Andrew Needham looks at how to revoke the option to tax within the six-month ‘cooling-off’ period.
A business will often buy a commercial property and ‘opt to tax’ it immediately, either because it thinks it will renovate the property and then rent it out, or because it just thought that opting to tax was a good idea!
By opting to tax a property, you can turn an exempt supply of rental or sale into a taxable supply, which allows you to recover any VAT you incurred in purchasing the building or renovating it. So, opting to tax can be a good idea, as it allows the recovery of input tax on associated costs.
What if I change my mind?
Having opted to tax, it is not uncommon for a business to decide that it didn’t really want to opt to tax after all. This may be because the new owner receives an offer for the building before renovating it and incurring costs, or simply because he did not fully understand the implications of the option to tax at the time of purchase and now wants revoke it.
If you change your mind within six months of the effective date of your option to tax, HMRC will allow you to revoke your option to tax if you meet certain conditions.
How to revoke the option to tax
To revoke the option, permission must be obtained from HMRC. Consent may be granted automatically if a number of conditions are met, or if they are not met HMRC must be asked for permission before the option can be revoked.
The automatic conditions are:
- less than six months have passed since the day on which the option had effect;
- no tax has become chargeable on a supply of the land as a result of the option;
- no input tax has been claimed;
- no transfer of a going concern has occurred, and
- you have notified the revocation to HMRC (on form VAT1614C).
If input tax has been claimed, you can ask HMRC for permission to revoke your option to tax provided you agree on a method of repaying the input tax already claimed with them. HMRC may impose other conditions for accepting the revocation of the option to tax depending on the circumstances, and if these are broken the revocation will be withdrawn.
Once a revocation has been accepted, it is backdated to the date of the original option to tax, so it is treated as if the option to tax was never made.
What if I am outside the six-month limit?
If you are outside the six months ‘cooling-off’ period, you may only revoke an option to tax where more than 20 years has elapsed since you opted to tax the property provided you meet certain conditions, although you do not need to obtain HMRC’s permission to do so; you just need to inform HMRC (using form VAT 1614J). The conditions are listed in VAT Notice 742A (at para 8.3.3).
The revocation will take effect from the day that you specify on the VAT 1614J, but this cannot be any earlier than the day on which you notify HMRC – so you can’t backdate it!
If you do not meet the automatic conditions, you may still seek HMRC’s permission to revoke.
Practical Tip:
If you opt to tax a commercial property and decide that it was a mistake, you can revoke your option within six months provided you meet certain conditions. If you are outside the six-month limit you will need to wait 20 years!
