VAT: exercising and notifying the option to tax land and buildings during coronavirus lockdown

HMRC have extended the time limit to notify them of an option to tax commercial land and buildings from 30 to 90 days where the decision to opt was made between 15 February and 31 October 2020.

However, this won’t necessarily help you if you have already gone ahead charging VAT on rent or sale price before notifying the option to tax – a scenario which can cause some messy VAT issues.

Background: the option to tax

The usual starting position under UK value added tax (VAT) is usually that no VAT is charged on selling or leasing (or otherwise making “supplies” of) real estate. However, sellers or landlords with commercial real estate can (subject to some restrictions) reverse this position by making an “option to tax” in respect of the land or buildings in question, obliging them to charge VAT on such supplies and account to HMRC for the VAT collected.

The advantage of opting to tax is that “input” VAT you pay which is attributable to the sale or letting (such as VAT on construction works or professional fees) can generally be recovered from HMRC, turning this input VAT from an absolute cost to only a potential timing cost. Of course, opting to tax causes your buyer/tenant a corresponding VAT cost, which may be a commercial obstacle depending on their business’ ability to recover input VAT.

What has changed?

There are two steps to exercising an “option to tax” land: deciding to exercise the option, and notifying HMRC of the option within 30 days of the decision. Without timely notification to HMRC, an option isn’t valid unless HMRC exercises its discretion to permit belated notification.

HMRC have extended this time limit from 30 to 90 days of the decision to opt, where that decision was made between 15 February and 31 October 2020. So if notifying an option to tax you decided to make has (understandably) fallen by the wayside during the coronavirus pandemic, it’s not necessarily too late.

How do I notify HMRC?

Options to tax can (just as before the crisis) be notified to HMRC by email – for further details, see here.

Moreover, HMRC are accepting electronic signatures on the notification, provided that it’s accompanied by evidence that the signature is from a person authorised to make the option on behalf of the business (eg a director of the relevant company). Examples of evidence are an email showing that the authorised signatory had given authority for the electronic signature, or the authorised signatory emailing the notification and including his or her email sign-off.

A pitfall to watch for

Although welcome, this extension will not necessarily help any taxpayers who had decided to opt to tax and started charging VAT on the rent/sale (in the belief that the option to tax was valid) before notifying HMRC.

The problem is that HMRC require taxpayers to seek written permission in some cases where they have already made supplies of the same land or buildings prior to making a valid option.  In the scenario above, because the option wasn’t yet notified, it wasn’t valid. As a result, the supplies of the land which the taxpayer had supposed were VATable, would in fact be supplies prior to making a valid option to tax, and would trigger the requirement to seek permission.

This kind of misunderstanding could take until your first VAT returns – or longer – to become clear, during which time your business would be charging VAT incorrectly and endangering its ability to recover opt to tax and input VAT.

However, this kind of tangled situation can be solved – and the earlier, the better. HMRC may grant permission on request in writing, and also provides for a number of cases where “automatic” permission applies (subject to some fairly complex conditions). If you suspect that your business may have been caught by the pitfall above, our tax team have the experience to help you to a solution.


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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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