If you build a new building is it covered by the previous buildings option to tax? Reply

Croner Taxwise question of the week covered this

My client purchased a small industrial unit in 2010 on which he was charged VAT. He lodged an option to tax on the building and charged the tenant VAT on the rent. The last tenancy expired in 2014 but he found he could not get a new tenant easily because the unit was built in the early 1970s and businesses looking to rent space were more attracted by newer units with modern facilities. My client decided that to reap real benefit from the investment he would demolish the existing unit and build a new one on the site, which would then command a higher rental figure. He has now done this at a cost of around £100,000 and is ready to market the unit for rental. He is assuming that he will not charge VAT on rents to any new tenant as he has not lodged an option to tax on the new property. Is he able to do this?

Legislation on the option to tax underwent some changes in 2008 and since then it has no longer been possible to opt land and buildings separately. This means that the option to tax made on the unit in 2010 covers not only the original unit, but also the land on which it was built and also to any buildings later constructed on that land if the original building is demolished. Therefore in your client’s case, as he opted to tax the unit, the option is still in force and will apply to his supplies of the new unit, and allow him input tax recovery on the redevelopment.

The corollary is also true that if he had placed an option to tax on the land then that option would apply to any buildings on the land at the time of the option and to any future buildings constructed on the land. However, where the option to tax has been made on land, rather than on a building, it is possible to exclude a new building constructed on the opted land from the option to tax, provided the new building is not within the curtilage of any existing building. Notice 742A explains how this is done in paragraph 2.7.

VAT Notice 742A

2.4 What is covered by the option to tax?

2.7.1 In what circumstances can I exclude a new building from the effect of an option?
If you construct a new building on opted land (and that building is not within the curtilage of an existing building – for the meaning of ‘curtilage’, see paragraph 2.4) you may exclude the new building (and land within its curtilage) from the effect of the option to tax by notifying us of the exclusion.
If you decide to do this, the new building will be permanently excluded from the effect of your existing option to tax. But you may, if you wish, make a fresh option to tax in the future, subject to obtaining permission from us if appropriate – see Section 5.
If you choose to exclude a new building from the effect of an option to tax this may affect your entitlement to recover input tax on your costs. See Section 9 for further information about input tax.



Is TOMS an option for Serviced Accommodation VAT? Reply

TOMS is the Tour Operators Margin Scheme (VAT Notice 709/5).

It is a special scheme for businesses that buy-in and re-sell travel, accommodation and certain other services (see paragraph 2.9) as a principal or undisclosed agent (that is, acting in your own name).

TOMS does not apply to:
# supplies you have arranged as a disclosed agent/intermediary and your commission is readily identifiable (see paragraphs 2.14 and 6.7)
# in-house or agency supplies you make which are not packaged/supplied with margin scheme supplies (see paragraphs 2.12 and 2.13)
# supplies you make to business customers for subsequent resale by them (that is, wholesale supplies), or
# supplies that are incidental to your other supplies (see paragraph 3.6)

If you are registered for VAT, you must normally account for tax on the full selling price of your supplies, but you can reclaim the VAT charged on purchases (subject to the normal rules).

Under the TOMS, you cannot reclaim any UK or EC VAT charged on the travel services and goods you buy-in and re-supply – the tax on such goods or services is accounted for in the relevant Member State by the providers of those services (hotels, airlines and so on).
However, as a tour operator based in the UK, you only account for VAT on the margin you make on your margin scheme supplies (see paragraph 2.7), that is, the difference between the amount you receive from your customer (including any amounts paid on behalf of your customer by third parties) and the amount you pay your suppliers.

A margin scheme supply is defined in law (see paragraph 1.2) as a ‘designated travel service’.
This means it is a supply of goods or services which is:
bought in from another person and re-supplied without material alteration or further processing, and
supplied by a tour operator from an establishment in the UK, for the direct benefit of a traveller – see paragraph 2.8

The following are always margin scheme supplies:
# accommodation
# passenger transport
# hire of a means of transport
# trips or excursions
# services of tour guides
# use of special lounges at airports

The reason why this would be useful for Serviced Accommodation is because often its done on Rent to Rent basis and the landlord supplies Residential Accommodation (which exempt from VAT), Serviced Accommodation is Vatable (if you cross the £85k threshold), so the VAT bill would be lower using TOMS. However, its not like a normal tour operator, normally they would buy in holiday accommodation not residential accommodation!

So before using TOMS you should get prior approval from HMRC after full disclosure of all the facts.

Surely in these circumstances HMRC would want the original landlord to change the status from Residential to Holiday Accommodation so that they will become subject to VAT?



How do DIY builders reclaim VAT? Reply

You can apply for a VAT refund on building materials and services if you’re:

  • building a new home
  • converting a property into a home
  • building a non-profit communal residence – eg a hospice
  • building a property for a charity

The building work and materials have to qualify and you must apply to HM Revenue and Customs (HMRC) within 3 months of completing the work.

But its important to note..


When a sole proprietor or partnership is in the business of constructing property for sale and builds a house on his own land for his own occupation, or by a connected person, he can either:

  • recover the VAT through his VAT return in the normal way


  • claim the VAT through the Refund Scheme.

Until 1 January 2011, a sole proprietor or partnership (in the business of constructing property for sale) who built a house on his own land for his own occupation, or by a connected person, could either:

  • recover the VAT through his VAT return in the normal way


  • claim the VAT through the DIY Refund Scheme.

After 1 January 2011, however, this choice is no longer available to him and it will only be possible to recover VAT through his return to the extent that the services and materials will be used for taxable business purposes. Where the house has not been constructed for a business purpose it will not be possible to claim back the VAT through his return. The only option that will now be available to him will be to make a claim through the Refund Scheme.

Companies and other corporate bodies who build dwellings for their staff or officers of the company can’t make a Refund Scheme claim because the tax is incurred in the course or furtherance of their business.

VAT incurred in relation to staff accommodation is input tax and can be recovered through the company’s VAT return, subject to the normal rules.

As such the only way to recover the VAT is by making a DIY claim for the cost of materials and this should be made as one claim within 3 months of completion.


The 1614D VAT Dilema Reply

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


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.






Making Tax Digital will see the end of VAT Returns Reply

Whilst we know that due to the election Making Tax Digital was dropped from the Finance Bill, we also know HMRC has said it will be back as soon as the elections are over!

The plan is that by 2019 VAT returns will be abolished for businesses including the Self Employed, Landlords and Partnerships.

But don’t start celebration too soon, they are being abolished because we will be providing more information each quarter online to HMRC.

Interestingly HMRC say they may be able to accept spreadsheets if they meet specific criteria, but realistically, surely everyone should now be using online accounting software. DIY spreadsheets are not the best way to keep your accounts and there is a high risk of error.

Why create your own spreadsheet when you can get software like Sage One Start for £6/mth or you might get an even better deal if you ask a Sage One Accountant.

So what is the expected timetable for Making Tax Digital

  • April 2018 – quarterly reporting for income tax purposes for unincorporated businesses with a turnover over £85,000
  • April 2019 – quarterly reporting for both incorporated and unincorporated businesses for income tax and VAT
  • April 2020 – quarterly reporting for corporation tax purposes

2018 is just the beginning as Sage explain …

What Making Tax Digital really means

  • All self-employed individuals, landlords and incorporated entities with business income over £10,000 will be required to keep digital records of all their income and expenditure and submit these records electronically to HMRC. Those in employment who have secondary income of more than £10,000 per year through self-employment or property will also be affected.
  • HMRC will not provide you with the tools for digital record keeping and submission. These will be offered through commercial software providers.
  • Those affected have the option to make the electronic submission in collaboration with their accountant or bookkeeper or can do this on their own.
  • Updates to HMRC will need to be made at least quarterly, taxpayers will have an option to pay tax based on their quarterly submissions, if they wish.
  • Any activity at the end of the year must be concluded and sent either by ten months after the last day of the accounting period, or by 31st January, whichever is sooner.


The truth is, we don’t know exactly what the rules will be until the bill is drafted which won’t be till after the election, but what we do know is that big changes are coming!


Do you have to charge VAT when you buy things for clients? 1

When you buy things for your client on their behalf the items could be excluded from your VAT calculations if they are Disbursements

To treat a payment as a disbursement all of the following must apply:

  • you paid the supplier on your customer’s behalf and acted as the agent of your customer
  • your customer received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your customer’s responsibility to pay for the goods or services, not yours
  • you had permission from your customer to make the payment
  • your customer knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your customer when you invoice them
  • the goods and services you paid for are in addition to the cost of your own services

It’s usually only an advantage to treat a payment as a disbursement if the supplier didn’t charge VAT on it, or if your customer can’t reclaim the VAT.

An example of an invoice showing disbursements and recharges

A website design consultant based in London does a week’s work for a client in Edinburgh. The consultant visits the client’s premises at the start of the week to discuss the project. The consultant also agrees to purchase a website hosting package from an Internet service provider on behalf of the client.

The consultant and the client agree the following fees:

Activity Fee
Consultant’s work £2,500 plus VAT
Consultant’s travelling expenses £300
Website hosting package purchased on the client’s behalf £150

The £300 travel cost that the consultant recharges to the client is not a disbursement so the consultant must charge VAT on it. But the cost of the website hosting package is a disbursement and can be excluded from the VAT calculation, because:

  • it was purchased for the use of the client
  • the client agreed that the consultant would arrange and pay for it on their behalf – this means the consultant agreed to act as the client’s agent
  • the consultant passed the whole £150 charge on to the client, without adding anything, as a separate item on the invoice
  • it was the client’s responsibility to pay for the goods
  • the consultant had permission from his client to make the payment
  • the client knew the web hosting package was from another supplier and not from the consultant
  • the consultant showed the costs separately in the invoice
  • the web hosting package paid for by the consultant is additional to the other services being billed to the client

The consultant’s invoice to their client for this work might include the following items:

  • design services – £2,500
  • travelling expenses – £300
  • amount on which VAT is due – £2,800
  • VAT at 20% – £560
  • disbursements – £150
  • total including VAT – £3510


Are Rental Property Service Charges Vatable? Reply

Residential Service Charge Accountant Hiring Now. 3D.

Within a property lease the landlord often agrees to be responsible for:

  • repairs and maintenance to the building
  • the management of repairs and maintenance
  • management of the lease
  • provision of security
  • provision of utilities
  • reception
  • insurance
  • other services

The critical factor in whether they are vatable of not is wording of the lease.

If they are additional consideration to the main supply of rent they will be treated the same as the rent, which for residential usually means they are exempt (unless its a commercial property opted to tax).

However, if the lease doesn’t specifically cover these costs then they will be standard rated for VAT!

Management Agents will be supplying the landlord not the tenants so their costs will always be standard rated unless the extra-statutory concession is applied.

If you provide services to freehold owners of dwellings your supply is taxable because there is no supply of domestic accommodation to link those services to. However this is unfair to freehold owners, especially those living on the same estate as leaseholders. To address this inequity an extra-statutory concession allows all mandatory service charges paid by occupants of dwellings toward the:

(a) upkeep of the common areas of a housing estate, such as paths, driveways and communal gardens; or

(b) upkeep of the common areas of a block of flats, such as lift maintenance, corridors, stairwells and general lounges; and

(c) general maintenance of the exterior of the block of flats or individual dwellings, such as painting, and

(d) provision of an estate warden, house manager or caretaker,

to be treated as exempt from VAT.

Where you apply the concession and treat the service charges as exempt your right to recover the associated input tax may be restricted. This may also have an impact on your eligibility to remain registered for VAT.

To read the rules in more detail see VAT Notice 742



What is an Option to Tax on Property? Reply

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.


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.




What are the VAT rules for Serviced Accommodation? 1

Business couple in formal wear traveling

Residential Rent is an Exempt Supply for VAT, however, Serviced Accommodation isn’t, its treated as Holiday Accommodation.

Holiday accommodation includes, but is not restricted to, any house, flat, chalet, villa, beach hut, tent, caravan, or houseboat.

If you supply holiday accommodation, or a site for such accommodation, you must account for VAT at the standard rate on any charges that you make regardless of the length of occupation or description of the charges.


The problem with VAT is that if you promote your serviced accommodation to the general public it will either make it 20% more expensive for them or reduce your profit!

So lets look at somethings that might help

VAT Registration

You can’t charge VAT unless you are registered for VAT and you don’t have to register until your turnover hits £83,000.

VAT taxable turnover is the total value of everything you sell that isn’t exempt from VAT.

You must register for VAT with HM Revenue and Customs (HMRC) if it goes over the current registration threshold in a rolling 12-month period. This isn’t a fixed period like the tax year or the calendar year – it could be any period, eg the start of June to the end of May.

VAT Flat Rate Scheme

There are going to be changes to the VAT Flat Rate Scheme in April 2017 the changes are aimed mainly at low cost traders, we don’t know the full details yet.

A Low or Limited Cost Trader would spend less than 2% on gross turnover, or less than £1000 on the purchase of goods.

Assuming that the changes don’t affect Hotels and Holiday Accommodation, Flat Rate could save you VAT.

To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.

With the Flat Rate Scheme:

The Flat Rate for Hotels and Accommodation is 10.5%


You bill a client for £1,000, adding VAT at 20% to make £1,200 in total.

You’re selling serviced accommodation, so the VAT flat rate for your business is 10.5%.

Your flat rate payment will be 10.5% of £1,200, or £126.

Separate Businesses

Provided there are commercial reasons why you should have separate businesses or companies, then each business would have the £83,000 registration threshold

The rules are set out in HMRC manuals and in this blog


VAT on Deposits

Most deposits serve as advanced payments, and you must account for VAT in the return period in which you receive the payment. If you have to refund a deposit, you can reclaim any VAT you have accounted for in your next return.

Normally, if you make a cancellation charge to a guest who cancels a booking, VAT is not due, because it is compensation. This includes amounts debited from credit cards using details provided at the time of the booking. Where the cancellation charge takes the form of a retained deposit, you can reclaim any VAT already accounted for as an adjustment to your next return.


How do you leave the Flat Rate Scheme? 1

Businesswoman Leaving Job vector

In the next few weeks and months many small businesses will leave the VAT Flat Rate Scheme.

The reason why Flat Rate is going see an exodus is because of Low or Limited cost traders will see their Flat Rate increased to 16.5% in April.

So for example

If your sales are £5,000, the VAT is £1,000, total £6,000 x 16.5% = £990 VAT payable, so HMRC have let you keep £10!

It is highly likely that almost every trader will have input tax higher than £10 so therefore there is no point in being in the Flat Rate Scheme.

How to leave

You can choose to leave the scheme at any time.

To leave, write to HMRC and they will confirm your leaving date.

HM Revenue and Customs
Imperial House
77 Victoria Street
DN31 1DB

Ask your accountant if you need help.