Supplies of land and buildings, such as freehold sales, leasing or renting, are normally exempt from VAT. This means that no VAT is payable, but the person making the supply cannot normally recover any of the VAT incurred on their own expenses.
But you can opt to tax land.
For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it. You do not need to own the land in order to opt to tax. Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard-rated, and you will normally be able to recover any VAT you incur in making those supplies.
When you opt to tax, you can specify an area of land or a ‘building’. Commonly, you will specify a ‘building’ because that is the prominent feature of the land. If you specify:
- a building, the option to tax will continue to apply to the land on which the building stood if the building is demolished and to any future buildings constructed on the land
- land, the option will apply to any buildings on the land and future buildings constructed on the land
In both circumstances, you can specifically exclude new buildings from the effect of an option to tax if you wish to.
There are 2 stages in opting to tax:
The first stage
Is making the decision to opt. This may take place at a board meeting or similar, or less formally. However, you reach your decision, you should keep a written record, showing clear details of the land or buildings you are opting to tax, and the date you made your decision.
If you have previously made exempt supplies of the land or building, you may need HMRC permission before you can opt to tax.
The second stage
Is to notify HMRC of your decision in writing.
For your option to tax to be valid you, as authorised signatory, must normally make your notification within 30 days of your decision. You can ask HMRC to accept a notification made more than 30 days after your decision but HMRC will not do so unless we are satisfied that you made your decision to opt at the relevant time. If you would like HMRC to consider accepting a belated notification, you should enclose with your notification an explanation of your circumstances and any evidence that will help to show HMRC that the decision was made at the relevant time.
Your option to tax will have effect from the date of your decision, or any later date that you have specified, as long as you notify HMRC in writing within the relevant time limits.
In no circumstances can an option to tax have effect from a date before you made your decision to opt.
It’s for you to decide whether to opt to tax any land or buildings. If you do decide to opt to tax and are not a member of a VAT group or intend to become one in the future, only the supplies you make of your interest in the land or building will be affected. Your option to tax will not affect supplies made by anyone else. For example, if you are selling an opted building the buyer has the choice of whether to opt to tax or not. Similarly, if your tenant is sub-letting, they too have this same choice. For this reason, you should inform your tenant of your decision at the earliest opportunity so that they may safeguard their right to recover input tax by opting to tax, should they wish to.
If you’re a member of a VAT group your option to tax may affect other members.
If you change your mind within 6 months of the effective date of your option to tax, you can revoke your option to tax if you meet all the conditions set out in a) to d) below. You will not need HMRC prior permission but must notify HMRC before the end of the 6-month period, and your notification must be made on form VAT1614C.
The conditions are:
- a) less than 6 months have passed since the day on which the option had effect
- b) no tax has become chargeable on a supply of the land as a result of the option
- c) no transfer of a going concern has occurred
- d) you have notified the revocation to HMRC