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The ‘Option to Tax’ - beware costly misunderstandings.

Article

The ‘Option to Tax’ - beware costly misunderstandings.

11 Nov 2022

2 minute read

There aren’t too many single purchases or sales a business will make that involve bigger sums of money than real estate. Getting things wrong with regards to VAT can be costly.

The ‘Option to Tax’ - beware costly misunderstandings. - news article image

There aren’t too many single purchases or sales a business will make that involve bigger sums of money than real estate. Getting things wrong with regards to VAT can be costly. 

Whilst many businesses have a good appreciation and understanding around the option to tax (OTT) and commercial property, we still hear some common misunderstandings based on incorrect assumptions: 

“Yes, we must have an option to tax as we have always charged VAT on our rental income…” “When we bought the building, we were charged and claimed VAT, so clearly the building has an option to tax…”

 A poll conducted by HMRC during an OTT webinar in 2021 revealed a worrying level of misunderstanding amongst industry professionals and tax advisors, with seemingly basic questions answered incorrectly. 

It is these kinds of misunderstandings that can sometimes lead to problems for a business, especially where an assumption is made concerning the existence of an OTT. 

An OTT is specific to your own interest in any particular property. It doesn’t matter if the previous owner had an OTT. It doesn’t matter if the ultimate landlord has an OTT. All that matters is the decision you make concerning your interest, and understanding the implications for VAT.

Whilst having an OTT on your property can potentially benefit VAT recovery, the decision regards OTT needs to be considered carefully as it is legally binding for 20 years, and can only be rescinded in limited circumstances. 

And where you do make the decision to have an OTT on your interest, notifying that decision to HMRC in the appropriate manner and at the right time are vitally important. 

On a number of occasions, we have been asked to assist where a property is being sold, and it comes to light at the 11th hour that either there is no OTT in place where it was believed there was one, or conversely that a property has an OTT in place which wasn’t initially identified.

Last minute snags like this can cause delays to property transactions, can create additional tax burdens either through non recoverable VAT or increased Stamp Duty, and in some cases can result in collapsed deals as the VAT rules concerning transfers of property rental businesses can be unforgiving. 

There are usually ways to bypass problems of this nature, and this is something we can assist with if necessary, but we would rather make sure that clients are not in this position to begin with. 

Businesses need to fully understand the pros and cons of having an OTT, they need to be aware of potential pitfalls concerning anti-avoidance provisions and situations where the OTT might be disapplied leaving them exposed to a large and unnecessary VAT bill, or perhaps there is an opportunity for VAT savings. 

If your business is buying, selling, or receiving rental income from commercial property, and you would like to discuss VAT matters relating to the Option to Tax, please do get in touch.

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