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VAT Notice 742A

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Option to tax: choosing the correct form

Reason for making an election

You will only ever make an option to tax a building in order to gain an input tax benefit. In other words, your future property rental income or sale proceeds will be standard-rated rather than exempt, meaning you can claim input tax on your related costs. An election is only relevant to a non-residential property - it is overridden for supplies involving residential buildings. So, for example, if you buy a property that consists of a ground floor shop and first floor flat, you will charge VAT on rent for the shop if you opt to tax but not the flat.

Trap. Don’t forget that an option to tax election will remain in place for 20 years before you can revoke it. You must therefore consider the potential downsides of opting to tax a building, e.g. having to charge VAT on its future sale, which might deter buyers who cannot fully claim input tax.

Correct form

In most cases, you will submit FormVAT1614A to HMRC. This is always used if you have never earned any past exempt rental income from the property, e.g. you have just purchased it and been charged VAT by the buyer which you want to claim as input tax before renting it out.

However, it’s possible that you have previously rented out the property and not charged VAT but now want to opt to tax the building because you intend to carry out major building improvement works and reclaim input tax. This is where you need to press the pause button: should you complete FormVAT1614H instead?

Tip. If your exempt rental income was earned more than ten years ago, it can be ignored.

Is HMRC’s permission needed?

The main difference between the two forms is that you are asking for HMRC’s permission to opt to tax with the latter form, whereas FormVAT1614A is a notification process only. Needless to say, you must complete both forms correctly, providing HMRC with all the information needed.

However, just because you have earned past exempt income from the building, this does not mean that you always default to using FormVAT1614H . If your previous arrangements pass certain tests, you will still complete FormVAT1614A . There are four tests listed in HMRC’s guidance and you only need to pass one of them. These are set out in VAT Notice 742A (see The next step ).

Tip. The main reason for having the tests is to prevent a landlord or property owner from manipulating the rules, e.g. by making a large advance charge for rent and not charging VAT the day before the election takes effect. So, stand back and see if your own arrangement gives an unintended VAT windfall that HMRC will challenge.

If you have made exempt supplies in the past ten years, and do not pass any of the four tests where automatic permission is granted, you must complete and submit FormVAT1614H . Once permission has been granted, your option will automatically take effect from the date of your original notification.

For a link to VAT Notice 742A, visit https://www.tips-and-advice.co.uk , Download Zone, year 12, issue 10.