The differences between properties that are subject to an option to tax and those that are not and how this will influence how you should deal with a property, including how to account for VAT.  You need to take advice from your accountant about the benefits of option to tax.  This note is to give some background and understanding to the implications of doing so. 

Opted properties

If you have exercised an option to tax over a property, this will normally mean that you need to account for output tax on any sale or letting of it. You will want to ensure that the sale agreement or lease allows you to add VAT to the price or rent. It will also normally mean that you can recover input tax on related costs.

But it’s not that simple.

Exceptions

If you have opted to tax, the starting point is that a sale or letting will be subject to VAT at the standard rate. However, this will not be the case:

•      If it is VAT-free as a transfer of a going concern (TOGC). This can only apply to a disposal of your entire interest, and not, for example, to the grant of a lease. If you have exercised an option to tax there are additional conditions that the buyer must meet if TOGC treatment is to apply.

•      In most cases where the building is designed or intended for use as a dwelling or dwellings.  This can include cases where a buyer or tenant intends to convert it for residential use.

•      If the transaction is caught by anti-avoidance rules. These do not just apply where avoidance is intended, as motive is largely irrelevant. You need to consider these rules if both the following apply:

•      You expect the property to be occupied by someone who cannot recover all the VAT they incur. This does not need to be your immediate buyer or tenant; it might be someone further down the chain, or it might be you as the seller if you are taking a lease back. It might also be someone who will occupy only a part of the property, or who will only do so in a few years’ time.

•      That expected occupier is you, or someone providing you with finance in connection with the property, or someone connected with you or with someone providing finance. Someone providing finance can include, for example, a tenant paying a contribution towards your works to the property, or transferring land to you at less than its market value. The connection may be coincidental, for example, it may be that you have funded the property by borrowing from a bank, and a member of the same banking group happens to be one of the tenants.

•      In some instances where the building is intended for other residential or charity uses, and the buyer or tenant certifies that intention.

•      If the buyer or tenant is an individual who intends to build their own dwelling on the site. There is no certification requirement here.

•      If the option has lapsed or been revoked. Revocation generally needs a positive action by the owner, so you should know whether this has happened. Also note that the option does not strictly apply if it was never notified to HMRC.  This would be a de facto option you should give retrospective notification to HMRC.

You will normally know whether you have exercised an option to tax. However, the buyer or tenant might want evidence of this, so it is advisable to have this available. The option has to be notified to HMRC, and it will normally be enough to produce HMRC’s acknowledgement of the notification. If you cannot trace this, you might need to ask HMRC’s Option to Tax Unit for a copy.

Evidence that an option to tax has been made

There are some further points to be aware of:

•      Although the option to tax was introduced in 1989, the Option to Tax Unit was only formed in 2003. HMRC have no central record of options notified before then. If they have a record at all, it will be held by the local VAT office. However, local offices are often unable to trace relevant papers, and may well have had them destroyed. Also, until March 1995 you did not necessarily have to notify the option to tax at all.

•      It follows that HMRC may be unable to help with evidence of the option. In particular, they can never confirm that there is no option to tax, only that they have not traced a record of one. They will also not disclose the position to third parties, such as a purchaser, without the owner’s authorisation.

•      If you cannot produce a copy of HMRC’s acknowledgement, you might at least have a copy of your original notification, although of course this does not prove that you actually sent it to HMRC.

•      Board minutes or correspondence with tenants, and/or evidence that VAT has been consistently charged to tenants. This may be helpful, but may not be enough to satisfy the buyer or tenant. You may find that you need to re-notify HMRC to make sure of the position.

•      Even if you do have evidence of the option to tax, you may find that there are questions over the details; perhaps a discrepancy over the address of the property, the name of the company or the VAT number. You may therefore need to have evidence to show what has happened, and why the option is still valid. A purchaser or tenant, however, may have to be reasonable about minor discrepancies, such as a misspelling of the name of the street, if it is clear that the option cannot refer to any other property.

•      In other cases, it may actually have been a different group company that opted, but the option may still be valid under the relevant associate rules.

•      A building may have been constructed or demolished on the site. Normally the option will still apply, but in some cases you can revoke the option when this happens, so you may need to show that you have not done this.

•      Sometimes a property will be caught by an option on a neighbouring property, so that, for example, an option on number 1 High Street also applies to number 3. Different rules continue to apply for options dating from before March 1995. You may need to check the details of the building, and the history, if you are to satisfy the buyer or tenant that your option on number 1 really does cover number 3.

•      If you had already been letting the property out before you opted, you may have needed HMRC’s permission to opt. This is often overlooked, and buyers and tenants will sometimes question this, wanting evidence that the option was actually valid. You may therefore need to be able to show that permission was not needed, or alternatively that the option was covered by specific or general permission given by HMRC. Otherwise, you may need to ask HMRC for confirmation that they will overlook the fact that you needed permission, and will still treat the option as valid.

•      If you have exercised a real estate election (REE), you will not have direct evidence that it applies to a particular property. Although the idea of a REE is that it is a general option to tax, it does not cover every property. You may therefore need evidence that it does apply.

•      If you cannot prove that you have opted, it may be best to notify a fresh option, in order to satisfy a purchaser or tenant.

You might find that your option to tax is affecting the marketability of the property or the price or rent you can achieve. In some instances you may be able to do something about this. For example:

•      If you have not yet notified HMRC of your option, there is still time to change your mind. The option is not valid if it is not notified.

•      If your option took effect less than six months ago, you may be able to revoke it.  There are, however, conditions for this, and in particular you cannot do this if you have charged VAT under the option in the meantime.

•      You may be able to revoke your option if it first took effect more than 20 years ago. Even if this does not apply now, you might be able to agree with the tenant that you will revoke the option when you can, perhaps in two or three years’ time.

If you have not exercised an option to tax a property, this will normally mean that a sale or letting will be exempt. You will not be able to recover VAT on related costs and there may also be a liability for VAT you have recovered in the past.  The benefits of opting are to do with input tax recovery and you should consult your accountant in this regard.