure that it is tax beneficial to do so.
Find out if you should VAT register your property company in our blog.