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Option to tax

Hi Guys,

I have a client who purchased business premises 11 years ago and had to pay VAT thereon, which of course he reclaimed. 

About 4 years ago he incorporated but the premises remained in his own name. He transferred his VAT reg. to the new company as a going concern and nobody, myself included, gave a thought to the property VAT reclaimed.

Now he's wondering what will happen should he retire and sell the business.  He cannot charge VAT himself as he's not registered and presumably nor should the company 'cos it doesn't belong to them.  If  VAT has to be charged then presumably the buyer will simply reclaim it.

Maybe the VAT should have been repaid when he deregistered ?  Bit late for that now, but otherwise would the company just charge VAT on the sale ?  I seem to recall that there's something saying that 'option to tax' VAT does not have to be repaid when somebody deregisters after 15 years; this may have a bearing.

Any thoughts would be welcome !

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As I understand it, your client dergsitered when he transferred this business but kept the premises.

 

Did he opt to tax? Was there any rent paid?

 

If he reclaimed on purchase, this would I assume be on the grounds there was business use - and therefore not subject to an option to tax.

 

I quote from the HMRC guidance:-

If you have opted to tax land or buildings you may be required to account for VAT at the time of deregistration. For information on Options to Tax, including how to revoke an option to tax, anti-avoidance rules and exclusions from the effect of an option to tax, please see Notice 742A Opting to tax land and buildings

If the opted land or property is sold, then VAT may be due on the sale price, subject to transfer of a going concern criteria, as set out in Notice 700/9 Transfer of a business as a going concern

If the land or property is retained and input tax was claimed at the time of the purchase, then a deemed supply must be made at the time of deregistration, for example, VAT will need to be accounted for on the current market value of the land or property.

If no input tax was claimed at the time of the purchase, and the land or property is retained, then VAT will only become due on any subsequent sale of the land or property during the life of the option.

 

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Thanks Arthur,

Yes, client deregistered upon transfer to ltd. co. as a going concern and yes, he did reclaim the VAT on the premises when purchased.

He kept the premises in his own name and outside the company for the usual reasons.

If he reclaimed on purchase, this would I assume be on the grounds there was business use - and therefore not subject to an option to tax.

Don't quite follow you here - we are talking about business premises, of course, but why would they not be subject to OTT ?

I think the bottom line here is that he should probably have repaid the VAT when he deregistered but from a common sense point of view the best option now would be to just charge VAT on any sale to new owners, who'll just reclaim it anyway.

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AS you note, he should have paid VAT over when he de registered.

 

Not too sure too wrongs make a right

 

 

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Values, CGS, OTT

Firstly an Option to Tax actually has to be made to take effect, if the client has never opted and never notified an option to HMRC (which he wouldn't have needed to do if he was using the premises for taxable business), then any subsequent disposal of the property is exempt from VAT (unless it's within three years of completion).

An OTT is there to make exempt supplies (rent/sale of land) taxable, if the client was occupying the building for his taxable business then he wouldn't need to opt to recover the VAT he incurred. If he wanted to charge VAT now to new owners then he would need to make an option now, he would also need to register for VAT as a sole trader in order to do that, from the OP the owner of this property is not registered for VAT, and so cannot charge VAT to new owners anyway, if he does then he's compounding his accounting errors by committing fraud.

So it looks like about 4 years ago we have an exempt supply of the business property, so no VAT to account for on that. What perhaps should have happened is that on disposal there should have been an adjustment under the capital goods scheme. In order for this to happen then the taxable purchase of the building would need to have been £250K or over. If that's the case then on disposal 4 years ago the taxable use of the building ceases and the trader is laible to repay a portion of the VAT recovered. The VAT recovered is pro-rata'd over a ten year span and then is repaid proportionally to it's exempt use, so purchase 11 years ago, disposal 4 years ago gives 7 years taxable use, 3 years exempt use. So if the purchase was for over £250k then the trader should have repaid 30% of the purchase VAT recovered.

Now we say 'about 4 years ago', what you'll need to look at is whether any assessment that HMRC could raise would be in time since they can only assess four years back.

Basically what you're looking at is that the client has made a cock up in one of the most complex and expensive areas of VAT, so sorting it out is not something to be made up as you go along, nor is it something that you or HMRC can take a 'common sense'* view on. If you don't have experience in land and property VAT then please, please, consider getting this sorted by someone who does.

 

*As the Court of Appeal said in 1995 [C&E vs Arbib] "Common Sense and the law applicable to VAT are not well acquainted"

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Thanks for the useful insight, Spidersong.

I was under the impression that once OTT applied to a property, then it stuck to it - rather like a VAT qualifying car. But you seem to be saying that if the client wants to charge VAT (which he wouldn't) he'd have to re-register and opt to tax ?

Anyway, the cost was circa £180K + VAT which, as I said, was reclaimed. I think you might have misunderstood the situation of 4 years ago - nothing happened to the property then, it's rather what didn't happen to it, in that it was simply retained by the client personally when he incorporated his business.

All a bit academic at the moment as he's only considering selling or he may just rent it out but, as you suggest, specialist advice may be essential as I freely admit I'm no specialist in land & property.

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Client looks to be in the clear

An Option to Tax sticks to a combination of a property and a trader. So if a person opts a property then that option continues for at least 25 years even after they've sold the property, so if you opt, then sell, then repurchase your option still stands.

Any option someone else make has no effect on your treatment of a property. So when the client bought the property the previous owners option did not carry over to them. They would have not needed to opt to recover the VAT if they were occupying the property themselves for taxable purposes, and so I assume that they themselves did not opt. [The law on this is VAT Act 1994 Scedule 10 largely para 2 (2) which restricts the effect of an option to a "grant ... made (a) by the person exercising that option"]

Since they haven't opted (presumably) then any supply they make of the property is exempt.

I had understood that the property was retained by the original owner when incorporation took place, but from a VAT point of view there will have been a supply. Depending on the precise form of the transfer either assets forming part of a business were dispossed of so as not to form assets of the business (i.e. the Ltd company gave them to the client as a sole prop) [VAT Act Sch 4 para 5] or the sole prop retained assets upon deregistering which is a deemed supply to himself [Sch 4 para 8].

So we have an exempt (actual or deemed) supply taking place four years ago, what we need to consider is whether there is a charge to tax arrising on that disposal. We know there's no Output Tax as the sale wasn't taxable [VAT Act Sch 9 Group 1 Item 1], so we need to consider whether any Input Tax adjustment is needed.

Input tax adjustment is only required where the potential use of an asset changes before it's bought into use [VAT Regs 95, regs 107,108] (not applicable here), or where an adjustment is required under the Capital Goods Scheme. The Capital Goods Scheme applies to buildings bought, constructed, or refurbished as part of a taxable supply which had a VAT exclusive value of £250,000 or over [VAT regs 95, reg 113].

£180,000 plus VAT is not therefore above the CGS limit, so we have no taxable supply, no adjustment required under CGS, no pre-use change in intention, and that means no VAT to account for, either now or then.

So unless he made an option when he had no need to there was no VAT to be accounted for at the time, and no VAT to be accounted for now, he can now go and start worrying about Capital Gains Tax instead!

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Many thanks indeed, Spidersong, for your time and trouble taken over that most useful and comprehensive reply.

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