Option to Tax – What’s Changed?
What is an Option to Tax?
The standard position is that the sale or lease of a commercial property is exempt from Value Added Tax (VAT).
There are two exceptions to this:
- The Property is built within the last 3 years; or
- The Owner has exercised an Option to Tax.
An Option to Tax allows a Seller/Landlord to opt to charge VAT at the standard rate (20%). If they do so, the Seller/Landlord must charge VAT on all supplies they make relating to that property. However, they can recover the VAT charged to them on any costs related to the property.
Please note that the Seller/Landlord must decide to opt to tax the property and notify HM Revenue and Customs (HMRC) of their intentions to do so in writing within 30 days of this decision. At present, HMRC acknowledges exemptions by letter.
What’s Changing?
- HMRC will no longer issue an acknowledgement letter unless you submit your application via email, in which case, you will receive an auto-response confirming the application has been made.
- HMRC will also not process any queries relating to whether the Option to Tax is in place.
These changes came into force on 1st February 2023.
How do the changes affect Sellers and Landlords?
The onus is now on Sellers and Landlords to ensure that their records are correct, as HMRC will no longer assist you if you have lost the Option to Tax letter.
They will also need to ensure that the Option to Tax is valid. This makes good record-keeping important, and there will be costly implications for those who fail to maintain their records.
How do the changes affect Commercial Property transactions?
The legal representatives will need to ensure that their Seller/Landlord client has evidence of the Option to Tax if they are charging VAT. They cannot simply charge VAT unless they can prove that it is payable. This means that they will be reliant on their client to provide adequate records rather than HMRC. Therefore, the client is likely to suffer the financial implications of not being able to provide the Option to Tax.
On the other hand, if it is a Buyer/Tenant client the legal representative is acting for, then it will be equally important to check that where there is an Option to Tax, it is valid.
Either way, if there is no clear evidence that a valid Option to Tax exists, then the legal representative will need to negotiate and put in place warranties and indemnities within the lease or contract affecting the transaction.
If you have any queries, then please feel free to contact our Commercial Property Team at Bradley Haynes Law on 01905 900 919.