Save content
Have you found this content useful? Use the button above to save it to your profile.
Office block

VAT and the option to tax: Part 2

21st Jul 2017
Save content
Have you found this content useful? Use the button above to save it to your profile.

Neil Warren considers how to make a correct election to opt to tax a property with HMRC, and the time when this should be done.

Two stages of an election

In order to make a successful option to tax election, a taxpayer must go through two hurdles as set out in VAT Notice 742A, paras 4.1 and 4.2:

The decision

There will be a moment in time when the business owners (or their advisers) make the decision that it will be necessary to make an option to tax election with HMRC on a property (land and buildings) in order to achieve an input tax benefit. I explained in part 1 of my guide VAT and the option to tax that the ‘decision’ to opt to tax is always based on an input tax motive.

The notification

HMRC should be notified of an option to tax election within 30 days of the ‘decision’ being made.

The forms

The election should be submitted to HMRC either on form VAT1614A (in most cases) or form VAT1614H.

The latter form is sometimes relevant when an opter has previously earned income from the property and HMRC needs to ensure there is no unfair tax gain being made with the election (see Example 1). In this situation, HMRC’s permission to opt is needed, rather than it being granted automatically with a VAT1614A. If there have been no previous exempt supplies, then VAT1614A will always be the relevant form.

I have seen advisers ‘play safe’ and submit both forms to HMRC in relation to a property, i.e. on the basis that one of them will be correct. But this strategy is flawed – HMRC will reject both of them and ask for just one form to be submitted, which should be the correct form based on the facts of the property in question.

Example 1

Mike has rented out an office block for many years and never opted to tax the building. However, he intends to spend £150,000 + VAT on an extension to the building and therefore wants to opt to tax the building to claim input tax (he is already VAT registered because of other income). Which form should Mike submit to HMRC to make the option to tax?

Mike has made previous exempt supplies, so his first challenge is to review para 5.2 of Notice 742A to see if he can still submit a form 1614A, rather than form 1614H. There are four conditions listed in this paragraph and he must meet one of them in order to complete a form 1614A. The most likely condition he will meet is ‘condition 3’.

This condition usually applies as long as he doesn’t receive rental income from the tenant before the election takes effect, which relates to a time period after the election date. In other words, he receives rent paid in advance with no VAT charged, in respect of a period after he has made the option to tax, when VAT should be charged on the rent.

HMRC’s Option to Tax Unit

HMRC will acknowledge all elections in writing, and this is important because it gives the opter proof to provide to either their purchaser or tenants that an election has been made, and therefore a 20% VAT charge is correct. Don’t forget that input tax can only be claimed if VAT has been correctly charged in the first place.

In the modern world, we expect almost instant acknowledgement of our actions. But there have been delays in HMRC’s Option to Tax Unit in Glasgow confirming elections in writing, which can be frustrating.  The official line is given in VAT Notice 742A, para 4.2.4 as follows:

HMRC will normally acknowledge receipt of your notification within 15 working days, although this is not necessary for the option to tax to have legal effect. You should not delay charging VAT just because you have not received our acknowledgement.”

However, I understand there is a processing opt to tax application backlog at the moment. As a tip to finding out the progress of your application, it might be worth emailing the Option to Tax Unit at [email protected]

Belated notifications

There are two possibilities here:

  1. You did make the decision to opt to tax but then forgot the notification stage as the paperwork was not submitted to HMRC; or
  2. You did not make a decision to opt to tax a property until now, and are trying to backpedal with a retrospective election date.

In the first situation, HMRC should be provided with evidence that the decision was made regarding an election, (see VAT Notice 742A, para 4.2.1). The best evidence that an option was made is copies of sales invoices charging VAT on the rent to tenants, and also showing that input tax was claimed on related expenses because the costs relate to taxable rather than exempt supplies.

In the case of the second situation - a retrospective election before the decision date - this will always be refused. 


In his final article on the option to tax rules, Neil will look at common problems and errors that happen in practice.


Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.