VAT Option to tax – 20 Years are up!

Newsletter issue - October 2009.

On 1 August 1989 the VAT law was changed to permit property owners to elect for specified buildings to be subject to VAT at the standard rate. This election is known as the ‘option to tax’.

Without activating the option to tax by election, the letting or sale of the building would be exempt from VAT (with some exceptions), so no VAT can be charged on rents, and VAT on maintenance costs cannot be reclaimed. Opting to tax is generally beneficial for commercial landlords, as they can reclaim VAT on their costs, including VAT on the purchase of the building itself. However, some tenants such as charities and banks, cannot reclaim the VAT charged on the rent, which makes the lease on a VAT-opted building far less attractive.

The option to tax election can now be revoked if 20 years have passed since the election was made in respect of the building. You could now be in a position to revoke an option to tax you made over 20 years ago. You may want to do this to encourage a wider range of tenants to take on a lease, or to effectively lower the price of the building in this difficult market. Remember Stamp Duty Land Tax (SDLT) is charged on the VAT inclusive cost of a building or lease, so a VAT exempt building means the purchaser has less SDLT to pay.

In most cases the revocation does not need HMRC permission if 20 years have passed since the option to tax took effect, and the same person still holds an interest in the building. You just need to complete the HMRC form VAT1614J to inform the Tax Office the option to tax election for a particular building is being revoked. However, you need to check whether the anti-avoidance conditions numbered 3 to 5, on that form are also met. If those conditions are not met you need the permission of the tax Office to revoke the election. If you have any questions about the option to tax election or how to revoke it, please ask us, as it can be very expensive if you get it wrong.