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How to check your ‘option to tax’

Posted: November 2, 2015

Since 1 August 1989 those that hold an interest in a commercial property or land have had the ability to remove the usual VAT exemption that would apply to any use or disposal of that property or land – this was always formally referred to as the ‘election to waive exemption’, but more commonly known as the ‘option to tax’.

The making of the option is a relatively straightforward exercise in itself – it basically meant that a decision was taken by the interest holder to remove the exemption. Equally straightforward is the notification of that decision to HMRC, involving completion of the relevant HMRC online form.

The tricky part of the process is the actual making of the decision to opt and whether it is allowable (there are restrictions), practical (the charging of VAT can be an onerous issue) and beneficial (the amount of VAT on expenditure that may be recovered as a result of opting).

Having made the option to tax, it effectively lasts for 20 years, and as the 20th anniversary of the introduction of the option passed in 2009 there are many opted interests in properties and pieces of land that have remained in place beyond their envisaged shelf life.

One problem that crops up increasingly is the lack of any supporting evidence recording the fact that such an option was made all those years ago, as the passing of time and updating and replacement of systems and personnel mean that such decisions and documentation can disappear into the distance.

“Never fear” shouts the intrepid business owner “I’ll just ask HMRC to confirm what they were told all those years ago”. “Not so fast” replies the person who has tried to do just that “HMRC are currently taking more than 50 working days to respond to such requests!”

This can cause problems, such as when a property transaction is about to complete and the vendor wants to charge 20% VAT on top of the asking price. It is perfectly normal for the purchaser to want to see evidence that this is a legitimate charge, in other words that the vendor has opted to tax.

Without that evidence, it is unlikely that anyone would feel confident in paying over what could be a substantial amount. Even when the property forms part of a going concern business that is being transferred and no VAT is being charged, it is vital to establish whether the property has been opted, as this can be a decisive element of whether VAT is actually chargeable on the transaction or not.

Good record keeping is easy for others to preach about, but with the best will in the world paperwork does get mislaid and memories fade for even the most efficient of businesses. The lengthy delays in obtaining the confirmation of decisions made many years ago can be hugely costly and may cause proposed transactions to fail.

If you’re not sure if there is an option to tax applied to commercial land or property owned by your business, then now might be a good time to have a quick look back and see whether you have the relevant paperwork available, and if necessary place your request for help with HMRC in their lengthy queue.