A taxing issue

Since the introduction of VAT in the UK in 1973, business owners have come to appreciate that this tax is complex and has far reaching consequences in many business transactions not least in those involving property says commercial property agent Prop-Search and accountants Isis Business Solutions.

Chris Billson, a Director at Prop-Search, comments: “Careful consideration should be given to the issue of VAT at the outset of any deal involving property, and businesses should ensure they seek the appropriate advice at all stages of a particular transaction to reduce the risk of being caught out by matters that could adversely affect the profitability of a deal.”

The main problem surrounding VAT and property arises in practice because the rules are often misunderstood.  Businesses should be aware that opting to tax is a two stage process.  Firstly, the vendor or landlord should decide whether to opt to tax.  It should be born to mind that it may not always be necessary to opt to tax.  For example, where VAT was not charged on acquisition or where no development or construction is planned there may be little need to opt to tax.  Secondly, in order to make it legally valid, it is necessary to notify HMRC. 

Failure to correctly opt to tax buildings can lead to disputes also arising on two fronts.  Firstly with the tenant or purchaser, who may upon identifying that an option to tax a particular building was ineffective, take action to reclaim VAT unlawfully charged, or secondly with HMRC who may take action to pursue VAT wrongly reclaimed plus interest and penalties.  A worrying point to note is that often large businesses have no reliable record of which properties they have opted to tax and therefore they are leaving themselves open to the possibility of disputes arising.

However, a business may automatically revoke an option to tax at any time after a 20 year period has expired, subject to the business satisfying certain conditions. 

Mark Hollyman a Director of Isis Business Solutions, adds: “These conditions are technical and businesses will need advice for each specific opted building to assess whether the conditions for revocation have been met.  In addition, HMRC will require confirmation of this from a responsible person.  This re-enforces the need for businesses to involve their advisers where they wish to revoke an option to tax.”

As is the case when making the option to tax, businesses must notify HMRC in order for a revocation to be legally valid.  Businesses should be alert to the fact that where the correct procedure is not followed for revocation, this could lead to HMRC demanding the VAT unpaid plus interest and penalties.  It should however be noted that any option to tax is also subject to a six month ‘cooling off’ period.

A further issue which has caused problems for the property sector is where a seller has opted to tax a commercial building (on which it has paid VAT on acquisition and then undertaken construction works) that is then sold to a buyer that wants to convert it for residential use.  Where the purchaser fails to make it clear to the vendor before exchange of contracts, that they intend to convert the building for residential use, the seller would be locked into making an exempt supply and would have to repay HMRC significant sums in respect of the VAT on the costs incurred.

With Stamp Duty Land Tax also payable on either the net present value/lease premium or purchase price in a transaction, whether VAT is chargeable is also an important consideration.  Therefore, with the VAT rate now at 20%, the extra amount chargeable is an important consideration for any purchaser or lessee and can affect the rent or freehold price achieved.