The term option to tax holds significant importance in commercial property transactions. If you're a business owner involved in leasing or purchasing commercial property in the UK, it’s important to understand the tax aspects of the commercial property transactions you enter into.
This article sets out the rules relating to the option to tax, outlining its implications, recent changes and practical considerations.
What’s the option to tax?
At its core, the option to tax is a mechanism that enables businesses to charge Value Added Tax (VAT) on the sale or lease of commercial property, which would otherwise be exempt from VAT. This option provides businesses greater control over their VAT obligations and can impact various aspects of property transactions, such as the purchase price.
What does the option to tax on property mean for VAT?
Before delving deeper, let's clarify the relationship between the option to tax and VAT. Generally, the sale or lease of land and buildings is exempt from VAT. However, by exercising this option, a business can choose to apply VAT to such transactions. This decision has significant implications, affecting both the buyer/tenant and the seller/landlord.
Recent changes to option to tax procedures
From February 1, 2023, HMRC modified its approach to notifications. The traditional acknowledgement process has been replaced with an automated email response upon receiving electronic notifications. However, issues with this automated system have surfaced, leading to occasional missing receipts. It's important to maintain robust records to compensate for potential gaps in this system.
Practical implications and considerations
These changes may impact various aspects of property transactions, including:
- Sellers informing buyers or tenants about their VAT charging entitlement
- Buyers notifying sellers about opting to tax a property for VAT-free transfer
Given these uncertainties, it's advisable to establish meticulous record-keeping practices. Maintaining an option to tax register within your VAT records can help you track and validate your notifications. Addressing the option to tax during the early stages of a transaction can also prevent unnecessary delays.
Does the option to tax transfer to a new owner?
The option to tax isn’t an ongoing commitment. Under specific circumstances, like property sales, you can transfer it to a new owner. However, it’s important to understand and comply with the time limits and procedures for notifying HM Revenue & Customs (HMRC) about the transfer.
How long does an option to tax last?
Typically, once your business makes the decision to opt for the option to tax, it remains in effect for 20 years. Once made, an option to tax can only be revoked in limited circumstances; otherwise, it remains in place for 20 years.
How do I check up on option to tax application?
The recent changes by HMRC have altered how they handle option to tax notifications. Unlike before, when HMRC acknowledged these notifications, they now provide automated email responses upon receiving an email notification at [email protected]. This response is a confirmation of the date of receipt and retaining it’s essential for your records.
Can you send option to tax forms electronically?
Yes, sending option to tax notifications via email is now the preferred method. The subject line should include the property's address and the effective date of the notification. This electronic process streamlines communication and helps you keep track of your notifications.
How can I get a copy of the option to tax certificate?
As HMRC no longer formally acknowledges notifications, you won't receive a certificate. Instead, retain the automated email response as your proof of notification.
Can you disapply an option to tax?
There are limited circumstances where an option to tax can be disapplied. When an option to tax has been in place for more than 20 years, it’s possible to apply for it to be revoked. A number of conditions will need to be met for this to take place. HMRC will need to agree to the revocation. HMRC will want to check that there has been no tax avoidance, for example.
Can a partnership get an option to tax?
Partnerships are eligible to exercise the option to tax, provided they meet certain criteria outlined by HMRC. For a partnership to be eligible to opt for the option to tax, it needs to fulfil the following key conditions:
- Business activity - the partnership must be engaged in a business activity that involves the leasing or sale of commercial properties (this can encompass a range of commercial real estate, such as offices, warehouses, retail spaces and more)
- VAT registration - the partnership must already be registered for VAT (this means that the partnership is conducting transactions that meet the VAT registration threshold set by HMRC)
- Property ownership - the partnership should hold a legal interest in the commercial property in question (this can include owning the property outright, having a leasehold interest, or any other legal arrangement that grants the partnership the authority to make decisions about the property)
Get legal assistance from LawBite
If you’d like any further advice or assistance regarding option to tax procedures, speak to one of our expert commercial property lawyers. We’re committed to simplifying complex legal concepts for small businesses like yours. With the help of our team, you can harness the benefits of the option to tax while safeguarding your business's interests.