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What is Option To Tax
Income from the sale or letting of property is generally exempt from VAT.
However, you can opt to tax land
Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard rated, and you will normally be able to recover any VAT you incur in making those supplies.
An option to tax election is only ever done by a taxpayer in order to produce an input tax benefit that would not be otherwise available without the option.
There is no such thing as an ‘opted property’.
Each taxpayer with an interest in a property (including land as well as buildings) makes his or her own decision as to whether an option is in their best interests. So just because a client has bought a property from Owner A and been charged 20% VAT on the purchase price, this does not mean that the client must also make an option to tax election with HMRC.
Why Would You Opt to Tax ?
The main reason for opting to tax is that VAT on costs e.g. a refurbishment can be recovered whereas without an option the VAT would not be recoverable
Avoiding VAT on a going concern purchase – if a person steps into the shoes of an existing commercial landlord who charges VAT on rental income then as long as certain conditions are met including the incoming purchaser making an option to tax on the property then no VAT is chargeable on the disposal price (this can reduce SDLT costs)
The main disadvantage is that VAT must be charged on the sale or rental of an opted building when the purchaser cannot necessarily recover this VAT.
ABC Accountants Ltd has bought the freehold of offices on the high street for £300,000 + VAT. ABC will only use the premises for its trading purposes as accountants and tax advisers.
In this situation, there is no need for the directors to opt to tax the property because it is wholly used for taxable purposes.
Input tax can be claimed on the property purchase in the same way that the business claims input tax on its telephone bills and stationery costs.
John has purchased a commercial property in his SIPP (Self-Invested Pension Scheme) for £500,000 + VAT, which will be rented out to tenants for an annual rent of £20,000
The starting point is that the rental income earned by John will be exempt from VAT. So there is no scope to register the SIPP for VAT and claim input tax.
However, if he made an option to tax election on the building in question (complete form VAT1614A and send it to HMRC) then the rental income would be taxable and input tax recovery is now possible. This is the key principle with an option to tax election, it is always done for an input tax motive.
Condition One - The Relevant Interest Condition
Neither the taxpayer nor any relevant associate connected with the taxpayer has a relevant interest in the building or land at the time when the option is revoked, and
if the taxpayer or a relevant associate of the taxpayer has disposed of such an interest, no supply for the purpose of the charge to VAT in respect of the disposal -
is yet to take place, or
would be yet to take place if one or more conditions (such as the happening of an event or the doing of an act) were to be met.
Condition Two - The Twenty Year Condition
The taxpayer or a relevant associate connected with the taxpayer held a relevant interest in the building or land:
after the time from which the option had effect, and
more than 20 years before the option is revoked.
Condition Three - The Capital Item Condition
Any land or building that is subject to the option at the time when it is revoked does not fall, in relation to the taxpayer or a
relevant associate connected with the taxpayer,
for input tax adjustment as a capital item under part 15 of the Value Added Tax Regulations 1995 (adjustments to the deduction of input tax on capital items).
Condition Four - The Valuation Condition
Neither the taxpayer nor any relevant associate connected to the taxpayer has made a supply of a relevant interest in the building or land subject to the option in the 10 years immediately before revocation of the option that:
Was for a consideration that was less than the open market value of that supply, or
Arose from a relevant grant.
Condition Five - The Pre-Payment Condition
No part of a supply of goods or services made for consideration to the taxpayer or a relevant associate connected with the taxpayer before the option is revoked will be attributable to a supply or other use of the land or buildings by the taxpayer more than 12 months after the option is revoked.
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