The typical situation where ‘opt to tax’ could be used is where a commercial property is purchased for renting. As a new commercial property, VAT would usually be charged on the purchase price and, if rented out, this VAT paid cannot be reclaimed as rental income is exempt from VAT. Although opting to tax will require VAT to be charged on the rents paid by the tenant, the owner will recover all VAT paid on purchase, the associated professional costs and any ongoing expenses (e.g., repairs). However, on sale VAT would be charged. Another reason for ‘opting to tax’ is to avoid VAT being charged where a property is acquired as part of an ongoing business (transfer of a going concern) and the previous owner has opted to tax.

The sale or rental of a property is normally exempt from VAT, the main exceptions being the sale of new residential property (zero-rated) or the sale of new (less than three years old) freehold commercial property (standard-rated). Exempt transactions mean no VAT is chargeable, but it also means that the person making the supply cannot usually recover any VAT incurred on their expenses.

However, a business can ‘opt to tax’, choosing to charge VAT on the sale or rental of commercial property only, i.e., make a taxable supply out of what otherwise would be an exempt supply, thereby allowing VAT recovery.

Tax implications of ‘opting’

When deciding whether to opt, consideration should be made as to whether the property will be subject to the Capital Goods Scheme (CGS). The CGS is a method of adjusting the amount of input tax claimed on the purchase of a capital asset in line with its taxable use over five or ten years. In this situation, not opting to tax could render the business liable to repay some or all of the VAT recovered on property costs. In addition, the VAT situation of the tenant may be relevant, e.g., will the lease be tenant repairing or will the tenant or future purchaser likely be in a position to recover any or all VAT charged on any rental or sale?

When to claim

Once applied, the option to tax stays in place for 20 years and can only be revoked in limited circumstances, namely:

• within a six-month cooling off period providing no input tax has been claimed or output tax charged; or
• if the opter has no interest in the property after six years (e.g., if an opt to tax claim is made during the purchase process but the deal falls through).

Although at first glance ‘opting to VAT’ may seem advantageous, through the following 20 years the reasons for the original option may no longer exist (e.g., repair costs may be minimal).

New reporting changes

For an option to tax to be valid, it must be notified to HMRC within 30 days, and before the ‘relevant date’ (usually before the creation of a tax point) if an acquisition would otherwise be subject to VAT, and the intention is for the acquisition be a VAT-free transfer of a going concern (TOGC). Pre-1 February 2023, HMRC would have formally ‘acknowledged’ the claim and, after carrying out checks, would confirm the existence of any options to tax notified to it previously, if requested. From 1 February 2023, no acknowledgements will be issued and HMRC will only check its records for previously made options in limited circumstances However, as long as a claim is sent by email to optiontotaxnationalunit@hmrc.gov.uk, the sender should receive an automated email response showing the date of receipt.

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