The next step

For detailed commentary on the de minimis rules

[Memo]

VAT1614C

[Document]

Property seller changes their mind about charging VAT

Land supplies

The starting point with most supplies of land and buildings is that the income received is exempt from VAT. There are exceptions where supplies might be zero-rated or standard-rated, e.g. the freehold sale of a non-residential building which is less than three years old is standard-rated. If you have exempt property income, e.g. from a rental agreement, then you win by not having to account for output tax but lose because you cannot claim input tax on your expenses.

Tip. The exception with claiming input tax on exempt supplies is if the VAT you pay on your expenditure means that your business can benefit from the partial exemption de minimis limits.

For detailed commentary on the de minimis rules, visit http://tipsandadvice-vat.co.uk/download (VA 10.08.04).

Option to tax

There is a solution to the input tax problem. If you opt to tax your interest in a plot of land or building with HMRC, then you can charge output tax on your future income from that site but then claim input tax on your expenses. This is a key feature of the option to tax rules, namely that you should only ever opt to tax land or buildings if there is an input tax benefit from doing so, e.g. you can claim VAT on the cost of buying the property if the seller is charging VAT.

Trap. The decision to opt to tax a building must be fully considered because, once made, it cannot usually be revoked for 20 years. This will be a problem for a future tenant or buyer who cannot claim VAT on their expenses, e.g. a dentist.

Tip. An option to tax election does not apply to any residential part of a building. For example, if you opt to tax a building that consists of a ground floor shop and first floor flat, you will not charge VAT on renting out or selling the flat, which will continue to be exempt from VAT.

Solution for our subscriber

Our subscriber opted to tax the warehouse because they expected to be charged 20% VAT on the purchase of the building and wanted to claim input tax. But now that the seller has confirmed the sale will be exempt from VAT, our subscriber might not have much input tax to claim and would prefer not to have the election in place. There is a potential solution: the election could be revoked by submitting FormVAT1614C (see The next step ) to HMRC. But how can they do this before the 20 years are up?

Cooling-off period

There is an exception to the general rule. The form can be used to revoke an election within the first six months of it being made, as long as the following conditions are met:

• the opter (our subscriber) has made no supplies linked to the property where VAT has been charged, e.g. for rent
• no input tax has been claimed on any expenses relevant to the property.

Tip. The six-month window starts with the date when your option to tax took effect and not six months from when the property was purchased.

For a link to Form VAT1614C, visit http://tipsandadvice-vat.co.uk/download (VA 10.08.04).