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OPTION TO TAX - EXEMPT SALES

What happens if taxed property is converted to dwellings?

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Hi All, Just looking for a comfort blanket here because the numbers are big!

Client has a small barn conversion complex used for FHL's.  Previous owner opted to tax, client took over as TOGC and that included option to tax without taking  any advice prior to purchase (anyone heard that before?!)

7 years on they're fed up with the FHL game, and by hard work and a bit of luck got change of use and full residential PP on all the units.

As far as my reading of all the VAT literature goes, a sale of a residential dwelling is always exempt, and therefore that over-rides the option to tax, so each unit is sold without any vat being chargeable by the vendor or payable by the purchaser.

Am I correct that on the sale of the final unit, the option to tax effectively ceases to exist?  Are there any notifications client needs to send in to HMRC to let them know that?  Or just deregister and wait for the inevitable questionnaire?

(I am pleased to say that the Capital Goods Scheme does not apply, not enough was spent by client or their vendor).

Thanks in advance for any pointers to elephant traps I have missed.

NKW

Replies (21)

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Portia profile image
By Portia Nina Levin
02nd Dec 2016 15:01

What is a residential dwelling? Is that one of those dwellings that people can actually live in, as opposed to one of those virtual dwellings?

Neither the previous owner's option to tax, nor your clients have hade any effect, because an option to tax is automatically disapplied in relation to a dwelling.

Happily, no harm has come from it, because supplies of holiday accommodation are standard-rated irrespective of whether or not the person making the supply has made an ineffective option to tax.

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Replying to Portia Nina Levin:
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By nkwayne
02nd Dec 2016 16:41

Thats very interesting. I always thought that the option to tax was a very weird thing to have done. I assumed the previous owner did it to get input tax relief on his build costs, but as you say the FHL income was vatable and therefore attributable input tax could have been claimed.

Is an 'ineffective option to tax' just your way of saying it was pointless, or is that an actual piece of terminology that means that the option does not really actually mean anything at all?

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Replying to nkwayne:
Portia profile image
By Portia Nina Levin
02nd Dec 2016 16:51

I just mean that the options were pointless. They did not achieve anything at all, other than the TOGC treatment.

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Replying to Portia Nina Levin:
By Ruddles
02nd Dec 2016 20:29

Did they even achieve that? If the property is a dwelling, then the previous owner's option would, as you have already said, have had no effect.

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Replying to Ruddles:
Portia profile image
By Portia Nina Levin
03rd Dec 2016 11:42

The option is nonetheless there. If the vendor has opted, then the purchaser must opt in order for there to be a TOGC

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chips_at_mattersey
By Les Howard
02nd Dec 2016 15:32

Do expect HMRC to query the 'deemed supply' on disposal at deregistration, as their records will still show the Option to Tax. You will need to respond carefully to explain that the deemed supply is of an exempt building, not a taxable building.

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Replying to leshoward:
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By nkwayne
02nd Dec 2016 16:42

Yes indeed, already aware of that, but thanks for reminding me.

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Replying to leshoward:
By Ruddles
02nd Dec 2016 20:24

But it won't be an exempt deemed supply, will it? (Assuming that there are no other taxable supplies, such that deregistration would have been compulsory the moment that the FHL business ceased.)

Ignore that - Friday night after a few gins is the wrong time to be posting answers on A Web.

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By shaun king
02nd Dec 2016 22:36

Call it Friday night feeling but why can't the sale be a Zero rated supply of a major interest in a "new" residential building?

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Replying to shaun king:
By Ruddles
02nd Dec 2016 22:57

But are they new? If anything, I'd say the sale by the previous owner more likely to be Z/R

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Replying to shaun king:
Portia profile image
By Portia Nina Levin
03rd Dec 2016 11:44

Because it is only the FIRST grant of a major interest that is zero-rated.

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Replying to Portia Nina Levin:
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By nkwayne
05th Dec 2016 09:40

Agreed, nothing about this indicates zero rating would apply for my clients, or indeed their vendor. None of it was 'new build'.

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Replying to nkwayne:
By Ruddles
05th Dec 2016 09:52

But, you've told us that the buildings were converted from former farm buildings. First grant etc of a dwelling following qualifying conversion is Z/R.

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Replying to Ruddles:
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By nkwayne
05th Dec 2016 10:16

True. Not sure of the circumstances of vendor's sale, I was not acting for my client then, probably should not have generalised.

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By shaun king
02nd Dec 2016 23:05

Isn't OP saying they are FHL's. If they were residential why would previous owner have opted to tax?

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Replying to shaun king:
By Ruddles
03rd Dec 2016 08:07

Because he and/or his agent didn't know what they were doing? It wouldn't be the first time that I've come across an unnecessary option.

The missing information in this case is that the OP has not confirmed whether the units, used for FHL, nevertheless qualified as self-contained dwellings. If they didn't, then client may have a serious problem.

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Replying to Ruddles:
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By nkwayne
05th Dec 2016 09:38

Ruddles wrote:

The missing information in this case is that the OP has not confirmed whether the units, used for FHL, nevertheless qualified as self-contained dwellings. If they didn't, then client may have a serious problem.

Originally - ie after the previous owner had completed the conversion and when my clients acquired - there were 5 FHL units which only had holiday let planning permission. Since then client has received PP to each unit to become self contained fully residential dwelling.

So they qualify now, but not when acquired.

What would that be a serious problem?

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Replying to nkwayne:
By Ruddles
05th Dec 2016 09:51

As already noted above, the option to tax is disapplied in respect of a dwelling. If the building does not, whatever reason, qualify as a dwelling then the option remains in force. So, your client may - on ceasing to make taxable supplies (in the form of FH letting, and assuming no other taxable supplies) - have had to deregister whilst holding taxable assets in the form of the opted properties.

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Replying to Ruddles:
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By nkwayne
05th Dec 2016 10:11

Ruddles wrote:

As already noted above, the option to tax is disapplied in respect of a dwelling. If the building does not, whatever reason, qualify as a dwelling then the option remains in force. So, your client may - on ceasing to make taxable supplies (in the form of FH letting, and assuming no other taxable supplies) - have had to deregister whilst holding taxable assets in the form of the opted properties.

Ah, I see what you mean. Fortunately the timing works in my client's favour, the change of use was all granted before FHL lettings finished, so all assets on hand at date of cessation of trade were residential dwellings.

Thanks for that.

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Replying to nkwayne:
By Ruddles
05th Dec 2016 10:41

For the avoidance of doubt, then, the planning permission was solely in respect of the actual use of the properties, so that no work was required to convert them from non-dwellings into dwellings? If so, the planning permission point is redundant - a dwelling is a dwelling is a dwelling.

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Replying to Ruddles:
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By nkwayne
05th Dec 2016 11:48

Excellent. Thanks for all your input, much appreciated.

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