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18 January 2022

Revoking an Option to Tax on Property


Q&A Session

I purchased a commercial property in 1990. As the seller was charging me VAT, I had to opt to tax the property to recover the VAT. I have leased the property out to a local business and I have charged VAT on the rent and declared this to HMRC. This business is now down-sizing and it has deregistered for VAT and I was wondering could I stop charging this business VAT because I am outside the 20-year holding period. I believe the process is straightforward but what are the implications of revoking the option to tax?


Option to Tax

The option to tax allows a business to charge VAT on the sale or rental of commercial property, or in other words, to make a taxable supply from what otherwise would be a VAT exempt supply. An important feature of the option to tax regulations is that they apply to a property for a 20-year period once an election has been made by a business. However, once that 20-year period has expired, income from either renting or selling the property can again be exempt from VAT rather than standard-rated if the business revokes its option with HMRC.

The option to tax regulations were actually introduced in 1989 so each day more options to tax are eligible for revocation. The paperwork to revoke an option is relatively simple but the ramifications of failing to do so or making the wrong decision can be huge.

If you have an interest (freehold or leasehold) in commercial property and you let this property out, most businesses consider whether or not an option to tax should be made. There are pros and cons of opting to tax and in view of the large sums often involved in the purchase and sale of commercial property, it is essential to take specialist VAT advice.

Option to Tax | Pros and Cons

The option to tax is a useful tool which allows input tax recovery that would not be possible without the option to tax being made. Essentially, it creates the ability to recover VAT on related costs by turning an exempt supply – on which you can’t recover any VAT – into a taxable supply on which you can recover associated VAT.

As Options to Tax have now come of age – i.e. where they have been in place for more than 20 years, it is now possible to revoke one which was made more than 20 years ago.

In the case of a property purchase the revocation of the option to tax by the seller can result in VAT and SDLT savings for the buyer. The sale of an unopted property can be much more attractive if no VAT has to be added to the selling price. Of course, revoking an option to tax means that the owner/vendor won’t, in principle, be able to claim VAT on related costs because their income will be VAT exempt. So if you’re considering revoking an option, you need to check out how much irrecoverable VAT you may incur. But even if you do lose a little VAT on costs, having a VAT free property could be a much more valuable commodity in the property market.

Option to Tax | The Conditions 

Certain conditions must be met though, and advice should be taken in respect of future exempt supplies and how that might impact on input VAT recovery. HMRC’s permission is needed to revoke the option rather than it being an automatic right for a taxpayer when the 20-year period has expired and they will need to be convinced that there has been no tax loss caused by anti-avoidance.

In order to revoke an option, you must notify HMRC that you are revoking it using form VAT1614J but you cannot revoke an option to tax retrospectively, so the earliest date from which an option can be revoked is the date on which the notification to revoke is made. If you do not notify HMRC that you are revoking the option, then it remains in place and all supplies remain taxable until such time as you do notify them.

Here to HelpContact FPM

The team at FPM are here to help with all your finance and tax queries. If you would like more assistance in relation to revoking an Option to Tax, our team of VAT specialists are on hand to identify the pros and cons specific to your circumstances. Simply contact our Tax Team.

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The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies. 

Contact Malachy

Malachy McLernon / Tax Director


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