Real Estate things you once knew but may have forgotten - VAT - the option to tax

VAT - the option to tax

When a property owner elects to waive exemption (otherwise known as "opting to tax") in relation to a building the effect is that if the property owner makes any supplies in relation to the building (eg sales and lettings) they will be standard rated rather than exempt. The purpose of this note is to highlight the importance of following the correct procedures when opting to tax.

Once the election to waive exemption has been made and notified to Customs & Excise it can only be revoked in limited circumstances. Therefore, proper consideration should be given to the implications of opting to tax a building before going ahead eg will it make the building harder to sell or attract new tenants?

Once the decision to opt to tax has been made consider whether the prior permission of Customs & Excise is required. Where a property owner has previously made an exempt supply in relation to the property the option to tax can only be made with the prior written permission of Customs & Excise. Paragragh 8.6 of Customs & Excise Notice 742 sets out specific instances where Customs & Excise have given a blanket permission so that specific permission is not required. However, the blanket permissions are very limited in scope although Customs & Excise are currently reviewing this area and it is expected that the blanket permissions will be extended.

Care should be taken in the preparation of the election and notification of election so as to ensure that all details are correct. Instances arise in practice where the property owner has mistakenly opted to tax over one property instead of another.

It is also important to understand that there is a specific definition of "building" for the purposes of VAT so that what might be regarded as two separate buildings may be treated as a single building for VAT purposes. For example, an election made over a building will also extend to all other buildings linked to that building by a covered walkway (where in the same ownership). Again, Customs & Excise are looking at the VAT definition of “building” as part of their review.

The decision to opt to tax should be made by a person or persons with authority to make such a decision. For example, in the case of a company the Board of Directors or a person to whom the Board has delegated authority should make the election.

Unless the election is notified to Customs & Excise within 30 days of it having been made it will not be effective.

Although the option to tax can only be revoked in limited circumstances, an option to tax in relation to a building will automatically terminate on the demolition of that building. This is an important point to remember particularly in the context of new developments; care should be taken to make sure that an election is made at the appropriate time.

For further information on this topic please contact Mike Boutell at [email protected] or on +44 (0) 20 367 3000.