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VAT Option to Tax

POSTED BY: Steve Little

30 October 17

There are special VAT rules that allow businesses to standard rate the supply of most non-residential and commercial land and buildings (known as the option to tax). This means that subsequent supplies by the person making the option to tax will be subject to VAT at the standard rate.

The ability to convert the treatment of VAT exempt land and buildings to taxable can have many benefits. The main benefit is that the person making the option to tax will be able to recover VAT on costs (subject to the usual rules) associated with the property, including the purchase and refurbishment of the property.

However, any subsequent sale or rental of the property will attract VAT. Where the purchaser or tenant is able to recover the VAT charged, this is not normally an issue. However, where the purchaser / tenant is not VAT registered or not fully taxable (such as bank) the VAT can become an additional (non-recoverable) cost. Once an option to tax has been made it can only be revoked under limited circumstances so proper consideration of the issue is important.

The following VAT forms related to the option to tax have recently been updated:

VAT: notification of an option to tax land and buildings (VAT1614A)

VAT: ceasing to be a relevant associate to an option to tax (VAT1614B)

VAT: revoking an option to tax within first 6 months (VAT1614C)

VAT: notification of a real estate election (VAT1614E)

VAT: new buildings - exclusion from an option to tax (VAT1614F)

VAT: revoking an option to tax after 20 years (VAT1614J)

As always, advice should be sought if you are entering into a property transaction where you think the Option to Tax might apply.

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