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So Why Opt to Tax - Interesting findings from HMRC

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The VAT People - Expert Author

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17th June 2014

HMRC recently commissioned a report in order to understand why businesses choose to opt to tax commercial properties and the administrative burdens relating to the option to tax.

Unsurprisingly the main reason leading to a business opting to tax was to facilitate input VAT recovery on costs relating to the property. What is more surprising is that many businesses do not in fact realise the value of opting to tax or the circumstances where doing so would lead to an increase in VAT recovery, or even secure a VAT property purchase.

Often the need to opt to tax is identified very late on in the process of selling a commercial property which can then lead to a deal stalling if the increased plus VAT purchase price means that funding falls short of the purchase price, or the increased level of stamp duty makes the property less desirable.

The findings of the report make for interesting reading as it was established from the sample of 833 businesses that the majority either held all opted to tax properties, or all non opted properties, indicating that they preferred to avoid having a mixed portfolio for VAT purposes and the need to carry out partial exemption adjustments.

Exempt businesses (those making exempt supplies with little or no ability to recover VAT) regularly encountered options to tax being made on properties they intended to purchase or lease. This indicates that many businesses may lose the opportunity to secure a sale or a tenant by opting to tax without checking if this is in fact of benefit. Why add VAT on to a sales price and lose a deal if there is little input VAT at stake or if an agreement can be reached to adjust the purchase price to reflect potential VAT loss?

The other interesting point was that the majority of businesses that were asked expressed confidence in their understanding of the law relating to VAT land and property whereas their advisors felt that knowledge was not that great other than in the case of large businesses who may have in-house VAT expertise.

This perhaps indicates that many small and medium size businesses require specialist help to ensure that they do not inadvertently create problems for themselves. This is especially the case given that all parties agreed that the VAT anti avoidance provisions intended to block planning schemes aimed at generating VAT recovery for businesses who were heavily exempt from VAT or had a high level of non business activities were highly complex. This means that is very easy for businesses to fall foul of these rules without even realising that they apply.

It remains to be seen if HMRC will simplify the administrative system for opting to tax, or revise the VAT anti avoidance provisions.

If you or your client is involved in either purchasing, selling or leasing a property, it is always worth seeking professional VAT advice ideally before any sales or leases are finalised.


About the Author

The VAT People are leading VAT and Customs Duty consultants based in the North West of England. We work with a wide range of businesses throughout the UK as well as assisting our accountancy colleagues to unravel the thorny VAT issues for their clients. We are one of the UK's largest and most comprehensive sources of VAT and Customs advice, our consultancy team having over 140 years of experience in VAT and Customs gained in either HMRC or a Big 4 accountancy practice environment.

Call us on our VAT helpline 0800 077 4604 to discuss. All initial discussions are free with no-obligation.



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Article Published/Sorted/Amended on Scopulus 2014-07-16 09:50:27 in Tax Articles

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