Option to tax

Option to tax

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A and B are Directors of C Ltd. A and B are jointly purchasing a new commercial property to rent to C Ltd. Obviously A and B will suffer VAT on the purchase of the property, it being a standard rated supply. The intention is for A and B to opt to tax the property and charge VAT on the rentals to C Ltd, enabling them to recover the Input VAT on purchase and pay over the Output VAT on the rentals.

Clearly VAT 1614 needs completing but do forms VAT 1 & 2 also need completing to register A and B in 'Partnership'? Rent would be no more than £20k per annum.

I called the National Advice Service to check but neither of the 2 people I spoke to really installed me with much confidence. The 2nd person checked with his supervisor and said that Customs 'may deem them all to be financially linked'. Is this particularly bad?? They couldn't say what the implications of this would be other than to fill the forms in and see what happens!!

If there is a problem with it I need to know now as C Ltd could quite simply buy the property instead (ideally however this would be plan B).

Hope this makes sense - seem to have rambled a bit!!
Paul Hendley

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By theaardvark
26th Oct 2007 10:18

Yes, Yes and Possibly
If A & B are to recover the VAT, they will need to register for VAT. HMRC view joint owners of a property that are exploiting it for commercial benefit and being a de-facto partnership. A & B must therefore complete a VAT 1 and VAT 2 to register for VAT along with the VAT 1614. Indeed, HMRC will not accept a VAT 1614 from an entity that is not registered or registering for VAT. I would recommend, therefore, that all 3 forms are sent in at the same time. I usually send the original registration documents and a copy of the 1614 to the Registration Section and the original 1614 and copy registration documents to the Option to Tax unit.

The partnership of A & B will be "connected" or "financially linked" with C Ltd. However, this will only be a problem if C Ltd has any VAT exempt or non-business income. If this is the case then A & B's option to tax may be disapplied making the lease to C Ltd exempt from VAT and disallowing their claim for the input VAT on the purchase.

I would recommend that you ask a VAT specialist to cast his/her eye over the planned purchase to confirm that there are no hidden VAT issues. I would be happy to do this.

Regards

Paul Taylor
Senior VAT Consultant
Dains

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