Andrew Needham looks at how to revoke your option to tax and any potential pitfalls that can arise.
Opting to tax
If you own a commercial building and make supplies of it (rent it or sell it) the only way you can recover the VAT on the costs of maintaining or refurbishing it is to opt to tax it. Once you have opted to tax a property you can recover the VAT on costs associated with it but have to charge VAT on any supplies you make of it, for example, rent, lease or sale.
Opting to tax commercial properties can be very advantageous to businesses, but once the option to tax has been exercised it will remain in force for up to 20 years, so businesses need to take this into account before opting.
Revoking the option to tax
The option to tax can only be revoked in very limited circumstances:
- within a 6 month cooling off period providing no input tax has been claimed or output tax charged;
- it is automatically revoked if the ‘opter’ has no interest in the property after 6 years. For example, you opt to tax a property during the purchase process but the deal falls through and you do not purchase it; or
- 20 years after you exercised the option to tax.
After 20 years the reasons for the original option to tax may no longer exist. For example with few VATable costs now being incurred, by revoking the OTT a landlord would then be able to offer commercial accommodation without charging VAT.
This would be attractive to certain types of tenants that are unable to reclaim all or some of the VAT charged; for example, businesses in the financial sector which tend to provide more VAT exempt services and thus suffer a restriction to the amount of input VAT they can recover.
If you are selling a property more than 20 years after opting it, revoking the option could save a large amount SDLT (as SDLT is charged on top of the VAT) making its purchase more attractive to potential buyers.
Remember that once you have revoked the option to tax you can no longer recover the VAT on any costs associated with the property.
How to revoke the option
You can revoke your option to tax after 20 years by completing a form VAT 1614J. Before you can revoke the option to tax without having to obtain prior permission from HMRC, you have to fulfil a number of criteria. The form lists six criteria and you have to fulfil the first one alone or all of the remaining five (See VAT Notice 742A section 8). If you do not meet these criteria you have to get HMRC’s permission before you can revoke your option to tax.
In deciding whether or not to grant permission, HMRC will give particular consideration to whether or not your business or a third party will receive a VAT benefit as a result of revoking the option to tax. HMRC can impose further conditions if they think it is necessary.
If HMRC grant permission to revoke the option to tax they can specify the date the revocation takes effect.
Trap:
If you think you have met the automatic condition for revoking the option to tax and it subsequently turns out that you did not, HMRC will treat it as though the revocation had never been made and you will have to seek their permission from a current date.
Practical Tip:
If you own a property and have opted to tax it more than 20 years ago you can revoke that option. But be careful that you meet the conditions for revoking it.
