Tag Archives: land-and-property

VAT – Latest from the courts: Craft fair pitches standard rated

By Marcus Ward 17 October 2016

The Upper Tribunal (UT) case of Zombory-Moldovan (trading as Craft Carnival)

Background

In the past, the rent of stall at craft fairs have generally been treated as an exempt right over land. In fact, in this instant case, the First Tier Tribunal agreed with the appellant that supplies made to stallholders to sell their goods were the equivalent to a right to occupy land and therefore exempt from VAT.

However, in this decision, the UT overturned this analysis and found that the supply was standard rated.

Decision

The reasons given were that what Craft Carnival supplied went beyond the mere use of a plot of land for a specific period and amounted to the use of a pitch at an event in order to “offer certain goods for sale”. The test in the previous “Temco” case on this point stated that an exempt supply amounts to a “relatively passive activity linked simply to the passage of time and not generating any significant added value”. Craft Carnivals had “very real and significant responsibilities beyond the bare provision of an appropriately-sized plot”. This, being a single supply (it was decided) meant that the entire charge was subject to VAT at the standard rate.

The appellant’s website stated that “In addition to the erection of marquees, which are hired for the duration of a fair, Mrs Zombory-Moldovan arranges for the provision 45 of other necessary temporary facilities including portable toilets, electrical generators and security fencing. She also employs between five and seven members of staff to act as ticket sellers and car park 3 marshals. Before the fair takes place Mrs Zombory-Moldovan would have issued a press release and advertised the event in local newspapers and on Craft Carnival’s website and booked a children’s entertainer, such as a magician, to encourage families to attend.”

Impact

Any business or charity which provides similar supplies must review their VAT responsibilities in light of this decision immediately. This case is likely have far-reaching implications for both organisers and those businesses which sell goods in fairs and similar events. This may encompass; trade fairs, exhibitions and even, possibly, high end car-boot sales type events. We await HMRC’s response to their victory in this case and how wide-ranging they consider the decision to be.

Please contact us if this decision affects your or your client’s businesses.

VAT liability of a dwelling formed from more than one building

By Marcus Ward 6 September 2016

HMRC has issued a policy paper: Revenue and Customs Brief 13(2016)

This brief explains the change in policy relating to the treatment of dwellings that have been formed from either the construction of new buildings, or from the conversion of non-residential buildings into a dwelling. HMRC now accepts that single dwellings can be formed from more than one building.

Please contact us if this change affects you in relation to current, or past developments.

VAT Latest from the courts – what is an economic activity by a charity?

By Marcus Ward 5 September 2016

In the VAT case of Longridge on the Thames (Longbridge) here the Court of Appeal considered previous decisions at the First Tier Tribunal (FTT) and Upper Tribunal (UT) on whether Longbridge carried on an economic activity. This is an important case as it goes some way in determining the meaning of “business” in light of the term “economic activity” used in EC legislation. The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business, and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning. Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have previously commented on this matter here

Background

Longbridge is a charity. It uses volunteers to provide boating activities (mainly to young people) on the Thames. The fees charged by Longbridge were often at below cost and the charity relied on donations to continue its operations. It constructed a new building and sought VAT zero rating of these costs on the basis that the building was to be used for non-business purposes. Consequently, it was crucial to the relief claimed that the charity was not carrying out a business in VAT terms. The FTT and the UT found that the charity’s “predominant concern” was not to make supplies for a consideration and therefore it was not in business. These findings were based on long standing case law, the most salient being; Lord Fisher and Morrison’s Academy Boarding Houses Association. Lord Fisher set out a series of tests which HMRC rely on to determine whether a business exists – considered here and here

Decision

The Court of Appeal allowed HMRC’s appeal. It decided that Longridge was carrying on an economic activity and therefore the construction of the new building could not be zero rated. The decision is worth considering in full, however, the court held that there was a “direct link” between the fees paid and service the recipients received, even if it was subsidised in certain instances and that Longbridge was furthering its charitable objectives. The requirement for a direct link was clearly demonstrated in The Apple and Pear Development Council case. The establishment of the direct link meant that Longridge was carrying in business (in UK law).

Commentary

The important test for whether an economic activity is being carried on is now; the direct link between payment and service. There is no longer the requirement to consider the test of “predominant concern” and in fact it was stated in the decision by the judges that this test is “unhelpful and may be misleading.” We must now ignore; the motive of the provider of the service, its status as a charity, the amount charged, whether subsidies are received by the charity, and whether volunteers are involved in the relevant activities.

This is a very big change in the analysis of whether a business exists and basically means that previous cases on this matter were wrongly decided. It brings the UK into line with the EC on the definition of an economic activity and therefore provides clarity on this matter – which has long been an area which has desperately required it.

It means that, unless the decision is reversed at the Supreme Court, we say goodbye to the unloved Lord Fisher tests. However, this may be very bad news for charities and not for profit entities that have relied on these tests to avoid VAT registration and charging VAT on their supplies. It is likely that many more charities will be dragged into the VAT net. It remains to be seen whether this case will trigger a renewed targeting effort on charities by HMRC, but what is clear is that charities need to be conscious of this new turn of events and consider their position. We strongly recommend that any bodies which have had previous discussions with HMRC on this point and any entity which is affected by this decision take professional advice immediately.

VAT – Latest from the courts. More on separate and composite supplies and land exemption

By Marcus Ward 17 May 2016

TC05078 Blue Chip Hotels Ltd

This is a FTT case which considered the VAT analysis of a supply in two ways. The appellant was an hotel which offered a wedding “package”. The package comprised; a room which was licensed for civil wedding ceremonies, the hire of other rooms, catering, accommodation, car parking and the use of the grounds for photographs. The only activity carried out in the “wedding room” was the wedding ceremony itself. The hotel treated the hire of the wedding room as exempt and added VAT to the remainder of the package.

The two technical points were:

Was the supply of the wedding room a separate supply to the rest of the wedding package as advanced by the taxpayer, or was it one element of the overall package to which standard rating applied?, and;
If an independent supply, was it an exempt supply of land under VAT Act, Schedule 9, Group 1 as argued by the appellant?

Somewhat to the puzzlement of the Tribunal, HMRC had accepted that if the wedding room was supplied without any other element of the wedding package it could be treated as an exempt supply of land.

On the first point the Tribunal decided that the hire of the wedding room should be treated as a separate supply for VAT purposes. However, this was only relevant if the taxpayer could demonstrate that the provision of the wedding room was a supply of land.

On the second point, the issue was whether what the hotel supplied was more than the mere hire of the wedding room as a passive letting of land. The tribunal was of the view that an additional service was being provided, this being the service of a legal wedding ceremony which could be carried out only because of the licensed nature of the wedding room. That is; what was being paid for was the right to participate in a particular event, only part of which entailed the provision of the physical space in which that event occurred.

The Tribunal concluded that the supply of the wedding room could not be treated as an exempt supply of land via VAT Act, Schedule 9, Group 1, the provision of licensed premises in which a civil wedding could legally be carried out went beyond the passive letting of land and was outside the scope of the exemption.

This seems to go against the decision in Drumtochty Castle Ltd (TC2111) inter alia, where the Tribunal found that in similar circumstances to those in this instant case that what was being offered was a single package such that exemption could not be applied to certain elements. Although it may simply demonstrate that even subtle differences in the facts can result in a different VAT outcome. As previously observed in a number of these types of cases, it is crucial to analyse precisely what is being provided, even in cases where the VAT treatment has remained unchanged for a number of years. Case law develops at a very fast rate and legislation changes regularly, both of which can affect the tax position.

VAT – Liability of works carried out under Permitted Development Rights

By Marcus Ward 10 May 2016

HMRC has clarified its views on the zero and reduced rating of conversion construction work carried out under Permitted Development Rights (PDRs).

Who is affected?

Builders and developers who convert non-residential buildings into dwellings for which individual statutory planning consent is not required because the development is covered by PDRs. Additionally, it applies to any person carrying out a similar conversion who will be making a claim for a refund of VAT under the DIY Housebuilders’ Scheme.

What are PDRs?

PDRs are a national grant of planning permission for particular types of development. They are intended to streamline the planning process by removing the need for a full planning application, therefore reducing the amount of information required.

What has changed?

To zero-rate the sale of all newly converted dwellings (from non-residential buildings) or to make a valid claim under the DIY Housebuilders’ Scheme, the converted building must meet the requirements of a building “designed as a dwelling”. One of these conditions is that the developer, builder or DIY Housebuilders’ Scheme claimant must be able to demonstrate that statutory planning consent has been granted for a dwelling and that its construction has been carried out in accordance with that consent. In addition, part of the conditions for some supplies of construction services to be eligible for the reduced rate of VAT of 5% for the conversion of a non-residential building into a dwelling requires individual statutory planning consent.

HMRC have announced that following the introduction of PDRs, individual statutory planning consent will no longer be required for some developments making the meeting of this condition difficult.

HMRC Brief 9 (2016) sets out that when certain conditions are met, zero rating and/or reduced rating where applicable is additionally available when converting non-residential buildings to dwellings when work is carried out under a PDR. This is in contrast to work undertaken via planning consent.

Relevant parties will still be required to provide evidence that the work has been undertaken legally and that it qualifies as a permitted development.

The full guidance is here

VAT – Disbursements Q&As

By Marcus Ward 6 May 2016

Disbursements

A very common query regarding VAT is “I pass on charges incurred on behalf of my client/customer – do I add VAT?” In other words, does the payment qualify as a disbursement?

Does it matter if the original supply has VAT on it?

Yes. Whether a payment is a disbursement is only a practical issue if the charge involved is initially VAT free since, if it were VATable, there would be no benefit to the final customer in passing the charge on “in the same state”. The points below assume that the charge in question is VAT free, eg; statutory fees (land registry, stamp duty, search fees, MOTs etc) insurance, financial products etc although benefits may also be obtained if the original supply is reduced rated.

So only if a supply is a disbursement can I pass it on in the “same state; ie; VAT free?

Yes

So when can I pass on a payment VAT free?

A disbursement is passed on without any alteration (eg; not marked up or changed in any way) and the supply must be to the final customer by the original provider. If the supply is VAT free then the recovery of the costs is also VAT free. The passing on of the payment from the final customer to the supplier is done as agent. Therefore, in these circumstances, a supplier may be acting as principal for part of a supply, and agent for another part. The disbursement should not appear on the “agent’s” VAT return.

When do I have to add VAT onto a supply which is originally VAT free?

When the onward supply is not a disbursement.

A distinction must be drawn between a necessary cost component of a supplier making a supply and a disbursement. An example is zero-rated travel. A supplier may incur a train fare in providing his service, but that is a cost component for him and not a disbursement, so VAT would be added to any onward charge. It is clear that the supplier is not actually supplying train travel to his customer, but is consuming the cost in providing his overall VATable service.

What are the rules for treating a payment as a disbursement?

The following criteria must be met by a supplier to establish whether it qualifies as a disbursement:

you acted as the agent of your client when you paid the third party
your client actually received and used the goods or services provided by the third party
your client was responsible for paying the third party
your client authorised you to make the payment on their behalf
your client knew that the goods or services you paid for would be provided by a third party
your outlay will be separately itemised when you invoice your client
you recover only the exact amount which you paid to the third party, and
the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.

What if I get it wrong?

If you add VAT to a properly VAT free disbursement HMRC will treat the amount shown on the invoice as VAT. However, it will not permit the recipient of the supply to recover input tax (as it is not VAT) thus creating an actual VAT cost. if you treat a supply as a VAT free disbursement when it actually forms part of your taxable supply, HMRC will issue and assessment and potentially penalties and interest. Unfortunately, I have seen this course of action taken a number of times and the amounts of VAT involved were significant.

Please contact us if you have any queries on this matter. Sometimes the matter is less than straightforward and getting it wrong can be very expensive for a business. If you have been charged VAT on what you believe to be a VAT free disbursement, it may also be worth challenging your supplier.

A guide with helpful diagrams is available here

VAT – The Capital Goods Scheme (CGS)

By Marcus Ward 13 April 2016

The CGS

If a business acquires or creates a capital asset it may be required to adjust the amount of VAT it reclaims. This mechanism is called the CGS and it requires a business to spread the initial input tax claimed over a number of years. If a business’ taxable use of the asset increases it is permitted to reclaim more of the original VAT and if the proportion of the taxable supplies decreases it will be required to repay some of the input tax initially claimed. The use of the CGS is mandatory.

How the CGS works

Normally, VAT recovery is based on the initial use of an asset at the time of purchase (a one-off claim). The CGS works by applying a longer period during which the initial recovery may be adjusted if there are changes in the use of the asset. Practically, the CGS will only apply in situations where there is exempt or non-business use of the asset. A business using an asset for fully taxable purposes will be covered by the scheme, but it is likely that full recovery up front will be possible with no subsequent adjustments required. This will be the position if, say, a standard rated property is purchased, the option to tax taken, and the building let to a third party. The CGS looks at how capital items have been used in the business over a number of intervals (usually, but not always; years). It adjusts both for taxable versus exempt use and for business versus non business use over the lifetime of the asset. Example; a business buys a yacht that is hired out (business use) and it is also used privately by a director (non-business use). However, a more common example is a business buying a property and occupying it while its trade includes making some exempt supplies.

Which businesses does it affect?

Purchasers of certain commercial property, owners of property who carry out significant refurbishment or carry out civil engineering work, purchasers of computer hardware, aircraft, ships, and other vessels over a certain monetary value who incur VAT on the cost. (As the CGS considers the recovery of input tax, only VAT bearing assets are covered by it).

Assets not covered by the scheme

The CGS does not apply if a business;

acquires an asset solely for resale
spends money on assets that it acquired solely for resale
acquires assets, or spends money on assets that are used solely for non-business purposes.

Limits for capital goods

Included in the CGS are:

Land, property purchases – £250,000 or over
Refurbishment or civil engineering works costing £250,000 or over
Computer hardware costing £50,000 or over (single items, not networks)
From 2011, aircraft, ships, and other vessels costing £50,000 or more.

Assets below these (net of VAT) limits are excluded from the CGS.

The adjustment periods

Five intervals for computers
Five intervals for ships and aircraft
Ten intervals for all other capital items

Changes in your business circumstances

Certain changes to a business during a CGS period will impact on the treatment of its capital assets. These changes include:

leaving or joining a VAT group
cancelling your VAT registration
buying or selling your business
transferring a business as a going concern (TOGC)
selling an asset during the adjustment period

Specific advice should be sought in these circumstances.

Examples

A retailer purchases a brand new property to carry on its fully taxable business for £1 million plus £200,000 VAT. It is therefore above the CGS limit of £250,000. The business recovers all of the input tax on its next return. It carries on its business for five years, at which time it decides to move to a bigger premises. It rents the building to a third party after moving out without opting to tax. Under the CGS it will, broadly, have to repay £100,000 of the initial input tax claimed. This is because the use in the ten year adjustment period has been 50% taxable (retail sales) for the first five years and 50% exempt (rent of the property for the subsequent five years).
A company purchases a helicopter for £150,000 plus VAT of £30,000. It uses the aircraft 40% of the time for hiring to third parties (taxable) and 60% for the private use of the director (non-business). The company reclaims input tax of £12,000 on its next return. Subsequently, at the next interval, taxable use increases to 50%. It may then make an adjustment to increase the original claim: VAT on the purchase £30,000 divided by the number of adjustment periods for the asset (five) and then adjusting the result for the increase in business use: £30,000 / 5 = 6000 50% – 40% = £600 additional claim

Danger areas

Overlooking CGS at time of purchase or the onset of building works
Not recognising a change of use
Selling CGS as part of a TOGC
Failing to make required CGS adjustments at the appropriate time
Overlooking the option to tax when renting or selling a CGS property asset
Sale during adjustment period (not a TOGC)
Complexities re; first period adjustments and pre-VAT registration matters
Interaction between CGS and partial exemption calculations

Summary

There is a lot of misunderstanding about the CGS and in certain circumstances it can produce complexity and increased record keeping requirements. There are also a lot of situations where overlooking the impact of the CGS or applying the rules incorrectly can be very costly. However, it does produce a fairer result than a once and for all claim, and when its subtleties are understood, it quite often provides a helpful planning tool.

VAT – Residential Property Triggerpoints

By Marcus Ward 17 February 2016

VAT and property transactions are uneasy bedfellows at the best of times. Getting the tax wrong, or failing to consider it at all can result in a loss of income of 20% on a project, or forgoing all input tax incurred on a development. Even a simple matter of timing can affect a transaction to a seller’s detriment. Here I take a brief look at issues that can impact residential property transactions. It is important to recognise when VAT may affect a project so I hope that some of these triggerpoints may prove useful.

General points

The following are very general points on residential properties. No two cases are the same, so we strongly recommend that specific advice is obtained.

Refurbishing “old” residential properties

Broadly speaking, the VAT incurred on such work is not reclaimable as the end use of the property will be exempt (either sale or rent). There is no way round this as it is not possible to opt to tax residential dwellings. It may be possible to use the partial exemption de minimis limits if there are any other business activities in the same VAT registration. If this is the only activity of a business, it will not even be permitted to register for VAT. There are special rules if the number of dwellings change as a result of the work (see below).

New residential builds

The first sale (or the grant of a long lease 21 years plus) of a newly constructed dwelling by “the person constructing” is zero rated. This means that any VAT incurred on the construction is recoverable. Care should be taken if the new dwelling is let on a short term basis rather than/before being sold as this will materially affect input tax recovery. Advice should always be taken before such a decision is made as there is planning available to avoid such an outcome. VAT incurred on professional and legal costs of the development may also be recovered such as; architects, solicitors, advisers, agents etc. VAT registration is necessary in these cases and our advice is to VAT register at the earliest stage possible.

The construction of new dwellings is zero rated, along with any building materials supplied by the contractor carrying out the work. The zero rating also extends to sub-contractors. It is not necessary for a certificate to be provided in order to zero rate such building works.

Conversions

There are special rules for refurbishments which create a different number of dwellings (eg; dividing up a single house into flats, or changing the total number of flats in a block, or making one dwelling by amalgamating flats). Generally, it is possible for contractors to invoice for their building work at the reduced rate of 5%. This rate may also apply to conversions. A conversion is defined as work undertaken on a non-residential property, such as a barn, office or church, into one or more self-contained dwellings. Once converted the sale of the residential property will be zero rated and all of the input tax incurred on associated costs is recoverable (similar to a new build).

Renovation of empty residential premises

Reduced rating at 5% is also available for the renovation or alteration of empty residential premises. Such a premises is one that has not been lived in during the two years immediately before the work starts. HMRC will insist on documentary evidence that the property has been empty for that time.

Purchase of a commercial property intended for conversion

If it is intended to convert a commercial property into residential use and the vendor indicates that (s)he will charge VAT (as a result of the option to tax having been exercised) it is possible for the purchaser to disapply the option to tax by the issue of a certain document; form VAT 1614D. This means that the sale will become exempt. Advice should always be sought on this issue by parties on each side of the transaction as it very often creates difficulties and significant VAT and other costs (mainly for the vendor).

Mixed developments

If what is being constructed is a building that is only in part a zero-rated dwelling, a contractor can only zero-rate its work for the qualifying parts. For example, if a building containing a shop with a flat above is constructed, only the construction of the flat can be zero-rated. An apportionment must be made for common areas such as foundations and roof etc. The sale of the residential element when complete is zero rated and the sale of the commercial part will be standard rated if under three years since completion. If the commercial part is over three years old at the date of sale, or is rented rather than sold, the supply will be exempt with the option to tax available – details here. If an exempt supply is made, the recovery of input tax incurred on the development will be compromised and it is important that this recognised and planning put in place to avoid this outcome.

DIY building projects

There is a specific scheme for DIY Housebuilders to recover input tax incurred on the construction of a dwelling for the constructor to live in personally. Details here https://www.marcusward.co/?s=diy

Sale of an incomplete residential development

There are two possible routes to relief if a project is sold before dwellings have been completed (either new build or conversion). This can often be a complex area, however, there is some zero rating relief which may apply, and also it may be possible to apply TOGC (Transfer Of a Going Concern) treatment to the sale. In both cases, it is likely that input tax previously claimed by the developer should not be jeopardised.

Overview

There are VAT complications for the following types of transactions/developments and issues:

work on listed properties
definition of a dwelling
arrangements where consortiums or syndicates are used/profit share
transactions in connection with nursing or children’s homes or similar
“granny flats” in the garden of existing houses
work on charitable buildings/ for charities
converting specific commercial property into residential property – particularly ex-pubs
sales to Housing Associations
sales of “substantially reconstructed protected buildings”
buying VATable buildings
date of completion – zero rating cut off
supplies by members of VAT groups
definition of building materials
input tax on white goods and similar
alterations for people with disabilities
garages with dwellings
land supplied with a property
buying property with existing, continuing leases
beneficial owner versus legal owner supplies
change of intention (buying land/property with the intention of using it for one purpose, but the intention changes after purchase)
where professional/architect’s fees are incurred
planning gains
own use of a property
mobile homes
reverse premiums/surrenders/reverse surrenders re; leases
holiday lets
hotels
business use by purchaser/tenant
contract stage of a property purchase where VAT is potentially chargeable by vendor
timing of supplies
work re; schools, churches, village halls, hospitals, or any other “unusual” structures

This list is not exhaustive, but I hope it gives a broad idea of where VAT needs to be considered “before the event”. As always, I am available to assist.

VAT – Zero rating of charitable building; latest from the courts

By Marcus Ward 25 January 2016

A recent case at the Upper Tribunal (UT): Wakefield College here considered whether certain use of the property disqualified it from zero rating.

Background

In order to qualify for zero rating a building it has to be used for “relevant charitable purpose”

This means that it is used otherwise than in the course or furtherance of a business. In broad terms, where a charity has a building constructed which it can show it will use for wholly non business purposes then the construction work will be zero rated by the contractor. This is the case even if there is a small amount of business activity in the building as long as these can be shown to be insignificant (which is taken to be less than 5% of the activities in the whole building) This so called de-minimis of 5% can be of use to a charity. In order for zero rating to apply the charity must issue a certificate to the builder stating the building will be used for non-business purposes.

Although the UT supported HMRC’s appeal against the F-tT decision there was an interesting comment made by the UT. The fact that students paid towards the cost of their courses (albeit subsidised) meant that business supplies were made, and the quantum of these fees exceeded the 5% de minimis meant that the construction works were standard rated. This decision was hardly surprising, however, a comment made by the Tribunal chairman The Honourable Mr Justice Barling Judge Colin Bishopp may provide hope for charities in a similar position to the appellant: he stated that it believed that the relevant legislation should be reconsidered, suggesting that;

“… it cannot be impossible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse …”.

In my view, it is worth considering the summing up in its entirety as it helpfully summarises the current position and provides some much sought after common sense in this matter:

“We cannot leave this appeal without expressing some disquiet that it should have reached us at all. It is common ground that the College is a charity, and that the bulk of its income is derived from public funds. Because that public funding does not cover all of its costs it is compelled to seek income from other sources; but its doing so does not alter the fact that it remains a charity providing education for young people. If, by careful management or good fortune, it can earn its further income in one way rather than another, or can keep the extent of the income earned in particular ways below an arbitrary threshold, it can escape a tax burden on the construction of a building intended for its charitable purpose, but if it is unable to do so, even to a trivial extent, it is compelled to suffer not some but all of that tax burden. We think it unlikely that Parliament intended such a capricious system. We consider it unlikely, too, that Parliament would consider it a sensible use of public money for the parties to litigate this dispute twice before the FTT and now twice before this tribunal. We do not blame the parties; the College is obliged to maximise the resources available to it for the pursuit of its charitable activities, just as HMRC are obliged to collect tax which is due. Rather, we think the legislation should be reconsidered. It cannot be impossible to relieve 16 charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse”.

Action

If any charities, or charity clients have been denied zero rating on a building project, it will be worthwhile monitoring this development. Please contact us if you require further information.

VAT Land and Property – Why Opt To Tax?

By Marcus Ward 5 October 2015

Opting to tax provides a unique situation in the VAT world. It is the sole example of where a supplier can choose to add VAT to a supply….. or not.

VAT free supplies

The sale or letting of a property is, in most cases, exempt by default. However it is possible to apply the option to tax (OTT) to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate. (It is not possible to OTT a residential property).

Why opt?

Why would a supplier then deliberately choose to add VAT on a supply?

The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken. Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.

Once made the OTT is usually irrevocable for a 20 year period (although there are circumstances where it may be revisited within six months of it being taken). There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases H M Revenue & Customs’ (HMRC) permission must usually be obtained before the option can be made.

Two part process

The OTT is a two part process.

The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.

The second part is to formally notify HMRC (after obtaining permission if necessary). The form on which this is done is a VAT1614A. Here

There can be problems in cases where the OTT is taken, but not formally notified.

Disadvantages

The benefit of taking the OTT is the ability to reclaim input tax which would otherwise fall to be irrecoverable. However, one disadvantage is that opting the sale or rent of a property may reduce its marketability as it is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property.

Another is that the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be funded up front.

Also, an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.
Transfer Of a Going Concern (TOGC)

I always say that advice should be taken in all property transactions and also in cases of a Transfer of A business as a Going Concern (TOGC). This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met.

Property transactions are high value and often complex. The cost of getting VAT wrong, or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues. For these reasons, please seek VAT advice at an early stage of negotiations.

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