CVC Blog – Should you have opted to tax?

There are many VAT issues and points to consider in relation to transactions involving land.  One area where CVC receives many questions is around the question of notifying the ‘option to tax’. The grant of any interest in, or right over, land is usually an exempt supply for VAT purposes. The option to tax provisions allow for a person to tax certain supplies of land which would otherwise be VAT exempt.

Whilst many of the questions raised by businesses relate to whether they are being charged VAT correctly on a transaction, one point that is often overlooked is whether steps need to be taken, in advance of the transaction taking place, to ensure that any VAT that is charged can be reclaimed?

It is often assumed that the VAT liability of land for one person is the same for another. We regularly come across cases where businesses are operating on the basis that they are required to charge VAT on the lease or sale of a property because they were charged VAT on the initial purchase as it was opted to tax by the previous owner. There is an assumption that the seller’s option to tax passes to the purchaser and as a result the new owner has not notified an option to tax to HMRC. This usually only comes to light when a tenant or potential purchaser then requests to see a copy of the new owner’s option to tax acknowledgement from HMRC and the failure to notify an option can have significant consequences as regards recovery of input VAT incurred on the original purchase.

Each person acquiring an interest in land must consider whether they can or would wish to opt to tax the land.

There are two stages in opting to tax a property

  1. Making the decision to opt which may take place at a board meeting or similar, or less formally.
  1. Notifying HMRC of the decision. An option to tax has effect only if
  • notification of the option is given to HMRC before the end of the period of 30 days beginning with the day on which the option was exercised; and
  • that notification is given together with such information as HMRC may require.

In practice HMRC can accept that an option to tax has been made when it has not been notified provided that all of the actions of the taxpayer are consistent with this view (e.g. they have charged VAT on rent) and they did not require HMRC’s prior approval to make the option.

If a business has overlooked formally notifying HMRC of an option to tax but has raised invoices and charged and accounted for VAT it may be possible to agree a belated notification provided it can be clearly evidenced that this is the case.

Options to tax also need to be considered where a transfer of a going concern (TOGC) is taking place and the vendor has opted to tax any property involved in the business transfer. In such cases, it is not just important that an option has also been made by the purchaser but also that it has been notified to HMRC in time.

In the case of TC04460 NORA HARRIS, an assessment was raised by HMRC for failure to account for output VAT on the sale of a hairdressing salon to her daughter. Mrs Harris was of the view the sale was a TOGC and therefore outside the scope of VAT.  HMRC argued that Mrs Harris’ daughter failed to notify an option to tax prior to the transfer and therefore the TOGC conditions were not satisfied.

The Tribunal found that the purchaser must not only exercise an option to tax but also notify HMRC of their option to tax prior to the transfer in order for the TOGC conditions to be satisfied. There was no evidence that Mrs Harris’ daughter had notified HMRC of her option to tax and therefore Mrs Harris’ appeal was dismissed. HMRC accepted that if there was evidence that Mrs Harris’ daughter had exercised an option to tax (e.g. she had charged the tenants VAT on rental payments) they would accept her belated notification and she would be able to recover the VAT incurred on the purchase of the hairdressing salon. Although this solution would deal with the recovery of VAT on the transaction the failure to deal with the option to tax in relation to TOGCs correctly can lead to cash flow and funding issues as well as additional SDLT costs as the purchase price of the property is increased by the VAT charged, which may have been avoidable had the transfer been part of an outside the scope TOGC.

This case highlights the importance of seeking advice in advance of a property transaction taking place. Once a transaction is complete it is likely to be much more difficult to deal with any issues arising where an option to tax has not been notified at the correct time.

Please contact Laura Beckett if you would like to discuss any land and property related transactions and how CVC could assist you.

This blog is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. CVC cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog. Specialist VAT advice should always be sought in relation to your particular circumstance.