Option to Tax Property: When and Why to Charge VAT on Land & Buildings
The sale of property or land is usually VAT-exempt in the United Kingdom. There are specific situations where it will be in the best interest of a seller to choose to charge the standard rate of VAT on the sale. This particular procedure is commonly referred to as the "Option to Tax." In this article, we will discuss the conditions under which it will be to your advantage to opt to tax your property, the potential effects that are established by making such a decision, and the critical considerations that must be taken into account during the process.
In the case of an exempted property transaction, the seller is placed in a situation where he cannot recover any VAT paid on a wide range of expenses that were incurred in connection with the property in question. Nevertheless, in the event that the seller decides to opt for a charging regime, he can charge a 20% VAT on transactions that would otherwise be exempted from the levy of such impositions. This tactical choice enables the seller to recover all input VAT that is attributable to the expenses incurred in connection with the property. Though this move may initially appear to be a good option, it is to be noted that it is not always the best option, particularly where the buyer does not have the capability to recover the VAT that has been levied.
Acquiring a close knowledge of the subtle details that accompany the Option to Tax is an essential mandate for companies and real property investors, as being aware of such is a protective measure against being vulnerable to unwanted and potentially burdensome financial difficulties. This article aims to provide the latest VAT rules on real estate transactions and explain when choosing the option to tax can be a smart strategy for organizations.
For more information, visit HMRC Guidance on Option to Tax and VAT on land and property.
What is the Option to Tax?
Option to Tax is a provision by which owners of buildings and land have the right to tax VAT in the case of sale or renting of buildings and land, otherwise exempted. Through this provision of opting to tax, an enterprise is able to claim back VAT in costs incurred for properties, and it is thus an important fiscal aspect.
Once a company chooses to exercise the option to tax a
specific property, it must impose Value Added Tax (VAT) at the normal rate of
20% on all of the supplies in relation to that specific property. This
obligation must apply to different transactions, which range from selling to
leasing the specific property. It should be noted that this option to tax must
be exercised in full in relation to the whole of the property, including not
just the existing buildings but also any new buildings that are erected, the
land itself, and any associated works that are attached to the property.
In what exact situations can tax imposition be beneficial?
Paying taxes can be advantageous in certain circumstances,
including the following:
1. When You Pay Substantial VAT on Costs
- If you are constructing, remodeling, or enhancing a
property and have excessive VAT on construction or remodeling expenses, taxing
by choice allows you to recover such expenses.
2. At what circumstances or points is it permissible for the Buyer or Tenant to recover VAT
- If the buyer or the tenant is a VAT-registered business
that can reclaim VAT, then VAT charging on the sale or lease will not be
expensive for them.
3. In commercial property Transactions
- Most property transactions in commercial property are
assisted by the Option to Tax, as companies tend to be VAT-registered and can
recover the VAT.
4. In order to Improve Cash Flow
- Recovery of VAT on property expenditure can go a long way
towards providing much-needed relief in financial terms for the short run, thus
strengthening their cash position.
For tailored advice, visit Fair View Accountants VAT Services or explore UK Government VAT rules.
When is it not advisable to select the choice to tax?
There are some situations and circumstances under which the
choice to decide to impose a tax may not be the best or most preferable
alternative available, such as the following cases:
1. When Selling to Non-VAT-Registered Buyers
- Unless the purchaser is VAT-registered (i.e., an
individual, school, or charity), the purchaser will not be able to reclaim the
VAT and thus pay the extra cost to buy it.
2. For Residential Properties
- The Option to Tax does not cover residential properties at
all. If a property is being used for more than one purpose, for example, a
mixed use property, then one has to make a clear and detailed analysis to
determine rightly which specific sections or portions of the property can be
taxed.
3. If You Expect to Lease to Exempt Businesses
- If the tenant has an exempt business (e.g., education,
financial services, healthcare), then they cannot recover VAT, so it is an
additional expense.
4. When It May Lower Marketability
- Imposing a value-added tax, or VAT, on the property would
greatly reduce its attractiveness to potential buyers or lessees. This is
especially because those who are not able or simply do not want to pay the
additional 20% that the imposition of such a tax would require.
Main Points to Consider Before Choosing to Tax
1. The Option to Tax: its Extent and Scope
- This provision applies to all of the property, including property comprising buildings, ground, and land to be developed in the future.
- It is of the greatest importance to clearly identify and delineate the particular area or area to be covered by the option in question.
2. Notification and Approval Process
- The choice to tax has to be notified to HMRC within 30 days of having made the choice.
- The notice shall be served clearly and shall be accompanied by all information relative to the subject property.
- More details can be found on HMRC's VAT notification guidelines.
3. Revoking the Option to Tax
- Once the option has been constituted and formed, it is binding for 20 years and cannot, under any circumstances, be revoked or cancelled. There are certain special situations where revocation will be allowed even within the above period.
- Revocation only applies under particular conditions, notably if the payment of VAT did not take place in the previous six years. It must also be ensured that the property is not used for any purpose which is liable for taxation in these six years.
4. Understanding Capital Goods Scheme (CGS) Adjustments
- In the event that you are experiencing substantial capital expenditure in excess of £250,000, you may be required to make certain modifications in accordance with the conditions of the Capital Goods Scheme. This process has the potential to influence your recovery of Value Added Tax (VAT) in relation to those expenditures.
- Learn more at HMRC Capital Goods Scheme guidance.
Common Misconceptions Regarding the Decision of Taxation
1. "The imposition of taxation by default applies to all and any property that I have and hold in my ownership."
The election is only for the particular property which has
been properly notified to HMRC. Observe that each property will be opted in
individually, as they cannot be taken together for this purpose.
2. "Once Opted, VAT Must Be Charged on All Transactions."
There are some exceptions, such as but not limited to, the
sales of some residential components that form part of a mixed-use development.
3. "Adopting a taxation policy always leads to significant savings in the cost of expenditure."
The benefits of this position are only realized by
businesses with significant VAT costs and dealing with VAT-registered customers
or lessees.
Steps to Decide to Tax a Property
→ Assess the economic effect
→ Take into account possible VAT recovery against future costs of buyers/lessees.
→ Consult a Tax Adviser
→ Speak to an expert to learn more regarding an in-depth
review of the long-term effects and outcomes.
→ Prepare Comprehensive Documentation
→ Appropriate records should be maintained that correctly
document all costs incurred, document estimates of recovery of VAT and give the
necessary financial justification.
→ Notify HMRC
→ Return the option to tax form to HMRC within 30 days.
→ Track VAT Charges and Compliance
It is important to make sure that Value Added Tax, or VAT,
is charged correctly and properly posted for each transaction.
Conclusion
Imposing tax on a property is a strategic move that needs to be well thought of. While it makes VAT recoverable, it also affects marketability and can impose extra charges on buyers or lessees. Companies need to consider their particular case and seek the advice of a tax consultant before they make a decision.
If you need expert and professional tax guidance, Fair View Accountants is here to offer you the complete advice you require to navigate
the sometimes complex and confusing realm of VAT, property tax, and sound
business financial planning. We invite you to contact us today and allow us to
assist you with the assistance you require in all tax-related issues.
Do you need a professional tax adviser based in Watford? Fair View Accountants is a professional accountancy service in Watford dealing in tax advisory, VAT returns, business consultancy, and financial reporting. Are you looking for a private tax accountant in Watford? Get in touch with us today!
FAQs
What is the Option to Tax for?
It enables companies to tax property sales and reclaim VAT
on associated expenses.
Can the Option to Tax be withdrawn?
In general, no. In certain circumstances, however,
revocation can be exercised after 20 years.
Does opting to tax apply to residential properties?
No, it applies only to commercial properties.
How does opting to tax affect my tenants?
Tenants who are VAT-registered can reclaim VAT, but those
who aren’t will bear the cost.
Is the Option to Tax applicable to mixed-use properties?
Yes, but it is important to decide which areas of the
property are taxable.
What if I fail to inform HMRC within 30 days?
You could lose the right to charge VAT on the sale,
impacting VAT recovery.
How does VAT affect the sale price of my property?
The price rises by 20% if VAT is charged, which may
discourage some buyers.
Can I tax on land separately from buildings?
No, the option includes all land, property, and future
development.
What will be the effect of Brexit on VAT property
transaction regulations?
Brexit has introduced several VAT changes for businesses in the UK, particularly businesses dealing with importation and exportation from the EU. The VAT charge on property-associated expenses could be affected by such changes.
Find more in our guide Brexit & VAT: Essential Updates for UK Importers and Exporters in 2025.
Where can I find help for VAT and property tax decisions?
Consult Fair View Accountants for specialist advice.
Where can I see official HMRC guidance on VAT for property?