Should you charge VAT on your commercial property?

May 9, 2023

By Oliver Morris

Electing to charge VAT on commercial property is an important option, especially for developers as it enables recovery of input tax on items such as construction work, and has consequences on a sale or letting of the property.

Opting to tax your property

If a landowner opts to tax their commercial property, VAT is payable on any rent payable under leases and if the property is sold VAT will be payable on the purchase price.

Previously how did you exercise the option to tax?

In order to exercise an option to tax, HMRC must be notified in writing. HMRC’s previous policy was to provide a detailed acknowledgement of this identifying the property in question which landowners used as proof of exercising the option to tax. Purchasers and tenants relied on this acknowledgement, often provided in replies to commercial property standard enquiries, as proof that the landowner had opted to tax and that the option to tax was valid.

What has changed?

HMRC has this year decided it will no longer provide an acknowledgement when a landowner submits a notification of an option to tax. This leads to the question how do landowners now evidence their option to tax.

HMRC has also said it will no longer provide answers about whether it holds a record of an option to tax except for in limited circumstances, such as where the option date was likely to be more than six years ago.

How do you now evidence an option to tax?

Landowners will need to keep a copy of their submission together with the simple email acknowledgement of submission from HMRC. It may also be sensible for landowners on some transactions to take tax advice to confirm that the option to tax is valid.

If a landowner does not submit the application by email then there are currently no plans to acknowledge receipt by HMRC.

A failure to retain evidence of an option to tax is sure to cause issues and delays in transactions.

What are the knock on effects of HMRC’s change in policy?

Whilst it has not yet become common practice, over time we are likely to see a change of wording in documents such as contracts and leases regarding VAT. It would not be surprising if purchasers and tenants start requesting warranties from the landowner that the option to tax is valid and setting out what would happen if it wasn’t.

If you need any advice on options to tax, please contact a member of our commercial property law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.

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