What Is The Option To Tax?


The Option to Tax is like New York: it’s so good, they named it twice. Whether it survives the coronavirus crisis better than the Big Apple does remains to be seen.

It is a measure of just how unusual VAT can be that it includes an Option to Tax (“OTT”). I remember when I first heard the phrase (somewhere back in the mists of time) thinking “why would I opt to tax?”. I wonder if I am alone in that?

In fact, older readers may recall that the original term for the OTT was both more accurate and considerably less snappy: “the election to waive exemption”. However, HMRC gave way to the tsunami of public opinion when they rewrote the legislation about ten years ago, and made the official title the same as the one which was used in everyday practice.

The OTT does exactly what it says on the tin – it lets taxpayers opt to tax their supplies of land and property, which would otherwise be exempt. The OTT lasts for a standard 20-year period.

To return to the obvious question: why would anyone opt to tax? The reason, of course, is that sometimes in VAT it can make more sense to pay tax than not to pay it…

Very briefly, the reasoning is that if your customer can reclaim the output tax you are charging, then there is no commercial downside for them. This in turn means that there is a major incentive for you, in the form of being able to reclaim input tax, in being able to charge tax on your supplies, whether those supplies are rents or sales of property.

In other words, sometimes VAT is a lot like life – you get out of it what you put into it… and if you charge tax, then you are also able to recover it as well (most of the time, anyway…!).

This month’s Update starts off with the easy bits, and then runs through some of the more common tricky parts of the subject, before rounding everything off with a terrifying visit to the circularity of the OTT Anti-Avoidance Rule…

As ever, there is plenty that is not covered here – “global options”, real estate elections, VAT groups and OTTs, etc… but hopefully this Update will give you a good idea of the basics.

How Do I OTT? And What Does It Mean When I Do?

Assuming you’ve decided to take the plunge, how do you go about doing it?

The exact process depends on whether you have made supplies of the property before or not. Before we get into that, what does it mean when you have “opted to tax”?

Crucially, the property subject to the OTT is only opted from the perspective of the individual taxpayer making the OTT. Although we have all used the phrase “opted property”, it is not really accurate: in effect, it is only an opted property when it is supplied by the taxpayer who has made an OTT over it.

An example of a fairly standard OTT situation is found below.

If you have previously made supplies, then it may be a little bit more complicated, and this is discussed below.

No Previous Supplies Made

If you have not previously made supplies, then it is fairly easy, so we will start with that.

The law requires that you, as the taxpayer, actually decide to make an OTT. In order for this OTT to take legal effect, you must then notify HMRC of this decision on the appropriate form within 30 days of making the decision.

Note that the coronavirus relaxations have extended the 30-day period to 90 days for the duration of the pandemic. A cynic might be tempted to say “forever, then”!

It is also important to note that the OTT’s legal effect is not dependent on HMRC’s acknowledgement.

Legally speaking, all that is needed is the decision to opt, and notification. Indeed, for a time, HMRC actually stopped sending such acknowledgements out altogether. This legal position is relevant to the comments on “belated notification” below.

Where you have never made supplies before, the form in question is VAT1614A. It is not always the easiest form to complete, so take care. And it is usually sensible to include a map of the property and the folio number along with the form if you can.

It is worth noting that HMRC do not process these forms quickly: it is typically 40 working days in non-coronavirus times, and probably a bit longer now that the virus has struck.

Please don’t hesitate to give me a call if you need help with an OTT application or any related queries.

Where Previous Supplies Have Been Made

Having made previous supplies usually means the taxpayer has rented the property out before the OTT date. In other words, the taxpayer will have made exempt supplies of the property in advance of making the OTT.

If you have made supplies before, then the first thing you need to do is to work out whether you need HMRC’s permission to opt to tax. This involves running through the various questions in VAT Notice 742A and then working out if you qualify for “automatic permission”.

Very broadly speaking, if you are not seeking to reclaim input VAT incurred during the period you were making exempt supplies, you will probably qualify for “automatic permission”, meaning you can use form VAT1614A.

However, these rules are complicated and it is important that you get this right. Please feel free to give me a call to discuss if you come across this in practice.

Taxpayers which do not qualify for automatic permission need to use form VAT1614H. This is essentially a more complicated version of VAT1614A, and requires additional details about the property, etc.

HMRC will then decide, based on the facts provided, whether you are allowed to OTT, and may seek additional information from you. As you can imagine, this is a slower process than the standard approach.

If you need help with this process, please get in touch and I’ll be happy to assist.

  • Example 1: No Such Thing…

John is a VAT-registered trader and in April 2021, he purchased a commercial property in Belfast for £1 million plus VAT. In other words, he incurred VAT of £200,000 on the purchase and, not unnaturally, he wanted to reclaim it.

John spoke to his accountants for help, who sent off form VAT1614A to HMRC, along with a map and the folio number for his new property. HMRC took the standard eight weeks to reply to the application.

However, John sensibly started charge VAT on the rent paid by his tenants from the date the OTT took effect.

HMRC replied in due course with a letter acknowledging the OTT.

In December 2021, John was approached by one of his tenants, Elaine, with a view to allowing a sub-lease of a section of their part of the property. Elaine said that as this was an “opted property” she was planning to charge VAT on the sub-lease.

However, because John’s accountants had read their CJM Tax Monthly Update, they were able to tell John that there’s no such thing as an “opted property”. John agreed to the sub-lease, and suggested Elaine have a word with her accountant…

Belated Notification

The final point to examine under this section is “belated notification”.

As noted above, the legal test for a valid OTT is that the taxpayer decides to OTT, and notifies HMRC of that decision.

What happens if the taxpayer has decided to make an OTT, but forgot to notify it? In effect, this means they have met one part of the two legs of the OTT test.

HMRC will consider a request for a belated notification. However, it is important to understand that, legally speaking, this is not the same as backdating the OTT, or giving an OTT retrospective effect.

This means that HMRC will seek evidence that the taxpayer’s behaviour is consistent with a belated notification: for example, that VAT has been charged on any supplies made since the OTT date, and that any output VAT has been paid over to HMRC throughout the period.

Where the taxpayer can substantiate their statement that the OTT had been made, HMRC will generally issue an acknowledgement accepting that the OTT had been made from the date stated by the taxpayer, so long as that date is supported by the evidence (for example, VAT invoices for rent, etc).

What Should I OTT?

The basic position is very open: any VAT-registered taxpayer can OTT any land or buildings in the UK, regardless of whether or not they have any legal interest in it. The typical example people use is that any taxpayer could OTT tax Buckingham Palace… and clearly, very few of us have an interest in that piece of property (except possibly as a tourist, though that’s a different kind of interest).

In reality, of course, very few (if any?) taxpayers make an OTT over any property in which they do not, or will not, have a legal interest either already or in the immediate future.

So, in theory the answer to what you can OTT is “pretty well anything”.

But the answer to what you should OTT is a bit narrower.

Making an OTT is, obviously, optional, and therefore it should only be done when it is beneficial to do so.

In practice, there is only one kind of property which it is unequivocally beneficial to OTT: commercial property which is being let or sold to a tenant or purchaser who can recover any input VAT charged. SDLT, however, can be a problem… see the example below for more.

A situation which often comes up is where the taxpayer is in the “Capital Goods Scheme” (“CGS”) and is seeking to sell the property before the 10 intervals have elapsed.

The CGS is the kind of subject on which it is possible to wax lyrical for days, and it will certainly be the subject of a future Update.

However, for present purposes the key things to ask are:

  • Has the taxpayer spent in excess of £250,000 on a “single project” on the property in question within the past 10 years?
  • Will the onward supply of the property be exempt from VAT?

If the answer to both questions is “yes”, then the CGS is in play.

The example below sets out the kind of situation where you should be thinking “OTT?”.

  • Example 2: £64,000 Question

Highrise Ltd owns a large office block in Belfast which it acquired twelve years ago. It has used the property for its fully-taxable business since the purchase. The company spent £800,000 plus VAT on a refurbishment six years ago.

As part of a post-coronavirus restructuring, Highrise Ltd is looking to downsize its operations and move to smaller premises. Happily, it has had some expressions of interest from potential buyers.

Highrise Ltd’s accountants have pointed out that the office block is in the CGS, and that there are four years left to run. This means that, if the sale of the block is exempt from VAT, then Highrise Ltd stands to lose ca. £64,000 of input VAT ((£800,000 x 20%) x 4/10).

The question now facing the directors of Highrise Ltd is: should we opt to tax? If the purchaser is able to reclaim any VAT charged, then it looks like an attractive option.

However, there is a commercial impact: while the VAT would be recoverable in that situation, the SDLT on the sale, which would be increased by the VAT (because SDLT is calculated on the VAT-inclusive amount), would not be recoverable.

Inevitably, therefore, Highrise Ltd’s directors will need to assess the commercial impact of making an OTT over the office block on the likelihood of making a sale and on the value they can achieve for the sale. This impact will need to be weighed against the loss of £64,000 of input VAT they would lose by not making an OTT.

Is There Anything I Can’t OTT?

The answer to this question is “yes and no”. “Yes” the OTT can be prevented from taking effect, but “no”, it’s not always a blanket ban, because there are often certain conditions to be met.

The legislation specifically excludes certain forms of property from the effect of an OTT. However, some of the exclusions are more equal than others.

Some of the exclusions, or what are rather awkwardly termed “disapplications”, require certificates.

Some of them don’t need a certificate, but the tenant or buyer must inform the supplier that the OTT is not effective for one of the various reasons set out below – and you would be well advised to keep good written records of the whole thing.

Finally, some of the exclusions don’t require much of anything, but, again, it is always sensible to record everything in writing so that should HMRC ever look into the matter, you’re able to support your case properly.

HMRC have provided a very helpful summary in this table, which can be found in section 3.1 of VAT Notice 742A:

Summary of supplies not affected by the option to tax
Type of supply Evidence required
1. Buildings designed or adapted and intended for use as dwellings (for example, existing houses and flats). No certificate required.

Recommend: evidence of intended use retained.

2. Buildings designed or adapted and intended for use for relevant residential purpose. No certificate required, but buyers or tenants must inform supplier of intended use.

Recommend: written confirmation of intended use is retained by supplier.

3. Buildings for conversion into dwellings (for example, pub conversions). Certificate (VAT1614D) must be given by recipient and retained by supplier.
4. Buildings intended to be used for a relevant charitable purpose. No certificate required, but buyers or tenants must inform supplier of intended use.

Recommend: written confirmation of intended use is retained by the supplier.

5. Land sold to a relevant housing association. Certificate (VAT1614G) must be given by the recipient and retained by the supplier.
6. Land sold to an individual for construction of a dwelling. No certificate required.
7. Pitches for residential caravans. No certificate required.
8. Moorings for residential houseboats. No certificate required.
9. Supplies affected by the anti-avoidance measures. No certificate required.

Assuming you find yourself in a situation where a tenant or purchaser “disapplies” your OTT, what can you do?

For some of these exclusions, the answer is “not much”. If the conditions set out in the legislation are met, then the exclusion will apply. The OTT will therefore become ineffective, and the supply will be exempt.

An exempt supply will have the obvious knock-on effects on input VAT recovery, as discussed in July’s monthly Update. Broadly speaking, it is enough to know that an exempt supply is bad news where you are hoping to recover input tax.

By and large, HMRC’s guidance accurately reflects the legislative position.

There is one exception, however, and it is an important one. Charities are very commonly the kinds of tenants or purchasers who will seek to disapply an OTT. The law states that, where they intend to use the property for non-business purposes, and not as an office, then they can inform the supplier of that intended use and have the OTT disapplied.

There are certain conditions as to timing, etc, which I will not address here.

The key issue is the definition of “office”. In the early days of the OTT, “office” meant simply office.

However, over time, HMRC have complicated matters somewhat and taken a view that, where the office in question is itself used for non-business purposes (e.g.: for certain kinds of fundraising), then it is not covered by the exclusion to the exclusion. In their internal Manual VATLP22320, they say the following:

For example, a building used as the administrative headquarters of a charity is considered an ‘office’, unlike a charity call centre set up solely for the purpose of collecting voluntary donations.

The law, however, has not changed, and does not make any such distinction, as HMRC actually acknowledge.

‘Office’ is not defined in Schedule 10, but HMRC’s interpretation is that office used in this context means use for the administrative functions of the charity that are similar to those carried out in other organisations, such as personnel, payroll and general administration of the charity as a whole.

It is therefore open to the supplier, at least in principle, to take the view that the OTT should not be disapplied where the charitable tenant or purchaser intended to use the property as an office for any purpose, including collecting voluntary donations. In other words, the supplier could simply refuse to disapply the OTT once they were aware of the intended use.

In those circumstances, the tenant or purchaser might complain, and HMRC might even examine the position, but legally it is by no means clear that the supplier would have to take a different view.

Escape From New York: How Do I Get Out Of The OTT?

Why would you want to? Isn’t it great?

Well, clearly, real life is to some extent an ongoing journey into the unknown, and so the ability to change course if you need to is always welcome.

In short, the OTT is not quite the Hotel California, or even the Bates Motel. However, once you’re in, you’re probably in for quite a lengthy stay. And with any luck, it will be more Premier Inn than Claridge’s in terms of the costs…

There are broadly three scenarios which cover exits from the OTT. I will deal with each of them in ascending order of time.

Six Months: Cooling-off Period

This can be quite a handy escape route in certain circumstances. Unlike the automatic revocation discussed below it does need to be notified to HMRC. It generally takes effect from the original date of the OTT – essentially, it is as if the OTT never happened.

Revocation is permitted where the following conditions are met:

  • Less than six months have passed since the effective date of the OTT
  • No tax has become chargeable on a supply of the property as a result of the OTT
  • No TOGC has occurred

Assuming these conditions are met, then notification is made by form VAT1614C.

However, in addition to these, one of the three conditions set out in Paragraph F must be met, or HMRC’s permission must be sought to revoke. The three Paragraph F conditions are:

  • Neither the taxpayer nor any relevant associate has recovered “extra property input tax”, meaning input VAT attributable to supplies which would have been taxable if the OTT had effect
  • Any extra property input tax which was recovered would have to be repaid to HMRC either under the normal partial exemption rules, or as a “clawback” adjustment (i.e.: input tax reclaimed as taxable but put to exempt use within six years of the reclaim)
  • Extra property input tax has been recovered, but only in respect of one “capital item” (i.e.: a CGS property) and amounts to less than 20% of the total input tax incurred on that item

These conditions are detailed and care is needed! The motivation for all of this, as usual, is anti-avoidance.

If you have a property which has been OTT’d within the last six months and you have questions about revoking, please don’t hesitate to give me a call.

Six Years: Automatic Revocation

As noted above, the law also includes an automatic revocation provision where the taxpayer has not held an interest in the property for six continuous years. No notification is required.

The automatic revocation may not apply where there are “overages” in respect of the disposed property; and also in certain circumstances for members of VAT groups.

This is therefore worth looking at in detail if there is any doubt, but in practice this is unlikely to be a huge issue, as the taxpayer no longer has an interest in the property.

The 20-Year Itch?

Assuming you don’t jump in the “cooling-off period”, and you’re not covered by the automatic revocation rule, it is still possible to escape.

As noted above, the OTT lasts for a standard 20-year period, and it would be an unusual business or individual whose circumstances didn’t change in that length of time. Accordingly, while you might not be feeling an itch, you might be looking to get out of the OTT.

How is it done?

Essentially, the taxpayer must meet one of two sets of conditions, which are laid out with the force of law in Paragraph G at para 8.3.3 of VAT Notice 742A. These are fairly detailed, and what follows is nothing more than an outline. In other words, if you are seeking to revoke an OTT after 20 years, take care and take advice.

There are five conditions, although many come with their own peculiarities, so that in effect they amount to more than five conditions… Nevertheless, a taxpayer can revoke after 20 years if they meet either Condition 1, or ALL of Conditions 2 to 5.

  • Condition 1: the Relevant Interest condition

Condition 1 is called the “relevant interest condition” and effectively states that the taxpayer (and its “relevant associates”, a term I won’t discuss at length here) does not have a relevant interest in the property at the date of revocation – broadly that the taxpayer does not have a legal interest in the property.

The condition also requires that, if the taxpayer has disposed of such an interest, no supply in respect of that disposal is yet to take place, either on a particular date, or subject to certain conditions being met. In practice, this seems unlikely to arise outside cases of planning or avoidance.

  • Condition 2: the 20-year condition

This condition requires that the taxpayer or a relevant associate had a relevant interest after the effective date of the OTT, and more than 20 years before the revocation date.

  • Condition 3: the Capital Item condition

This condition states that the property must not be subject to CGS adjustments at the date of revocation.

  • Condition 4: the Valuation condition

Neither the taxpayer nor any of its relevant associates has made a supply of a relevant interest in the property in the 10 years prior to the revocation that was for a consideration that was less than open market value and which arose from a “relevant grant”. A “relevant grant” essentially describes a situation where the taxpayer has arranged for a large, exempt, payment to take place after the date of revocation. In practice, again, this seems likely to be rare.

  • Condition 5: the Pre-Payment condition

No part of a supply of goods or services made for consideration by the taxpayer before the date of revocation will be attributable to a supply or other use of the property by the taxpayer more than 12 months after the date of revocation.

As you will pick up, the basic idea of these conditions is to ensure that there is no avoidance activity by the taxpayer, with similar intent to the rules covering the other two exit routes.

To sum up, assuming that you can meet either Condition 1, or all of Conditions 2 to 5, you will be in a position to apply for revocation.

For 20-year revocations, this is done on form VAT1614J, and will take effect from the date specified by the taxpayer, but in no circumstances not earlier than the date notified to HMRC.

Note that even if the conditions are not met, it is still possible to seek permission for revocation from HMRC.

Interactions Between Acronyms: OTT and TOGC

The TOGC is a worthy contender for an Update all of its own, and like so many other topics, no doubt its day will come.

For now, the briefest of summaries of how the TOGC works.

TOGC stands for “transfer of a going concern”, and is a relief whereby a transfer of a business, meeting certain conditions, is treated as neither a supply of goods nor a supply of services for VAT purposes. In other words, no VAT arises on the transfer.

Given the potential impact of SDLT as outlined in section 4 above, clearly there will be situations where it is financially advantageous to avoid VAT arising on a property transfer, even where the purchaser is able to recover the VAT.

A TOGC can only apply when the relevant conditions are met – but when it does apply, it applies automatically, in other words, whether the parties want it to or not.

I do not intend to go through the standard conditions here, so it should be assumed for what follows that all of the other TOGC conditions are met, and that what is being transferred includes a property subject to an OTT (or, for completeness’ sake, the freehold of a new commercial property, which is also subject to standard rate VAT).

In addition to the normal conditions, the legislation sets out some additional requirements for TOGC treatment to apply where a VAT-able property is being transferred.

The additional conditions are that the BUYER must have:

  • Made an OTT over the property
  • By the “relevant date”, and
  • Notified the seller that the OTT will not be disapplied by the anti-avoidance rule (in respect of their (i.e.: the buyer’s) intended supplies of the property in question

The first bullet-point is easy – they need to make an OTT. However, a sensible buyer will request sight of the application, and it is commonly the case that buyers will demand a copy of HMRC’s acknowledgement before proceeding. Legally speaking, however, HMRC’s acknowledgement is not required to give an OTT effect.

The second and third bullet-points require a bit of explanation.

The “relevant date” referred to in the second bullet-point is an important issue in itself. It is the date on which a supply would otherwise have been made, but for the TOGC.

Where this can cause issues is with deposits, which can create a tax point by themselves. If a deposit is received before the OTT has been made and notified to HMRC, then that element of the consideration (at least) will not be regarded as being for a TOGC. This can be very messy in practice, and it is prudent to deal with the OTT question before anything else, and ideally before a deposit received. Note that “stakeholder” deposits do not create this issue.

The anti-avoidance rule referred to in the third bullet-point is discussed at greater length in section 7 below. In terms of notifying the seller that it will not apply, this is typically done via a term in the contract, and is generally sufficient to cover off the seller’s obligations.

Nevertheless, it does mean that the buyer’s intended use of the property is of direct relevance to the seller’s VAT position, and will need to be addressed as part of the negotiations.

The example below sets out some of the issues.

  • Example 3: Jane’s Dough

Jane owns a large portfolio of commercial properties which she has let out for many years on full written leases to a number of tenants, all of whom can recover their VAT. All of the properties are subject to OTTs.

In October 2020, Jane was approached by Consolidation Ltd with a view to acquiring the portfolio for a price of £20 million plus VAT. A deposit of £2 million plus VAT was also part of the deal, to be paid before 31 October.

Jane’s accountants advised that the sale looked like a TOGC, and so no VAT would need to be charged, provided the “property TOGC” conditions were met. This would mean that Consolidation Ltd would need to OTT the properties in advance of the deposit being paid (the “relevant date”), and it would need to confirm that its OTT would not be disapplied by the anti-avoidance rule.

Happily, Consolidation Ltd had plenty of experience with the OTT and the TOGC, and the paperwork was prepared and submitted to HMRC in advance of the receipt of the deposit. Copies of the documents were sent to Jane at the same time. The contracts were agreed, including confirmation of the anti-avoidance point, and the sale went through as a TOGC.

Jane was left with a large pile of cash and some decisions to make as to where to put it…

The Worm In The Big Apple: What is the OTT Anti-Avoidance Rule and How Worried Should I Be About It?

The anti-avoidance rule can be a bit of a horror-show, and so I have stuck to the highlights in this Update.

It will only generally be relevant if:

  • The property in question is, or would be, in the CGS from the perspective of the supplier or that of any purchaser: that is, broadly speaking, it is worth in excess of £250,000 and is subject to VAT, or it has had more than £250,000 plus VAT spent on it in the past 10 years – or, incredibly, it is in such bad repair that any purchaser will have to spend at least £250,000 on it within the next 10 years…
  • The supply would be taxable in the absence of the anti-avoidance rule (in other words, there is a valid OTT in place)
  • It is intended or expected to be used for “exempt purposes” to an extent greater than 80%
  • The person occupying it will be the supplier (or “grantor”), a “development financier” or a person connected with either of them

The goal of the rule is to prevent upfront reclaims of input VAT on valuable properties, and to dissuade purchasers whose activities are largely exempt from reorganising purchases to place the property into the hands of a connected Propertyco, for example.

The legislation is so broadly-worded, however, that the effect is to cover many entirely innocent transfers or leases where one of the parties is going to occupy the property for mainly exempt purposes and where the connection is fairly tenuous: for example, a developer selling a property to a bank which provided the developer with finance indirectly. Care is needed, in other words.

The example at the end of this section covers a fairly common scenario, without delving into the circularity of the rules, which is covered next.

Circularity and Catch-22

The anti-avoidance rules can have bizarre outcomes, particularly where (as in a TOGC) it is not clear whether the asset would be a CGS item. This is relevant because, if it is a TOGC, then no VAT will arise on the transfer, and so the property wouldn’t (necessarily) be a CGS item.

This has created the circularity I mentioned at the start of the Update, a “Catch-22” in the legislation which is acknowledged by the experts to exist, but which has not to date shown much sign of being resolved.

This Catch-22 situation led to the very strange case of David Moulsdale where the decision as to whether the anti-avoidance rule applied seems to have come down to whether or not the taxpayer believed that it would.

If he believed that the rule would apply, then it would not. However, if he believed that it would not apply, then it would apply. In other words, effectively, whatever he did, his plans would be reversed by the legislation.

This illustrates why the anti-avoidance rule can be so messy. In practice, if you have a purchaser who will be using the property for exempt purposes, you should tread with care…

If you have any queries about the anti-avoidance rule, please don’t hesitate to give me a call.

  • Example 4: Catch Me If You Can…

In October 2020, WeHelp, a charity providing exempt care to the elderly, was looking to acquire a new headquarters for its administration work. The trustees found a vacant property costing £1 million plus VAT, being offered for sale by PropCo Ltd. PropCo Ltd had owned the property for several years.

The trustees were concerned about the large amount of irrecoverable VAT involved in the purchase, and asked their accountants for help.

The accountants advised that they did not believe that there was any realistic prospect of seeking to disapply the seller’s OTT. This was because WeHelp intended to use the building as a general “office” (i.e.: for more than simply handling voluntary donations).

The trustees wondered whether WeHelp could form a special purpose vehicle (“SPV”). The SPV could be used to acquire the property, put in an OTT and reclaim the VAT. The SPV could then rent it on to the charity, thus spreading the VAT cost over time as the rents arose.

Again, however, the accountants had bad news.

WeHelp was caught. The OTT anti-avoidance rule would disapply the SPV’s OTT, since the property would be a “capital item” for the SPV (costing more than £250,000 and subject to VAT), and the expected use would be exempt. Moreover, occupation would be by a party (WeHelp) connected to the “grantor” (i.e.: the SPV).

Unfortunately, WeHelp had to find the extra cash to pay the VAT upfront…

Summary: What Are The Key Points I Need to Remember?

The OTT is a helpful tool for taxpayers seeking to recover input tax in respect of commercial properties.

It is not without its complications.

There are strict rules governing how it is applied for, especially when the taxpayer has already made supplies of the property.

It is possible to persuade HMRC to accept a “belated notification” of an OTT where the taxpayer has decided to opt, but has failed to notify as required. Generally the taxpayer will need to evidence this intention with VAT payments to HMRC and charging of VAT to tenants.

There are a number of situations (e.g.: charities, housing associations, etc) where a purchaser can “disapply” the seller’s OTT, thus immediately giving rise to input VAT adjustment issues for the seller.

In many cases, a balance will need to be struck between the commercial reality of the transaction and the “ideal” VAT outcome.

It is possible to revoke the OTT, first, within 6 months of making it (the “cooling-off period”) and then again after 20 years have elapsed, although in both cases certain strict conditions must also be met, and notification on the proper form to HMRC.

There is also a provision for automatic revocation where the taxpayer has not had an interest in the property for 6 continuous years after the OTT’s effective date.

The TOGC provisions require additional steps to be taken where property subject to VAT – so including property subject to the OTT – is transferred as part of a TOGC.

There are important anti-avoidance rules which can create traps for the unwary, and particular care should be taken when a property has a value in excess of £250,000 plus VAT, it is occupied for mainly exempt purposes and where there is a connection between the “grantor” and the occupier.

Very commonly, the supplier will need an idea of the intentions of the purchaser or tenant with regard to the use of the property, as this will often affect the VAT position of the supplier.

HMRC’s guidance in this area can be found in the relevant VAT Notices as follows:

  • VAT Notice 742A: Opting to tax land and buildings
  • VAT Notice 700/9: Transfers of a going concern

Hopefully this blog post has been helpful, and should you wish to discuss any of the issues arising – or indeed anything else VAT-related – please don’t hesitate to contact me for a free, no obligation initial enquiry.

Email me on ciaranmcgee@cjmtax.co.uk, or give me a call on 02871876220.