The default position is that the sale or letting of any property is exempt from VAT. However, for commercial property and bare land, the property owner may exercise the option to tax. Future income from the property will then become subject to VAT, but the owner will now be able to recover VAT incurred.
Opting to tax is a two-stage process. Firstly, a decision to exercise the option to tax must be made. This can be effective immediately, or from some future date, but cannot be retrospective.
There is no set way to record a decision to opt to tax. Good practice would be an internal email or board resolution – something that clearly shows that someone with authority has made the decision on behalf of the property owner and when they made it.
Secondly, the decision to opt to tax needs to be notified to HMRC in order for it to be effective. There is a standard form (Form VAT 1614A) that can be used. The details provided to HMRC should be as specific as possible to avoid any future confusion about what has been opted. An option to tax should normally be notified to HMRC within 30 days of the date of the decision to opt, albeit as explained below, this has now been temporarily extended to 90 days.
HMRC is entitled to accept a ‘belated notification’ made after this time period. To agree to this, the officer will be looking for evidence that the option to tax was exercised on the date claimed, and that this is not an attempt to opt to tax retrospectively. This is where an internal email or other document recording the decision to opt to tax becomes critical.
Due to the challenges of COVID-19, HMRC has announced a temporary extension to the normal time limit to notify the option to tax. If the decision to opt to tax was made between 15 February and 30 June 2020, you now have 90 days to notify this to HMRC.
Recognising the difficulties in getting documents physically signed, HMRC has also confirmed that notifications can be sent with an electronic signature, provided this is backed-up with supplementary evidence such as an email from the individual authorising use of their electronic signature. An agent can also be authorised to sign the form on the owner’s behalf. HMRC is also encouraging emailing of the forms.
Despite this relaxation, we recommend notifying HMRC immediately that a decision to opt to tax has been made. With HMRC’s pragmatic approach to electronic submission, this should be possible even if various parties need to complete the form.
In some cases the effective date of the option to tax can be crucial, especially where there is VAT being reclaimed. If HMRC receive a notification form stating that an option to tax was exercised a few days previously, this is unlikely to be questioned. However, if this was weeks – now possibly even months - previously, they may request further evidence that the decision to opt to tax was made when claimed.
It should be noted that this relaxation does not change the rules for acquiring a tenanted property as a transfer of a going concern (TOGC). Where the vendor has opted to tax, but the sale qualifies as a TOGC, it is possible for the vendor not to have to charge VAT. This reduces the SDLT cost as well as avoiding a significant VAT cashflow. In order to obtain this favourable treatment, the purchaser must exercise and notify an option to tax before the relevant date of the sale.
To discuss this further please get in touch with your usual VAT team contact or Robert Marchant.
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