The Value Added Tax (Buildings & Land) Order came into force on 1 June 2008. This Order introduces and updates the existing provisions regarding “opting to tax” land and buildings.
Income and expenditure relating to land and buildings is usually exempt for VAT purposes but businesses can elect to disregard this exemption i.e. they opt to tax. The effect is that the business is able to recover input VAT on purchases incurred in respect of the building; however it is then obliged to charge VAT on rental and other income.
The Order introduces a number of changes.
1)The date that permission is sought is now the effective date; taxpayers are also permitted to appeal should H M Revenue & Customs refuse an application.
2)The option remains with land after demolition and flows into any building built on it.
3)If a commercial building is to be converted into dwellings, the purchaser or tenant is to issue a certificate to disapply the option.
4)Once an application has been made to opt to tax a building there is a six month cooling off period – previously this was three months.
5)Automatic revocation of an option to tax six years after the disposal of all interest in it.
6)Introduction of a “real estate election” – this is a new way to opt to tax and does not require individual notifications in respect of each building or piece of land.
7)New administrative requirements.
One of the key implications of the option to tax is that this cannot be revoked for twenty years. The result is that when a building is bought and sold during that twenty year period, VAT must be charged on the transaction (unless certain other exemptions apply).
The rules were introduced nearly twenty years ago which means that from 1 August 2009 some taxpayers will have the ability to revoke the option to tax. This may be good news for taxpayers who have tenants that cannot recover the VAT on the rent. This also puts such landlords in an advantageous position over similar landlords who are still required to charge VAT.
Businesses that own property on which VAT is charged should check when the option can be revoked and whether such a move would be advantageous.
If you need assistance in this area please contact Jon Ward.
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