The 1614D VAT Dilema

As tax forms go, the 1614D to Disapply an Option to tax is probably one of the most straight forward.

Click to access vat1614d.pdf

The 1614D is used so that the seller won’t charge VAT when selling a building which has been opted to tax where the buy intends to convert to residential.

Basically it says – who are you, who is the seller and what is the property? – that’s nice and simple, what could possibly go wrong?

Its great for the purchaser as they don’t have to wait to recover the VAT.

The potential downside is for the seller, let say you originally bought the property for your business and only later decided to rent it out and Opt to tax. The issues are:

  1. Because its an exempt supply the seller can’t recover any VAT related to the sale
  2. The biggest potential problem is the Capital Good scheme which have a 10 year adjustment period, if you sell within this period you will have to pay back to HMRC some of the VAT

If you acquire or create an expensive capital asset, or already have one when you register for VAT, you may have to adjust the amount of VAT you reclaim. You do this by using the Capital Goods Scheme, which allows you to spread the initial VAT claimed over a number of years. You can reclaim more if the proportion of your taxable supplies increases, you’ll have to repay some if it decreases. Taxable supplies are the sales that you make which are standard, reduced or zero-rated.

You’ll have to use the Capital Goods Scheme if you spend £250,000 (excluding VAT) or more on:

  • buying land, a building or part of a building or civil engineering work
  • constructing a building or civil engineering work
  • refurbishing, fitting out, altering or extending a building or civil engineering work

Civil engineering work includes things like roads, bridges, golf courses, running tracks and the installation of pipes for connecting to mains services.

https://www.gov.uk/guidance/vat-capital-goods-scheme-and-capital-assets

steve@bicknells.net

 

 

 

What is an Option to Tax on Property?

Office Building An office building with glass windows on a sunny day.

Opting to Tax refers to Commercial Properties and VAT.

Supplies of land and buildings, such as freehold sales, leasing or renting, are normally exempt from VAT. This means that no VAT is payable, but the person making the supply cannot normally recover any of the VAT incurred on their own expenses.

However, you can opt to tax land. For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it. You don’t need to own the land in order to opt to tax. Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard rated, and you will normally be able to recover any VAT you incur in making those supplies.

https://www.gov.uk/government/publications/vat-notice-742a-opting-to-tax-land-and-buildings/vat-notice-742a-opting-to-tax-land-and-buildings

If you are buying a building for your business to use and your business is VAT registered you may be able to recover the VAT without opting to Tax.

However, most commercial landlords will opt to tax so that they can recover their VAT. They will then charge VAT to their tenants.

When you sell the building as an investment its generally the case that the buyer will want to register for VAT so that the transfer will be within the Transfer of a Going Concern (TOGC) rules to avoid getting stuck with a VAT bill.

If your buyer is a pension scheme they can register for VAT to benefit from TOGC.

If you sell to a developer who will be converting from Commercial to Residential TOGC will not apply but the developer will be able to recover the VAT as they will be developing the a Zero rated Residential Property.

It is also possible to ask for a belated Option to Tax (Section 4.2.1 Notice 742A)

HMRC will normally accept a belated notification if you provide:

  • direct documentary evidence that the decision was made at the relevant time (eg copies of correspondence with third parties referring to the option to tax)
  • evidence that output tax has been charged and accounted for and input tax claimed in accordance with the option and a responsible person (such as a director) provides a written declaration that the decision to opt was made at the relevant time and that all relevant facts have been given

HMRC might accept a belated notification in other circumstances. This will depend on the facts of your case.

The option is applied for using VAT 1614A.

steve@bicknells.net