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wooden houses and gavel | accountingweb | Option to tax when buying a property at auction

Buying property at auction and the option to tax


The option to tax remains one of the more complex parts of the VAT legislation and there can be some situations, such as buying a property at auction, that bring added uncertainty.

4th Jan 2024
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Purchasing a commercial property at auction is a common occurrence but sometimes the commercial property listed for auction may be being sold by a landlord or an administrator acting for a business in liquidation, and the question of VAT may arise.

Often when buying a commercial property at auction, there is an element of uncertainty in terms of whether your bid will be successful, so while the intention is clear, the end outcome may not crystalise until the hammer comes down.

Option to tax

If buying a commercial property that has been opted to tax but is vacant/not being sold as a going concern, then the situation is somewhat relaxed. If your bid is successful, the vendor will charge VAT on the sale. What the buyer intends for the property determines the next steps.

If the buyer intends to use it for their own business purposes, such as a warehouse or office, the buyer can simply reclaim the input tax charged to them by the seller (assuming the buyer isn’t partially exempt).

The buyer will have to pay stamp duty land tax (SDLT) too, which will be calculated on the VAT inclusive price – but that would be the case whether purchasing at auction or from a normal estate-agent listing.

If the buyer intends to rent the property, the buyer has 30 days to notify HMRC of their intention to opt to tax the property. It is important to remember that an option to tax does not transfer from seller to buyer, the option to tax must be notified by each person’s legal interest in the property.

Transfer of a going concern

The property might be being sold as a going concern, and the auction house may require potential bidders to be VAT registered before they can bid on such a property, as the sale might be on the basis of a transfer of a going concern (TOGC).

If this is the situation, then some care and precision is required. While there is a 30-day notification window for an option to tax, for a TOGC to be valid the buyer must be VAT registered and opted to tax “on or before the date of acquisition”.

If the buyer is not VAT registered, they may not be able to bid unless they submit a VAT registration and obtain a VAT number from HMRC – and as HMRC can take months to issue VAT numbers, factor in such timescales in advance. 

Also, because the option to tax must be notified before acquisition of the property, it may mean having an option-to-tax application form sitting in your draft folder ready to be sent same day if you are lucky enough to win the bid. The alternative is that the legal acquisition does not take place until a couple of days later when the lawyers draft the sale particulars, but the risk may be that the auction rules mean that a winning bid is full and final with no right to withdraw, and the legal status of acquisition may become muddied. Can the seller or buyer take the risk of getting the “acquisition” date wrong?

The seller must also ensure that the buyer meets the conditions for TOGC. Both sides should therefore seek legal advice to make sure that the TOGC conditions are met – just because the auction house requires a VAT number from a bidder does not constitute legal or tax advice, nor will the auction house ask for proof that the TOGC conditions have been met.

Notifying an option to tax

HMRC changed the process in notifying an option to tax. Previously, notification had to be in writing (VAT1614 form) and could be emailed with attachment documents or sent in the post, but due to significant delays and poor communications, HMRC decided to change its approach.

Now the applicant must email the option-to-tax unit with the completed VAT1614 form and attachments such as land registry titles, plans of site and so on. 

If submitting as an agent, HMRC does not recognise a 64-8(!) and a written authority letter from the client is required to be sent with the email.

Top tip: When you email the option to tax, make sure the subject line or email title incudes the name of the client, their VAT number, the address of the property being opted to tax and the date the option to tax will be valid from. Why? Because once the email is sent, HMRC sends an automated email confirming receipt and stating that the option to tax is deemed in effect.

Imagine now if you were a lawyer seeking proof the buyer has opted to tax, or you are a seller and the buyer has asked for proof of an option to tax. In the old days you would receive a letter from HMRC – your “certificate of an option to tax” – but they are no longer issued, so all you have as proof is that submission email.

So if your submission email to HMRC has all the details of who is opting, what is opted and when, then the automated reply from HMRC will contain those same details and acts as a form of evidence that you have as the buyer or seller submitted your option to tax. The automated email from HMRC also confirms the date of submission or the date the email was sent.

Replies (2)

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paddle steamer
04th Jan 2024 13:37

Jason, very helpful article, I will send it to a few properties bods I know who get themselves in a tizzy re options to tax and property. Thanks.

Thanks (1)
Replying to DJKL:
By FactChecker
04th Jan 2024 14:37

Especially the Top Tip.

Unlike HMRC, a simple and effective way of handling that 'everything, well mostly, digital' organisation!

Thanks (2)