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Opt to tax, How is it tax effective for a business owner?

Buying a commercial VAT-free could advantageous  for either a prospective buyer or the intending seller.

This might be due to the mortgage that the buyer has access to and adding an extra 20% could be a major additional cost to the property.

In this blog, we would like to explain how to buy commercial property VAT free.


opt to tax

What is the Vat treatment for the sale of property in the UK?

 In the UK, the VAT treatment of the sale of the property depends on the age or nature of the property that is been sold.

Taxable supplies and applications to types of property sale:

There are 3 types of taxable supplies that is applicable when selling land and properties in the UK.

  • Standard rated which is charged at 20%: The supplies that fall into this group are items that are either zero-rated or taxable at a reduced rate.

The sale of commercial property is standard rated except in special circumstances.

  • Zero-rated: the suppliers of these goods would charge 0% however they can still reclaim the VAT they pay on the cost of their business.

New residential properties are Zero-rated, meaning the seller won’t charge VAT however can claim Vat on the cost of building the house.

  • Exempt Supplies: These supplies of goods and services are exempted from VAT and they are also grouped in the legislation and conditions and exceptions should be considered before finally categorising them as an exempt supply.

Every other type of property that is not standard rated or zero rated falls within this category

When can a Standard rated commercial property be sold VAT free in the UK?

At times some commercial properties are sold without charging VAT.

For this to occur when the business applies to opt to tax the property with the revenue

When an application is made to opt to tax it allows the business to choose to charge VAT on the sale of rental commercial property

Choosing whether to opt to tax is a very important decision as soon as this is done, it can’t be revoked until it comes of age after 20 years of the first application.

When a property has opted for tax, it will be exempted from VAT and therefore VAT cannot be reclaimed from future transactions from the commercial properties.

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Questions to ask before making the decision to opt the property for tax

Before making the decision to opt your property for the tax you need to ask yourself the following questions

  • Does it matter to me if I don’t recover the VAT paid initially on the property when initially bought? ( The reason is that as soon as you opt for VAT you won’t be able to recover the VAT initially paid when the property was purchased).
  • Would I be liable to pay back HMRC some or all of the VAT recovered when the property was initially bought because it’s subject to the Capital good Scheme?
  • Would you be responsible for repairing the property when leased or in charge of other costs of the property? If this answer is yes, your wont be able to claim input VAt on these transactions when made in the nearest future.

How to opt to tax

When a seller wants to opt for their property to tax, they will first notify the HMRC within 30 days.

From May 2022, HMRC has gradually started a new trial for 6 weeks where rather than giving approving and acknowledging property’s option to tax as valid, they simply issue an acknowledgement of receipt of an option to tax notification and this gives them to remove the approval anytime if the law has not been applied appropriately.

This new trial could be extended if it proves to be effective because the purpose of the change is to reduce the administrative work involved in issuing the letters and help to reduce the backlog from the applications of opting to tax.



opt to tax

Conclusion to opt to tax

If after careful consideration and fact-finding, you have discovered that opting for the commercial property building is more beneficial to your business, you can make an application to the revenue to make to opt to tax by filling a form VAT1614A, however, if you need support with this or other tax issues, kindly contact us.