Option to tax definition

ˈɒpʃən tuː tæks

What does Option to tax mean?

Also known as:

Option to tax in a nutshell

The option to tax is an election to waive the land exemption and instead to charge VAT at the standard-rate on the supply of land and buildings.

Why would an option to tax be exercised?

The supply of land and buildings is normally exempt from VAT (albeit there are some exceptions to this). Although exemption is meant to be a relief from VAT, its effects will not always be desirable since VAT is not generally recoverable when the associated expenditure is used to make exempt supplies. Therefore, by choosing to change an exempt supply of land into a taxable supply, a person can become entitled to recover more VAT. The drawback of this is that the person must charge VAT at the standard-rate on their supply of the land / building. 

Does the option to tax apply to all supplies of the land / building in question?

The option to tax will apply to all future supplies that are made in respect of the land / building. So, for example, if an option to tax were applied over a commercial building all of the rents, the grant of a leasehold interest or the sale of the freehold in that building would be standard-rated.

It is possible to revoke an option to tax but only in limited circumstances. Normally the option to tax will only be revocable 20 years after it was made. It is therefore generally a long-term decision to opt to tax land and buildings. 

Can a person opt one building but not another?

The option to tax is normally made on a building by building basis which means that a person can elect to opt to tax one property but not another. However, it is possible for an option to tax to ‘spread’; for example, where buildings are linked internally or by a covered walkway. There are also options for opting to tax multiple properties at the same time.

Are there any kinds of supply that are unaffected by an option to tax?

Some supplies are not affected even where a person has opted to tax. Common examples of supplies not affected by an option to tax are supplies of buildings designed or adapted and intended for use as dwellings and buildings designed or adapted and intended for use for relevant residential purposes. So, for example, if a person rents out a flat above a shop, the rents for the flat will remain exempt even if an option to tax has been applied over the building. 

An option to tax can also be disapplied in certain circumstances. For example, if the recipient of the supply is going to convert the building in question into dwellings then it can issue a certificate to the supplier before the supply takes place and the option will no longer be effective. 

Does the option to tax pass with the property?

An option to tax does not pass with the property, so an option to tax by one person cannot bind a person who has a different interest in the land.

A good example of this can be seen through sub-leases. If company A lets opted land to Company B then it will charge VAT at the standard-rate on its rents. However, if Company B sublets the land to Company C then these rents will be exempt from VAT unless Company B also chooses to opt to tax its interest in the land in question. 

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