The supply of commercial property is, by default, exempt from VAT unless the property is a “new” commercial property (i.e. less than 3 years old from completion date). Where the purchaser/tenant will use the property in a fully taxable trade, it should be entitled to deduct input tax suffered in respect of the property. However, where the property owner/tenant will make onward supplies of the property, this can cause VAT leakage because input tax relating to exempt supplies is generally irrecoverable.

In order to mitigate this, it is possible to waive exemption by making an option to tax on the land/property. Opting to tax is a two-stage process. Firstly, the decision needs to be made. Secondly, the decision must be notified to HMRC on the prescribed form within 30 days of making the decision. In practice, this second part is often neglected but the good news is that, in certain circumstances, HMRC will accept a belated notification where it can be proven that the decision to opt was previously made.

The effect of making, and notifying HMRC of, an option to tax is that future supplies of the property should be taxable at the standard rate of VAT (but not always) resulting in associated input tax being recoverable.

Once the option to tax has been made, it is binding for at least 20 years, unless the property owner/tenant is eligible to retract the option within the 6-month cooling-off period.

The three most common areas of confusion that we see are as follows:

1. A common misconception is that an option to tax attaches to the property itself. This is not the case. Where there is a transfer of ownership/rights to use the property, the option will not be binding on the new party. They themselves must make a decision to opt to tax and notify HMRC of that decision.
2. A decision to opt to tax must be notified to HMRC within 30 days. However, where a business is acquired that includes property, and the transaction otherwise meets the conditions to be treated as a Transfer of Going Concern (“TOGC”), the TOGC conditions state that where the seller has opted to tax the property, the buyer must also opt to tax the property, and must notify HMRC of that decision on or before the relevant date (most commonly being the completion date, unless an earlier tax point has been triggered e.g. a deposit received or invoiced). There is no exception to this and HMRC will not accept a belated notification for the purposes of allowing TOGC to apply also to the property.
3. Under the Article 5(2B) Special Provisions Order test (the anti-avoidance test), an option to tax is dis-applied in relation to a grant if it is:
   
   • made by the owner of property which is/would become as a result of dis-application of an option to tax, a capital item within the Capital Goods Scheme, and
   • at the time of the grant, it is the intention of the owner that either they/a person connected with them, will occupy the building otherwise than for taxable business purposes.

Where both of these criteria are met, the option to tax will be dis-applied.

In light of the complex VAT rules for land and property, HMRC has launched a consultation on “Simplifying the VAT Land Exemption – call for evidence” in which it welcomes views on the potential simplification of the VAT rules for land and property by 3 August 2021.

Specialist advice should always be sought in respect of land and property transactions as mistakes can be costly given the quantum often involved.

Michelle Thompson is Indirect Tax Manager at PwC Belfast