Revoking VAT election on property

What input VAT will need to be repaid?

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My client has a mixed use property. It consists of three flats above a shop. The property was bought in about 2000 for around £100,000, and was refurbished in 2008 at a cost of a further £100,000. In order to save VAT on the refurbishment costs, the client elected the property for VAT.  Since then, the shop tenant has been properly billed with rent plus VAT, and the residential flats above are of course exempt.  Each quarter, VAT returns have been made and there has been nominal input VAT reclaimed.

The client now wishes to sell the property. In order to widen the range of potential buyers, he would like to offer the property without VAT. Thus the question arises as to whether the election can be cancelled and if so, how, and crucially, what input tax might need to be repaid to HMRC.

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VAT
By Jason Croke
09th Jun 2024 11:43

Options to tax cannot be revoked for 20 years from date the original option made.

If client opted to tax in 2008 then the option to tax still has about 4 years to go.

If sold as a ToGC (buyer opts to tax) then the sale is outside the scope of VAT so I don't see the option to tax being a big issue from a selling point of view. Remembering also that options to tax only apply to commercial property (the shop) and not residential.

Options to tax are never to be taken lightly, your client wanted to reclaim £20k of VAT on a refurb, by wanting that, they committed to the downsides of opting to tax.

Thanks (1)
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By davehome
09th Jun 2024 12:16

Are you saying that if a sale is made to a non registered purchaser, the sale is only partially chargeable to VAT, with the shop element valued separately? Or do there need to be 2 contracts?

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Replying to davehome:
VAT
By Jason Croke
09th Jun 2024 13:54

Correct, you don't necessarily need two sale contracts, but you will need two valuations to arrive at an accurate split between resi/shop that supports the split, should HMRC ever enquire.

Always best to get specialist advice if outside comfort zone as there are many ways to do this such as ToGC, split/single contracts, etc but also may be driven by other taxes or reliefs such as CGT where valuations may affect tax liabilities, depends on the sellers specific situation, and the buyer may need advice potentially in terms of SDLT if split as separate contracts (subject to linking rules), etc.

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