VAT planning using the option to tax | The Indicator Podcast

Description

The option to tax can be a valuable VAT planning tool, but it also comes with significant risks and compliance considerations. In this free CPD webinar, we explore how the option to tax works, when it can be beneficial, and the key issues advisors need to consider when advising clients on commercial property transactions.

Whether you're supporting property investors, developers, landlords, or business owners, this session provides practical guidance on navigating one of the most complex areas of VAT.

In this webinar, we'll cover:

What the option to tax is and when it applies
The benefits and drawbacks of opting to tax property
Common VAT planning opportunities
Disapplication rules and anti-avoidance provisions
Practical examples and case studies
Key compliance and record-keeping requirements
Recent developments and common advisor pitfalls

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Transcription

Andy Rainford
Good afternoon everyone and thank you very much for joining us for today's webinar which today is on the option to tax, practical issues, pitfalls and planning opportunities. Land and property remains one of the most complex areas of VAT and few topics generate more advisor queries than the option to tax. On the face of it the rules can appear relatively straightforward, a decision to convert an exempt property supply into a taxable one. In practice, however, the implications can extend for decades and affect everything from input tax recovery and tenant negotiations, through to capital goods scheme adjustments, transfer of going concern, planning and future disposals. For advisors, the challenge is often not understanding what the option to tax does, but understanding when it should be used, when it should be avoided and where the hidden traps lie. Today's session is designed to help you with exactly that. For those of you I haven't met before, I'm Andy Rainford. a Chartered Tax Advisor and one of the in-house technical editors here at Tax Essentials for Advisors. I'm delighted to be joined once again by my colleague Rachel Brown. Rachel's also a Chartered Tax Advisor and a member of the technical editorial team here. Between us, we spend our days immersed in tax legislation, HMRC practice, with a particular focus on helping advisors navigate complex technical areas with confidence. We're also very pleased to be joined today by our guest panellist, Ed Thompson. Ed is a Chartered Tax Advisor, so three of us for the price of one today, and also a Chartered Accountant. More significantly for today, he's a specialist VAT advisor and trainer with extensive experience advising businesses, accountants and professional firms on complex VAT matters. Through his work at VATSkills, he has developed a reputation for making technically challenging areas of VAT accessible and practical, helping advisors understand not only what the legislation says, but how it applies in real-world situations. Ed has taught on both the ATT and CTA qualifications and has lectured for professional bodies. Property VAT is an area where seemingly small decisions can have very significant financial consequences and Ed regularly advises on issues including the option to tax, land and property transactions, capital goods scheme implications, partial exemption and VAT planning opportunities. He's also a very highly regarded trainer and speaker, known for delivering practical and engaging guidance on complex topics. We're therefore delighted to have him with us today. Between the three of us, the aim is to provide a technically robust but practical discussion that focuses on the issues advisors encounter most frequently in practice, the areas where mistakes commonly arise, and the planning points that can make a significant difference for your clients. So Ed, welcome and thank you for joining us today. I guess to paraphrase Dylan Thomas, let's begin at the beginning. and perhaps we should start with the fundamentals. So can you just very quickly explain what is the option to tax?
Edd Thompson
Thank you Andy and hello everybody. Yeah absolutely. So at its simplest I guess the option to tax is a choice to take what would normally be an exempt sale or supply of land or property and to make it taxable at the standard rate instead. So in other words rather than making a VAT exempt supply, your elect... or opting to charge back on that interest in the property. And in practice, we're normally looking at bare land or commercial property. So an option to tax doesn't actually affect, it doesn't change the position for residential property, which is one of the reasons why you also need to look carefully at mixed use buildings. So, for example, you own a property with a shop on the ground floor and a flat above it, and you rent that out, you rent out both the shop and the flat and you opt to tax. The option to tax would apply to the commercial element, so you charge back on your commercial rents, but it won't override the normal VAT exempt treatment of the residential rents from the flat. And probably the other key point to know is that this option to tax, it isn't just a one-off decision for a single transaction. Once you've... opted to tax your interest in a property, the decision is going to affect all future supplies of that property. So that will include things like rental income, but also the sale of a freehold, the grant of a lease. So although the basic concept sounds straightforward, turning rents from that exempt to taxable, the practical consequences can be long lasting and pretty significant as well.
Rachael Brown
So, Ed, one of the things advisors do struggle with is understanding why a client would want to do that in the first place. So could you run through the key commercial considerations, please?
Edd Thompson
Yeah, of course. So in practice, the main reason why someone would want to opt to tax is normally going to be that recovery, input tax recovery. So the basic position is that if you kind of think about VAT principles, if a business makes exempt sales or exempt supplies, it normally can't recover any of the VAT on related costs. So if a property is facing kind of... significant VAT on acquisition costs, construction costs or refurbishment costs, opting to tax can be a way of basically bringing those costs into taxable use and improving VAT recovery. And that kind of ties in with this concept of partial exemption that some of you may be aware of. If you leave the property exempt and you, for example, you rent out on a VAT exempt basis, the VAT on costs won't be recoverable. By opting, you are proving the VAT recovery position because the rents, the sale proceeds, they become taxable supplies instead. And that can make a real difference, obviously, to the overall commercial cost of a project. But the value of the benefit that we're talking about here does really depend on how much VAT on costs is actually at stake. So If you've had a significant capital expense, so you've done a major refurbishment or a major redevelopment, the VAT on cost, the input tax, could be considerable and the upside of opting to tax might be massive. But if you contrast that with the situation where the property has just been going on for a time and has involved very little VAT bearing costs, the commercial case then for opting can be much, much weaker. So In practice, you have to kind of weigh up the scale of the recoverable input tax against the wider impact, the wider consequences of charging VAT going forward.
Andy Rainford
Yeah, so it sounds like it can be very beneficial in the right circumstances. But I guess as with most things in VAT and tax in general, there's probably another side to the story. So can you tell us about the downsides of using the option to tax?
Edd Thompson
Yeah, yeah, so. There is this balancing exercise, right? So the benefit of opting to tax is that improved VAT recovery, as I say. The downside, the main downside at least, is that you're now having to charge VAT at the standard rate on supplies of that property like rent that otherwise would have been VAT exempt. So the question then becomes whether the customer, your tenant on the other side of the transaction, can actually recover the VAT. Because if they can't, then that additional VAT becomes a real cost, a real additional cost in that supply chain. And that means that the size of the downside depends on commercial factors. So if you've got a fully taxable tenant, by which I mean a tenant who can recover all of their VAT on costs, they may just see being charged VAT on rent as largely neutral. But if I have an exempt or partly exempt business that sits in that property that I'm renting, then they're actually going to see a direct increase in their occupation costs. So from an advisor's perspective, you always need to look at the VAT profile of the intended tenant or purchaser or recipient, not just the landlord or the supplier's VAT recovery position. And it's probably worth also just briefly mentioning as well that you also need to think about what is the contractual position so If the contract, the lease or whatever it is, provides that that can be charged in addition to the stated rent, then that might be fine from my point of view. I might be able to just pass on the cost of that rent. But if the rent is VAT inclusive, then if I decide to opt to tax, then as the landlord, I might actually end up having to swallow that VAT cost to bear that VAT cost.
Rachael Brown
So the easiest way to bring that to life is probably with a few examples, if you don't mind, Ed, can you give us some practical scenarios where opt-in to tax may or may not make commercial sense for a client?
Edd Thompson
Yeah, sure. So it's probably good to give a couple of contrasting examples where it does and doesn't make sense. So take a case where you've got a client and they've done a massive refurbishment of a mixed-use property. So part of the building's being used in the client's own business. And let's say for the sake of argument, it's a fully taxable business. They can usually recover all of their BAT. But part is being let to someone else. And let's say that someone else is a... a VAT registered consultancy firm that charges that on all of their services. Now, in that situation, opting to tax might make very good commercial sense because there is a lot of input taxes, a lot of VAT recovery at stake on the refurbishment costs. And the tenant is likely to be able to recover any VAT that I charge to them on the rent. So the option may improve that recovery for me as the landlord without creating an additional cost for I hope. the occupier because they can just recover it through their own VAT return. But then contrast that with a property where, as I say, there's been very little VAT bearing expenditure and let's say the tenant or the intended tenant is an insurance company and insurance companies make largely VAT exempt supplies because there's an exemption for insurance and in that case the benefit of VAT recovery is is limited because I haven't actually incurred very much VAT on my costs of the building but the VAT charge on the rent is going to be a real problem for the tenant because they're not going to be able to recover the VAT that I'm charging on top of my rent to them. So although in both cases there you've got commercial letting situations the right VAT answer is very fact-specific and is going to depend completely on the kind of profile of the of the tenant, the customer and how much VAT recovery is at stake.
Andy Rainford
Yeah you've touched there on insurance companies specifically but I guess there's an impact on exempt businesses that perhaps we need to consider. Are there particular types of tenants where an option to tax can create real difficulties that it might be useful for our watchers to look out for?
Edd Thompson
Yeah so obviously I gave the example there of an insurance company but Essentially, the tenants most likely to be adversely affected are those who aren't able to recover their VAT in full. So that includes businesses that are unregistered for that, includes businesses that are partly exempt, or it includes kind of businesses and organisations like charities carrying on significant non-business activities. Because for those who occupy it, the VAT charged on the rent, if it's rent, is... much more likely to become a real additional cost for them. So in practice, in terms of kind of tangible sectors, so insurance, we've already mentioned, financial services, betting and gaming, healthcare, education and charities, parts of the real estate and housing world. And because those kinds of organisations all have partial exemption issues, some of them have non-business issues. And then small businesses also, because if they're not VAT registered at all, they're not going to be able to recover VAT on costs. But probably also worth noting that it's not just these kinds of businesses and organisations that are kind of a classic partly exempt or unregistered businesses. It can also impact on people in other sectors you don't necessarily typically associate with being largely exempt. So if you've got kind of. professional and retail businesses where only part of the income is exempt so you might have an accountancy practice but it has a corporate finance arm that makes some exempt sales or a law firm that also has some VAT exempt interest income or a retailer that also earns some exempt insurance or finance commission so the important thing is that it's not just what industry the tenant's in but whether the specific VAT profile of that particular customer is going to make VAT on top of the rent a problem.
Rachael Brown
So it sounds like this isn't just a short-term decision based on that initial VAT recovery you mentioned. It sounds like it could impact the property's future markability as well because tenants do change from time to time.
Edd Thompson
Yeah that's definitely right and that's one of the reasons why if you're writing on this you need to make sure that you're seeing the options taxed, not just as a kind of snapshot decision in time, it's a long-term decision. So in most cases, once you've made this option, you can't actually take it back, you can't revoke it for 20 years. So the effects are going to extend well beyond the transaction or the set of transactions that first prompted the decision. And there are a few routes out of it. There's a cooling off period of six months, but. that only actually applies if no that's been charged or claimed in the meantime and beyond that normally that is only going to be possible to revoke get rid of that option to tax after 20 years although there are some some more specific kind of nuanced cases where you where you can so you need to think about not just what's going on today what you might want the property to do in future what the likely market for that property is it might be that at the moment you're renting it out to an accountant but in future you know that the majority of the people that would be interested in that is insurance companies and that all has to kind of factor into your decision because you know that you've got this long-term decision that you're making okay so let's say i'm an advisor and i've got a client who's come to me um They're looking to either rent a commercial building or buy a commercial building that there is an option to tax on. They can't currently recover the VAT for whatever reason. Is there anything that they can do to protect themselves? So in most cases, there's nothing that they can do to actually stop the effect of that option to tax. So generally, although there are some exceptions which they'll come to, a tenant or purchase, they can't force that option to tax to. disappear. So if that seller has validly opted, that is their VAT position. What they can do, though, is try to protect themselves commercially. So one obvious point is via the contract. If the parties agree that the rent or the purchase price is VAT inclusive rather than VAT exclusive, then the tenant or the buyer knows that the seller or the landlord can't just decide to up to tax and then add that on to the the price without their agreement and there are some limited circumstances where that that option to tax can be disapplied so that classic examples are where you've got a property that's intended for to be used for residential purpose or you've got a registered housing association that's buying the property in those circumstances the customer might be able to give a certificate essentially so that that's not charged so that the option to tax no longer has effect that this application as we call it though is something that has to be done before you've kind of agreed on price and it's not always something that's going to be very welcome from the seller's point of view because if you think about it they've opted to touch for a reason and the reason that they've opted to tax is for their own VAT recovery. So in practice if they end up then making exempt rather than standard rated supplies, then they may have a worse fat recovery position and they may look to then reflect that in a higher rent that they're agreeing with you. So it all kind of wraps up together and there are things that you definitely need to be thinking about, but there's no kind of golden silver bullet for disapplying an option to tax in all circumstances.
Rachael Brown
So you've mentioned the disapplication there, but I know there's also anti-avoidance provisions that can override the option. Could you talk us through those?
Edd Thompson
Yeah, and that is something that everyone needs to have on their radar, because these anti-avoidance rules that can disapply the option to tax, even though you don't want to, apply in situations where people don't always expect it. And the way that the legislation works in this area is quite sort of... mechanical. So it's a bit turgid. I'm not going to go into like the huge detail on it. But what I should say is that it can apply in situations where no one, there's no sort of avoidance motive going on at all. It just is a sequence of conditions are met and therefore this disapplication applies and your options tax no longer has effect and it can cause that recovery issue. Normally, the risk area is when you've got a property that's going to be occupied by a business or an organisation who doesn't have the right to recover all of that. One of those partly exempt organisations, for example. And there are certain connections between the person who is supplying the property, granting the interest in the property and the person that's occupying it. But those connections can sometimes seem a bit tenuous from the kind of non-vap. specialist's perspective and because of the sort of mechanical way that those provisions work one of the areas people can get caught out is if they only just look at the commercial intention and say oh we're not trying to avoid VAT in any way here and think well those dis-application rules can't kick in. A good example is tenant contributions or funding arrangements which sometimes despite being quite normal things can actually cause the dis-application rules to kick in.
Andy Rainford
Another thing I guess is whenever land and property transactions and VAT comes up in conversation inevitably advisors will hear the words capital good scheme. Can you just explain what that is and why it matters in these situations?
Edd Thompson
Yeah so capital good scheme is one of those kind of key VAT risk areas that as VAT advisors we're always thinking about the capital good scheme and broadly where we're interested in it at least at the moment is it applies to land and buildings where the VAT exclusive cost of that land and building is more than £250,000 plus VAT and that includes kind of the purchase of a building itself like the freehold of the building sometimes you'll be charged VAT on that But it also includes if you engage in kind of major refurbishment or redevelopment expenditure and you capitalise more than £250,000 or close to that, you want to be looking at the capital good scheme as potentially applying. There are some plans to change the threshold of that £250,000 to £600,000 in the near future. But at the moment, we don't know quite how near because HMRC has kind of slightly delayed their implementation of the changes. there and once an asset, a refurbishment or the purchase of a property falls within this capital goods scheme, what you have to do is look at how that property is being used over a period of time and that's usually for land and property over a 10-year period and what you're doing is looking at any changes to the taxable use. of that property in that 10-year period and if it changes we're potentially going to have to make some adjustments to how much VAT we initially recovered on that asset. It becomes especially important if you're looking at the sales of property during that kind of 10-year window because if you're not careful about it and you sell something in a 10-year window which is a capital asset and you hadn't really thought about it, then you can end up crystallising a massive capital goods scheme adjustment in HMRC's favour. And that catches taxable businesses, like fully taxable businesses out all the time. They just recover loads of VAT and then they sell their property without opting to tax. And suddenly they've got a massive capital goods scheme adjustment property. But the option to tax then can come in as a really crucial planning. tool at that stage. If the sale can be made taxable rather than exempt, that prevents an adverse adjustment and it could even give rise to a favourable adjustment. So really important that the capital goods scheme and the option to tax are looked at together, particularly with kind of one-off property transactions, because getting it wrong can be really expensive and you can't turn back the clock once you've done something in this area.
Rachael Brown
Yeah. Well, That's certainly an area where problems arise. Have you got any other practical tips about any traps or pitfalls that advisors should have on their radar?
Edd Thompson
So capital goods scheme is definitely a major one, but other ones include that anti-avoidance dis-application that we touched on earlier, because those rules work so mechanically. They can sometimes switch off an option to tax where the property is being used by a partly exempt occupier and that can cause real issues for that recovery and another one that i'd point out is this de-registration trap. So if a person has opted to tax some property and then later they de-register for VAT, sometimes there can be a deemed output tax, a deemed VAT supply, so a deemed charge to VAT on that property if it is still on hand at the point that you de-register. And this is something that HMRC is all over. So if you deregister... and they have a record on file of you having an opted property, you can definitely expect questions to follow. And if you haven't accounted for VAT or haven't done what you needed to do, then you may find yourself in a bit of trouble there. But beyond that, there are, you know, practical pitfalls as well. Things like just simply ensuring that an option to tax is notified to HMRC at the right time and in the right way and things like that.
Andy Rainford
Another area that frequently generates questions around this kind of area is where we're selling a business or otherwise transferring a business from one entity to another. So a transfer of a going concern, I guess. How does the auction of tax fit into those kind of scenarios?
Edd Thompson
So with a transfer of a going concern, what a transfer of a going concern is from a VAT perspective. If you sell a business or a distinct... part of a business and certain conditions are met usually this is a sale of trade and assets rather than a sale of shares if certain conditions are met then that is a transfer of a going concern for that purposes or a togc as we call it for sure and if those conditions are met then there is a kind of mandatory treatment that it is outside the scope of vat so it's it's almost like a nothing for vat purposes you don't charge vat but it doesn't adversely affect your vat recovery. and often that is a very desirable treatment so often you want your transfer to be a TOGC that's the best one of the better treatments that you can get in a property concept that often comes up when you've got like a tenanted building being sold so if you sell a building with the benefit of an existing tenant even if they're not necessarily taking the whole building it's just some of the building. you sell it with the benefit of that existing tenant, then it may amount to a transfer of what we would refer to as a property rental business that could be a TOGC for that. It also comes up in other contexts, it could also just come up where a business is being sold and that business owns some property and an interest in that property, we could still be looking at property in the concepts of a TOGC. And where you have property in the context of a transfer of a going concern, there are special rules if the seller has opted property. So property which they've opted to tax and also certain other new commercial property. And in those cases, in order for that property to be outside the scope of the AT, included within this TOGC, the buyer needs to do. some steps so there's some planning that needs to go on before the sale so the buyer needs typically to have opted to tax before the transfer takes place and they also need to have notified hmrc of their option to tax otherwise that might end up being chargeable on that property so planning again essential here at the right time because if you don't follow the right steps at the right time, the impact can be very costly. And again, not something that can be unwound after the fact.
Rachael Brown
We've alluded a few times to notifying HMRC. So if someone does decide to opt, and I guess in that time pressured transaction of maybe selling a business as well, what does that process actually look like?
Edd Thompson
Yeah, it's a really important practical point because it's not just a decision to opt. You actually have to... notify and follow a procedure and there's a formal process that has to be followed properly. Broadly you make a decision internally to opt and then you notify HMRC of that decision and in most cases that notification needs to be made to HMRC within 30 days of the date of the option so 30 days of making that decision to opt to tax. And the normal way I would recommend doing that nowadays is by email. And you want to make sure that there's an option to tax email. You want to make sure that details of the property are kept in the kind of subject title of the email so that you have kind of proof that you provided that information to HMRC at the right time. Another point to note, though, as a kind of procedural point and tied to the actual rules is you're not automatically allowed to opt to tax something. Sometimes you are, but in some situations, particularly if there's been some kind of prior exempt use or exempt supplies of that property, you're going to need to get HMRC's prior permission before that option to tax can take effect, unless one of three automatic permission conditions is met. I'm not going to go into those conditions in depth now. They're quite sort of techie and detailed, but. It's just to remember that you may need to work through those conditions in detail before you can decide whether you're even allowed to opt a tax. And once you've decided whether you need that prior permission from HMRC, then in practical terms, you're usually using a form, which is a form VAT 1614A. And the key thing is to make sure property is clearly identified. What is it you're trying to opt and the effective date is right? And you've got that evidence of notifying because you need to be able to prove that you did notify at that particular date. And HMRC, annoyingly, unfortunately, no longer routinely confirms what options to tax they have on file for an individual taxpayer. So you've got to keep that record yourself, because if you go to HMRC and say, oh, can you give me details of which properties I've opted? These days, they will probably just tell you. No, sorry, we don't give out that information.
Andy Rainford
Okay, me being the cynic that I am, I'm thinking of a situation where perhaps because of time and work pressures, we've made a decision that we're going to opt to tax a particular building, but it transpires years later that we didn't notify HMRC, for example. So let's take that scenario. So let's say we discover years after we've made the decision, we've had the meeting. the paperwork wasn't completed properly. Is there any way back?
Edd Thompson
So if the paperwork wasn't completed, then potentially yes, but only in a limited sense. So HMRC does have these discretionary powers to accept a belated notification of the option to tax, so a notification that comes after that normal 30-day window. But they're only going to do that if an option to tax was... genuinely made at the relevant time so the the decision was made in the business but it just was not properly notified what you can't do is reinvent the past and make a fresh decision now and just say that it took effect years earlier because it is helpful to you from a tax perspective so generally retrospective option not allowed but a belated notification could be allowed but you're relying on HMRC's discretion. In order to get that... discretion in practice it normally means that you'd have to show evidence that the business behaved consistently with having opted to tax at the time so they charged VAT on rents and sale proceeds they accounted for that VAT over to HMRC recovered VAT on costs on the basis that it was opted and HMRC basically says to kind of paraphrase a bit that they'll normally look for either direct documentary evidence of the original decision that might be things like minutes from the time and things like that or evidence of the the VAT treatment applied together that's kind of consistent with having to opt to the tax together with a written declaration from like a responsible person confirming that the decision had been made at that time so there is a potential route back in that that circumstance you mentioned Andy but it's it does rely on HMRC's discretion and So, yeah, so you could have a situation where you got a landlord always charged back on invoices, but never sent in the notification form. Might be possible to give a belated notification, but not something that you should assume would be straightforward. And it's just better not to be in that situation in the first place if you can possibly avoid it.
Rachael Brown
Thanks, Ed, that's really helpful. Before we move on to audience questions. Could you go over some common misconceptions that advisors encounter in this area, please?
Edd Thompson
Yeah, sure. So one of the misconceptions that I often get is someone gets charged VAT on a property and they think that that means that the property itself is opted so that when they maybe sublet that property, that they should charge VAT as well. But that's not quite right. So you only ever... opt to tax your own interest in a property. There's no such thing as an opted property, you only opt an interest in a property. So my landlord might have opted to tax and charged me that on rents, but unless I also opt to tax, then I won't charge VAT on my rents when I'm subletting to someone else. Now I might want to opt to tax in that situation, because if I don't opt to tax, I'm being charged VAT on rents and that's being linked to my onward subletting to a tenant, which is exempt, and that VAT becomes a cost. Whereas if I opt to tax, then I can potentially recover that VAT on cost. So one of the key misconceptions is the idea that there is such a thing as an opted property. There isn't. You opt to tax your own interest in land and buildings. Another misconception that the option to tax can affect every kind of building. We already saw earlier on that example of a kind of a flat on one floor and a commercial building, a shop on another floor. The option to tax is normally going to have no effect over residential buildings. So I opt to tax one building. It's got a flat in one floor, a commercial building in the other floor. Only the commercial rents become subject to that. the residential rents remain VAT exempt despite the fact that that building is opted. And the other one, I don't know whether I'd call it a misconception, but it's certainly something that people don't necessarily always realise, is that there is an interaction, an important interaction between options tax, VAT, and stamp duty land tax, SDLT. And generally, stamp duty land tax or SDLT is charged on the VAT inclusive consideration. So a factor in my decision making, as well as looking at the kind of pure VAT position as to whether opt to tax is also what are the knock on effects going to be for other areas, particularly SDLT, because I might opt to tax and get a little bit more VAT recovery on costs, but that might have in turn the effect of increasing the stlt liability when i sell this building that might kind of wipe out any benefit of that recovery in that supply chain so all of these things have to be considered and interact together okay
Andy Rainford
i think that's uh that does it for the for the main um the main session the main uh questions from from me and Rachel. So if we move on to the Q&A, I think it's been relatively quiet, but I do have a question that was sent in ahead of time, if you don't mind indulging me. So I think the questions, yeah, so it's surrounded somebody that's looking at potentially buying a building that has been opted or an interest that's been opted. They can't recover the tax because they're exempt. They're a wholly exempt business. and but i guess this would affect partially exempt businesses as well um would it be prudent as part of the sort of contractual negotiations to ask the seller when they made the option to tax and potentially revoke it if it was if it was you know beyond the 20 years is that a potential solution in those kind of scenarios that's definitely something to think about that's definitely something to think about so um that in that scenario that is going to be a problem you've got and exempt.
Edd Thompson
a tenant or an exempt purchaser of the building uh if they incur a significant amount of that on the purchase of the building that is going to be linked if they're going to use this building in their business it's going to be linked to that exempt activity and they're not going to be able to recover a lot of that vat or maybe not all of that vat and so if you can get rid of the options to tax, that would be a really good thing. And it may be that... that option to tax has been in place for a long time and 25 years ago they put that option in tax in place because they wanted to do some VAT recovery at that point in time but since that point in time there hasn't actually been a significant amount of VAT incurred on on costs and there wouldn't be a significant clawback of VAT recovery were they to disapply that option were they to revoke that options tax but as you say you can only revoke it after that 20 year period you So they need to understand at what point that option to tax. did go in might also be worth thinking about well what are they going to do what what is this exempt business going to do with the with the property are they going to use it all themselves or might they sublet some of it if they're subletting some of it could they think about opting to tax themselves and then they might be able to get at least partial recovery on the VAT cost so there's a number of different angles that they might want to consider
Andy Rainford
Yeah, I mean, I suppose this is it potentially something that a taxable business might want to look at as well, purely for cash flow reasons? As you say, there's the SDLT problem as well, isn't there? So,
Edd Thompson
yeah, so it's not. Yeah, exactly. It's not just it's not just something that's confined to two exempt businesses. I think the SDLT issue is a big one there. Right. So you're potentially looking at a 20 percent uplift in the price paid, which is that. the VAT and then you work out the STLT on that so that can be a significant cost as well and yeah as you say cash flow can cause real problems if you have to fund the VAT in the interim and then you can't recover it until three months down the line say that could be something that people just aren't able to fund and they haven't sort of factored into their decision making at that time. So being able to revoke it can sort of clean up that issue.
Andy Rainford
Excellent. Okay, well, I think that's all the questions we've got. There's none in the live Q&A, so probably a good place to finish there. But before we do, I'd like to just say a few thank yous in the usual way. So firstly to Rachel for co-hosting, and especially to Ed for sharing his expertise and practical experience with us. Land and property VAT is an area that many advisors find challenging, and your insights have been incredibly valuable today. And of course, thank you to those of you that have joined us live and to those that are watching later on on the recording for your engagement throughout the session. We know how busy professional practice can be, so we genuinely do appreciate you taking the time to spend with us this afternoon. Hope it's been helpful to demystify some of the complexities surrounding the option to tax and provided you with some practical points you can take back into your own client work. As always, if there are any questions that pop up after the event, please do get in touch with us and we'll do our best to follow up with you. We'll be announcing details of the next webinar shortly, so please do keep an eye out for those communications from us. Thanks again for joining us and we'll look forward to seeing you again in the next session. Bye for now.

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Whether you're supporting property investors, developers, landlords, or business owners, this session provides practical guidance on navigating one of the most complex areas of VAT.

In this webinar, we'll cover:

What the option to tax is and when it applies
The benefits and drawbacks of opting to tax property
Common VAT planning opportunities
Disapplication rules and anti-avoidance provisions
Practical examples and case studies
Key compliance and record-keeping requirements
Recent developments and common advisor pitfalls

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Transcription

Andy Rainford
Good afternoon everyone and thank you very much for joining us for today's webinar which today is on the option to tax, practical issues, pitfalls and planning opportunities. Land and property remains one of the most complex areas of VAT and few topics generate more advisor queries than the option to tax. On the face of it the rules can appear relatively straightforward, a decision to convert an exempt property supply into a taxable one. In practice, however, the implications can extend for decades and affect everything from input tax recovery and tenant negotiations, through to capital goods scheme adjustments, transfer of going concern, planning and future disposals. For advisors, the challenge is often not understanding what the option to tax does, but understanding when it should be used, when it should be avoided and where the hidden traps lie. Today's session is designed to help you with exactly that. For those of you I haven't met before, I'm Andy Rainford. a Chartered Tax Advisor and one of the in-house technical editors here at Tax Essentials for Advisors. I'm delighted to be joined once again by my colleague Rachel Brown. Rachel's also a Chartered Tax Advisor and a member of the technical editorial team here. Between us, we spend our days immersed in tax legislation, HMRC practice, with a particular focus on helping advisors navigate complex technical areas with confidence. We're also very pleased to be joined today by our guest panellist, Ed Thompson. Ed is a Chartered Tax Advisor, so three of us for the price of one today, and also a Chartered Accountant. More significantly for today, he's a specialist VAT advisor and trainer with extensive experience advising businesses, accountants and professional firms on complex VAT matters. Through his work at VATSkills, he has developed a reputation for making technically challenging areas of VAT accessible and practical, helping advisors understand not only what the legislation says, but how it applies in real-world situations. Ed has taught on both the ATT and CTA qualifications and has lectured for professional bodies. Property VAT is an area where seemingly small decisions can have very significant financial consequences and Ed regularly advises on issues including the option to tax, land and property transactions, capital goods scheme implications, partial exemption and VAT planning opportunities. He's also a very highly regarded trainer and speaker, known for delivering practical and engaging guidance on complex topics. We're therefore delighted to have him with us today. Between the three of us, the aim is to provide a technically robust but practical discussion that focuses on the issues advisors encounter most frequently in practice, the areas where mistakes commonly arise, and the planning points that can make a significant difference for your clients. So Ed, welcome and thank you for joining us today. I guess to paraphrase Dylan Thomas, let's begin at the beginning. and perhaps we should start with the fundamentals. So can you just very quickly explain what is the option to tax?
Edd Thompson
Thank you Andy and hello everybody. Yeah absolutely. So at its simplest I guess the option to tax is a choice to take what would normally be an exempt sale or supply of land or property and to make it taxable at the standard rate instead. So in other words rather than making a VAT exempt supply, your elect... or opting to charge back on that interest in the property. And in practice, we're normally looking at bare land or commercial property. So an option to tax doesn't actually affect, it doesn't change the position for residential property, which is one of the reasons why you also need to look carefully at mixed use buildings. So, for example, you own a property with a shop on the ground floor and a flat above it, and you rent that out, you rent out both the shop and the flat and you opt to tax. The option to tax would apply to the commercial element, so you charge back on your commercial rents, but it won't override the normal VAT exempt treatment of the residential rents from the flat. And probably the other key point to know is that this option to tax, it isn't just a one-off decision for a single transaction. Once you've... opted to tax your interest in a property, the decision is going to affect all future supplies of that property. So that will include things like rental income, but also the sale of a freehold, the grant of a lease. So although the basic concept sounds straightforward, turning rents from that exempt to taxable, the practical consequences can be long lasting and pretty significant as well.
Rachael Brown
So, Ed, one of the things advisors do struggle with is understanding why a client would want to do that in the first place. So could you run through the key commercial considerations, please?
Edd Thompson
Yeah, of course. So in practice, the main reason why someone would want to opt to tax is normally going to be that recovery, input tax recovery. So the basic position is that if you kind of think about VAT principles, if a business makes exempt sales or exempt supplies, it normally can't recover any of the VAT on related costs. So if a property is facing kind of... significant VAT on acquisition costs, construction costs or refurbishment costs, opting to tax can be a way of basically bringing those costs into taxable use and improving VAT recovery. And that kind of ties in with this concept of partial exemption that some of you may be aware of. If you leave the property exempt and you, for example, you rent out on a VAT exempt basis, the VAT on costs won't be recoverable. By opting, you are proving the VAT recovery position because the rents, the sale proceeds, they become taxable supplies instead. And that can make a real difference, obviously, to the overall commercial cost of a project. But the value of the benefit that we're talking about here does really depend on how much VAT on costs is actually at stake. So If you've had a significant capital expense, so you've done a major refurbishment or a major redevelopment, the VAT on cost, the input tax, could be considerable and the upside of opting to tax might be massive. But if you contrast that with the situation where the property has just been going on for a time and has involved very little VAT bearing costs, the commercial case then for opting can be much, much weaker. So In practice, you have to kind of weigh up the scale of the recoverable input tax against the wider impact, the wider consequences of charging VAT going forward.
Andy Rainford
Yeah, so it sounds like it can be very beneficial in the right circumstances. But I guess as with most things in VAT and tax in general, there's probably another side to the story. So can you tell us about the downsides of using the option to tax?
Edd Thompson
Yeah, yeah, so. There is this balancing exercise, right? So the benefit of opting to tax is that improved VAT recovery, as I say. The downside, the main downside at least, is that you're now having to charge VAT at the standard rate on supplies of that property like rent that otherwise would have been VAT exempt. So the question then becomes whether the customer, your tenant on the other side of the transaction, can actually recover the VAT. Because if they can't, then that additional VAT becomes a real cost, a real additional cost in that supply chain. And that means that the size of the downside depends on commercial factors. So if you've got a fully taxable tenant, by which I mean a tenant who can recover all of their VAT on costs, they may just see being charged VAT on rent as largely neutral. But if I have an exempt or partly exempt business that sits in that property that I'm renting, then they're actually going to see a direct increase in their occupation costs. So from an advisor's perspective, you always need to look at the VAT profile of the intended tenant or purchaser or recipient, not just the landlord or the supplier's VAT recovery position. And it's probably worth also just briefly mentioning as well that you also need to think about what is the contractual position so If the contract, the lease or whatever it is, provides that that can be charged in addition to the stated rent, then that might be fine from my point of view. I might be able to just pass on the cost of that rent. But if the rent is VAT inclusive, then if I decide to opt to tax, then as the landlord, I might actually end up having to swallow that VAT cost to bear that VAT cost.
Rachael Brown
So the easiest way to bring that to life is probably with a few examples, if you don't mind, Ed, can you give us some practical scenarios where opt-in to tax may or may not make commercial sense for a client?
Edd Thompson
Yeah, sure. So it's probably good to give a couple of contrasting examples where it does and doesn't make sense. So take a case where you've got a client and they've done a massive refurbishment of a mixed-use property. So part of the building's being used in the client's own business. And let's say for the sake of argument, it's a fully taxable business. They can usually recover all of their BAT. But part is being let to someone else. And let's say that someone else is a... a VAT registered consultancy firm that charges that on all of their services. Now, in that situation, opting to tax might make very good commercial sense because there is a lot of input taxes, a lot of VAT recovery at stake on the refurbishment costs. And the tenant is likely to be able to recover any VAT that I charge to them on the rent. So the option may improve that recovery for me as the landlord without creating an additional cost for I hope. the occupier because they can just recover it through their own VAT return. But then contrast that with a property where, as I say, there's been very little VAT bearing expenditure and let's say the tenant or the intended tenant is an insurance company and insurance companies make largely VAT exempt supplies because there's an exemption for insurance and in that case the benefit of VAT recovery is is limited because I haven't actually incurred very much VAT on my costs of the building but the VAT charge on the rent is going to be a real problem for the tenant because they're not going to be able to recover the VAT that I'm charging on top of my rent to them. So although in both cases there you've got commercial letting situations the right VAT answer is very fact-specific and is going to depend completely on the kind of profile of the of the tenant, the customer and how much VAT recovery is at stake.
Andy Rainford
Yeah you've touched there on insurance companies specifically but I guess there's an impact on exempt businesses that perhaps we need to consider. Are there particular types of tenants where an option to tax can create real difficulties that it might be useful for our watchers to look out for?
Edd Thompson
Yeah so obviously I gave the example there of an insurance company but Essentially, the tenants most likely to be adversely affected are those who aren't able to recover their VAT in full. So that includes businesses that are unregistered for that, includes businesses that are partly exempt, or it includes kind of businesses and organisations like charities carrying on significant non-business activities. Because for those who occupy it, the VAT charged on the rent, if it's rent, is... much more likely to become a real additional cost for them. So in practice, in terms of kind of tangible sectors, so insurance, we've already mentioned, financial services, betting and gaming, healthcare, education and charities, parts of the real estate and housing world. And because those kinds of organisations all have partial exemption issues, some of them have non-business issues. And then small businesses also, because if they're not VAT registered at all, they're not going to be able to recover VAT on costs. But probably also worth noting that it's not just these kinds of businesses and organisations that are kind of a classic partly exempt or unregistered businesses. It can also impact on people in other sectors you don't necessarily typically associate with being largely exempt. So if you've got kind of. professional and retail businesses where only part of the income is exempt so you might have an accountancy practice but it has a corporate finance arm that makes some exempt sales or a law firm that also has some VAT exempt interest income or a retailer that also earns some exempt insurance or finance commission so the important thing is that it's not just what industry the tenant's in but whether the specific VAT profile of that particular customer is going to make VAT on top of the rent a problem.
Rachael Brown
So it sounds like this isn't just a short-term decision based on that initial VAT recovery you mentioned. It sounds like it could impact the property's future markability as well because tenants do change from time to time.
Edd Thompson
Yeah that's definitely right and that's one of the reasons why if you're writing on this you need to make sure that you're seeing the options taxed, not just as a kind of snapshot decision in time, it's a long-term decision. So in most cases, once you've made this option, you can't actually take it back, you can't revoke it for 20 years. So the effects are going to extend well beyond the transaction or the set of transactions that first prompted the decision. And there are a few routes out of it. There's a cooling off period of six months, but. that only actually applies if no that's been charged or claimed in the meantime and beyond that normally that is only going to be possible to revoke get rid of that option to tax after 20 years although there are some some more specific kind of nuanced cases where you where you can so you need to think about not just what's going on today what you might want the property to do in future what the likely market for that property is it might be that at the moment you're renting it out to an accountant but in future you know that the majority of the people that would be interested in that is insurance companies and that all has to kind of factor into your decision because you know that you've got this long-term decision that you're making okay so let's say i'm an advisor and i've got a client who's come to me um They're looking to either rent a commercial building or buy a commercial building that there is an option to tax on. They can't currently recover the VAT for whatever reason. Is there anything that they can do to protect themselves? So in most cases, there's nothing that they can do to actually stop the effect of that option to tax. So generally, although there are some exceptions which they'll come to, a tenant or purchase, they can't force that option to tax to. disappear. So if that seller has validly opted, that is their VAT position. What they can do, though, is try to protect themselves commercially. So one obvious point is via the contract. If the parties agree that the rent or the purchase price is VAT inclusive rather than VAT exclusive, then the tenant or the buyer knows that the seller or the landlord can't just decide to up to tax and then add that on to the the price without their agreement and there are some limited circumstances where that that option to tax can be disapplied so that classic examples are where you've got a property that's intended for to be used for residential purpose or you've got a registered housing association that's buying the property in those circumstances the customer might be able to give a certificate essentially so that that's not charged so that the option to tax no longer has effect that this application as we call it though is something that has to be done before you've kind of agreed on price and it's not always something that's going to be very welcome from the seller's point of view because if you think about it they've opted to touch for a reason and the reason that they've opted to tax is for their own VAT recovery. So in practice if they end up then making exempt rather than standard rated supplies, then they may have a worse fat recovery position and they may look to then reflect that in a higher rent that they're agreeing with you. So it all kind of wraps up together and there are things that you definitely need to be thinking about, but there's no kind of golden silver bullet for disapplying an option to tax in all circumstances.
Rachael Brown
So you've mentioned the disapplication there, but I know there's also anti-avoidance provisions that can override the option. Could you talk us through those?
Edd Thompson
Yeah, and that is something that everyone needs to have on their radar, because these anti-avoidance rules that can disapply the option to tax, even though you don't want to, apply in situations where people don't always expect it. And the way that the legislation works in this area is quite sort of... mechanical. So it's a bit turgid. I'm not going to go into like the huge detail on it. But what I should say is that it can apply in situations where no one, there's no sort of avoidance motive going on at all. It just is a sequence of conditions are met and therefore this disapplication applies and your options tax no longer has effect and it can cause that recovery issue. Normally, the risk area is when you've got a property that's going to be occupied by a business or an organisation who doesn't have the right to recover all of that. One of those partly exempt organisations, for example. And there are certain connections between the person who is supplying the property, granting the interest in the property and the person that's occupying it. But those connections can sometimes seem a bit tenuous from the kind of non-vap. specialist's perspective and because of the sort of mechanical way that those provisions work one of the areas people can get caught out is if they only just look at the commercial intention and say oh we're not trying to avoid VAT in any way here and think well those dis-application rules can't kick in. A good example is tenant contributions or funding arrangements which sometimes despite being quite normal things can actually cause the dis-application rules to kick in.
Andy Rainford
Another thing I guess is whenever land and property transactions and VAT comes up in conversation inevitably advisors will hear the words capital good scheme. Can you just explain what that is and why it matters in these situations?
Edd Thompson
Yeah so capital good scheme is one of those kind of key VAT risk areas that as VAT advisors we're always thinking about the capital good scheme and broadly where we're interested in it at least at the moment is it applies to land and buildings where the VAT exclusive cost of that land and building is more than £250,000 plus VAT and that includes kind of the purchase of a building itself like the freehold of the building sometimes you'll be charged VAT on that But it also includes if you engage in kind of major refurbishment or redevelopment expenditure and you capitalise more than £250,000 or close to that, you want to be looking at the capital good scheme as potentially applying. There are some plans to change the threshold of that £250,000 to £600,000 in the near future. But at the moment, we don't know quite how near because HMRC has kind of slightly delayed their implementation of the changes. there and once an asset, a refurbishment or the purchase of a property falls within this capital goods scheme, what you have to do is look at how that property is being used over a period of time and that's usually for land and property over a 10-year period and what you're doing is looking at any changes to the taxable use. of that property in that 10-year period and if it changes we're potentially going to have to make some adjustments to how much VAT we initially recovered on that asset. It becomes especially important if you're looking at the sales of property during that kind of 10-year window because if you're not careful about it and you sell something in a 10-year window which is a capital asset and you hadn't really thought about it, then you can end up crystallising a massive capital goods scheme adjustment in HMRC's favour. And that catches taxable businesses, like fully taxable businesses out all the time. They just recover loads of VAT and then they sell their property without opting to tax. And suddenly they've got a massive capital goods scheme adjustment property. But the option to tax then can come in as a really crucial planning. tool at that stage. If the sale can be made taxable rather than exempt, that prevents an adverse adjustment and it could even give rise to a favourable adjustment. So really important that the capital goods scheme and the option to tax are looked at together, particularly with kind of one-off property transactions, because getting it wrong can be really expensive and you can't turn back the clock once you've done something in this area.
Rachael Brown
Yeah. Well, That's certainly an area where problems arise. Have you got any other practical tips about any traps or pitfalls that advisors should have on their radar?
Edd Thompson
So capital goods scheme is definitely a major one, but other ones include that anti-avoidance dis-application that we touched on earlier, because those rules work so mechanically. They can sometimes switch off an option to tax where the property is being used by a partly exempt occupier and that can cause real issues for that recovery and another one that i'd point out is this de-registration trap. So if a person has opted to tax some property and then later they de-register for VAT, sometimes there can be a deemed output tax, a deemed VAT supply, so a deemed charge to VAT on that property if it is still on hand at the point that you de-register. And this is something that HMRC is all over. So if you deregister... and they have a record on file of you having an opted property, you can definitely expect questions to follow. And if you haven't accounted for VAT or haven't done what you needed to do, then you may find yourself in a bit of trouble there. But beyond that, there are, you know, practical pitfalls as well. Things like just simply ensuring that an option to tax is notified to HMRC at the right time and in the right way and things like that.
Andy Rainford
Another area that frequently generates questions around this kind of area is where we're selling a business or otherwise transferring a business from one entity to another. So a transfer of a going concern, I guess. How does the auction of tax fit into those kind of scenarios?
Edd Thompson
So with a transfer of a going concern, what a transfer of a going concern is from a VAT perspective. If you sell a business or a distinct... part of a business and certain conditions are met usually this is a sale of trade and assets rather than a sale of shares if certain conditions are met then that is a transfer of a going concern for that purposes or a togc as we call it for sure and if those conditions are met then there is a kind of mandatory treatment that it is outside the scope of vat so it's it's almost like a nothing for vat purposes you don't charge vat but it doesn't adversely affect your vat recovery. and often that is a very desirable treatment so often you want your transfer to be a TOGC that's the best one of the better treatments that you can get in a property concept that often comes up when you've got like a tenanted building being sold so if you sell a building with the benefit of an existing tenant even if they're not necessarily taking the whole building it's just some of the building. you sell it with the benefit of that existing tenant, then it may amount to a transfer of what we would refer to as a property rental business that could be a TOGC for that. It also comes up in other contexts, it could also just come up where a business is being sold and that business owns some property and an interest in that property, we could still be looking at property in the concepts of a TOGC. And where you have property in the context of a transfer of a going concern, there are special rules if the seller has opted property. So property which they've opted to tax and also certain other new commercial property. And in those cases, in order for that property to be outside the scope of the AT, included within this TOGC, the buyer needs to do. some steps so there's some planning that needs to go on before the sale so the buyer needs typically to have opted to tax before the transfer takes place and they also need to have notified hmrc of their option to tax otherwise that might end up being chargeable on that property so planning again essential here at the right time because if you don't follow the right steps at the right time, the impact can be very costly. And again, not something that can be unwound after the fact.
Rachael Brown
We've alluded a few times to notifying HMRC. So if someone does decide to opt, and I guess in that time pressured transaction of maybe selling a business as well, what does that process actually look like?
Edd Thompson
Yeah, it's a really important practical point because it's not just a decision to opt. You actually have to... notify and follow a procedure and there's a formal process that has to be followed properly. Broadly you make a decision internally to opt and then you notify HMRC of that decision and in most cases that notification needs to be made to HMRC within 30 days of the date of the option so 30 days of making that decision to opt to tax. And the normal way I would recommend doing that nowadays is by email. And you want to make sure that there's an option to tax email. You want to make sure that details of the property are kept in the kind of subject title of the email so that you have kind of proof that you provided that information to HMRC at the right time. Another point to note, though, as a kind of procedural point and tied to the actual rules is you're not automatically allowed to opt to tax something. Sometimes you are, but in some situations, particularly if there's been some kind of prior exempt use or exempt supplies of that property, you're going to need to get HMRC's prior permission before that option to tax can take effect, unless one of three automatic permission conditions is met. I'm not going to go into those conditions in depth now. They're quite sort of techie and detailed, but. It's just to remember that you may need to work through those conditions in detail before you can decide whether you're even allowed to opt a tax. And once you've decided whether you need that prior permission from HMRC, then in practical terms, you're usually using a form, which is a form VAT 1614A. And the key thing is to make sure property is clearly identified. What is it you're trying to opt and the effective date is right? And you've got that evidence of notifying because you need to be able to prove that you did notify at that particular date. And HMRC, annoyingly, unfortunately, no longer routinely confirms what options to tax they have on file for an individual taxpayer. So you've got to keep that record yourself, because if you go to HMRC and say, oh, can you give me details of which properties I've opted? These days, they will probably just tell you. No, sorry, we don't give out that information.
Andy Rainford
Okay, me being the cynic that I am, I'm thinking of a situation where perhaps because of time and work pressures, we've made a decision that we're going to opt to tax a particular building, but it transpires years later that we didn't notify HMRC, for example. So let's take that scenario. So let's say we discover years after we've made the decision, we've had the meeting. the paperwork wasn't completed properly. Is there any way back?
Edd Thompson
So if the paperwork wasn't completed, then potentially yes, but only in a limited sense. So HMRC does have these discretionary powers to accept a belated notification of the option to tax, so a notification that comes after that normal 30-day window. But they're only going to do that if an option to tax was... genuinely made at the relevant time so the the decision was made in the business but it just was not properly notified what you can't do is reinvent the past and make a fresh decision now and just say that it took effect years earlier because it is helpful to you from a tax perspective so generally retrospective option not allowed but a belated notification could be allowed but you're relying on HMRC's discretion. In order to get that... discretion in practice it normally means that you'd have to show evidence that the business behaved consistently with having opted to tax at the time so they charged VAT on rents and sale proceeds they accounted for that VAT over to HMRC recovered VAT on costs on the basis that it was opted and HMRC basically says to kind of paraphrase a bit that they'll normally look for either direct documentary evidence of the original decision that might be things like minutes from the time and things like that or evidence of the the VAT treatment applied together that's kind of consistent with having to opt to the tax together with a written declaration from like a responsible person confirming that the decision had been made at that time so there is a potential route back in that that circumstance you mentioned Andy but it's it does rely on HMRC's discretion and So, yeah, so you could have a situation where you got a landlord always charged back on invoices, but never sent in the notification form. Might be possible to give a belated notification, but not something that you should assume would be straightforward. And it's just better not to be in that situation in the first place if you can possibly avoid it.
Rachael Brown
Thanks, Ed, that's really helpful. Before we move on to audience questions. Could you go over some common misconceptions that advisors encounter in this area, please?
Edd Thompson
Yeah, sure. So one of the misconceptions that I often get is someone gets charged VAT on a property and they think that that means that the property itself is opted so that when they maybe sublet that property, that they should charge VAT as well. But that's not quite right. So you only ever... opt to tax your own interest in a property. There's no such thing as an opted property, you only opt an interest in a property. So my landlord might have opted to tax and charged me that on rents, but unless I also opt to tax, then I won't charge VAT on my rents when I'm subletting to someone else. Now I might want to opt to tax in that situation, because if I don't opt to tax, I'm being charged VAT on rents and that's being linked to my onward subletting to a tenant, which is exempt, and that VAT becomes a cost. Whereas if I opt to tax, then I can potentially recover that VAT on cost. So one of the key misconceptions is the idea that there is such a thing as an opted property. There isn't. You opt to tax your own interest in land and buildings. Another misconception that the option to tax can affect every kind of building. We already saw earlier on that example of a kind of a flat on one floor and a commercial building, a shop on another floor. The option to tax is normally going to have no effect over residential buildings. So I opt to tax one building. It's got a flat in one floor, a commercial building in the other floor. Only the commercial rents become subject to that. the residential rents remain VAT exempt despite the fact that that building is opted. And the other one, I don't know whether I'd call it a misconception, but it's certainly something that people don't necessarily always realise, is that there is an interaction, an important interaction between options tax, VAT, and stamp duty land tax, SDLT. And generally, stamp duty land tax or SDLT is charged on the VAT inclusive consideration. So a factor in my decision making, as well as looking at the kind of pure VAT position as to whether opt to tax is also what are the knock on effects going to be for other areas, particularly SDLT, because I might opt to tax and get a little bit more VAT recovery on costs, but that might have in turn the effect of increasing the stlt liability when i sell this building that might kind of wipe out any benefit of that recovery in that supply chain so all of these things have to be considered and interact together okay
Andy Rainford
i think that's uh that does it for the for the main um the main session the main uh questions from from me and Rachel. So if we move on to the Q&A, I think it's been relatively quiet, but I do have a question that was sent in ahead of time, if you don't mind indulging me. So I think the questions, yeah, so it's surrounded somebody that's looking at potentially buying a building that has been opted or an interest that's been opted. They can't recover the tax because they're exempt. They're a wholly exempt business. and but i guess this would affect partially exempt businesses as well um would it be prudent as part of the sort of contractual negotiations to ask the seller when they made the option to tax and potentially revoke it if it was if it was you know beyond the 20 years is that a potential solution in those kind of scenarios that's definitely something to think about that's definitely something to think about so um that in that scenario that is going to be a problem you've got and exempt.
Edd Thompson
a tenant or an exempt purchaser of the building uh if they incur a significant amount of that on the purchase of the building that is going to be linked if they're going to use this building in their business it's going to be linked to that exempt activity and they're not going to be able to recover a lot of that vat or maybe not all of that vat and so if you can get rid of the options to tax, that would be a really good thing. And it may be that... that option to tax has been in place for a long time and 25 years ago they put that option in tax in place because they wanted to do some VAT recovery at that point in time but since that point in time there hasn't actually been a significant amount of VAT incurred on on costs and there wouldn't be a significant clawback of VAT recovery were they to disapply that option were they to revoke that options tax but as you say you can only revoke it after that 20 year period you So they need to understand at what point that option to tax. did go in might also be worth thinking about well what are they going to do what what is this exempt business going to do with the with the property are they going to use it all themselves or might they sublet some of it if they're subletting some of it could they think about opting to tax themselves and then they might be able to get at least partial recovery on the VAT cost so there's a number of different angles that they might want to consider
Andy Rainford
Yeah, I mean, I suppose this is it potentially something that a taxable business might want to look at as well, purely for cash flow reasons? As you say, there's the SDLT problem as well, isn't there? So,
Edd Thompson
yeah, so it's not. Yeah, exactly. It's not just it's not just something that's confined to two exempt businesses. I think the SDLT issue is a big one there. Right. So you're potentially looking at a 20 percent uplift in the price paid, which is that. the VAT and then you work out the STLT on that so that can be a significant cost as well and yeah as you say cash flow can cause real problems if you have to fund the VAT in the interim and then you can't recover it until three months down the line say that could be something that people just aren't able to fund and they haven't sort of factored into their decision making at that time. So being able to revoke it can sort of clean up that issue.
Andy Rainford
Excellent. Okay, well, I think that's all the questions we've got. There's none in the live Q&A, so probably a good place to finish there. But before we do, I'd like to just say a few thank yous in the usual way. So firstly to Rachel for co-hosting, and especially to Ed for sharing his expertise and practical experience with us. Land and property VAT is an area that many advisors find challenging, and your insights have been incredibly valuable today. And of course, thank you to those of you that have joined us live and to those that are watching later on on the recording for your engagement throughout the session. We know how busy professional practice can be, so we genuinely do appreciate you taking the time to spend with us this afternoon. Hope it's been helpful to demystify some of the complexities surrounding the option to tax and provided you with some practical points you can take back into your own client work. As always, if there are any questions that pop up after the event, please do get in touch with us and we'll do our best to follow up with you. We'll be announcing details of the next webinar shortly, so please do keep an eye out for those communications from us. Thanks again for joining us and we'll look forward to seeing you again in the next session. Bye for now.

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