Land and property queries are one of the most common areas that the team are asked to look at, particularly the option to tax. Unfortunately, the option to tax is one of the areas that can easily go wrong, which can result in costly errors or increased fees trying to put things right.
This article looks specifically at the option to tax position where there is a transfer of a going concern of a commercial property rental business, as there are further considerations that go beyond the basic TOGC conditions that can be easily overlooked.
Option to tax and the ‘Relevant date’
An option to tax notification for a property forming part of a transfer of a going concern must be received by HMRC by the relevant date of the transfer of property. You do not have the 30 days grace to submit the form as you would for a normal option to tax request. Please note that the HMRC Option to Tax unit normally take a minimum of 21 days to process applications and therefore it is advisable to address this early on in the negotiation process.
If the buyer pays a deposit that is released to the vendor or its agent prior to completion, the option to tax must be received by HMRC by this earlier date, not by the date of completion.
Normally, the deposit is held by a third party stakeholder (e.g. a solicitor client account) and not released to the vendor or its agent until completion, and this does not create a tax point for VAT purposes, and the date of completion (which is normally also the date of the transfer of the going concern) would still be the relevant date.
Failure to submit the option to tax by the relevant date can result in the property falling outside of the TOGC VAT free treatment and VAT would become due on the sales price.
The seller must obtain confirmation from the buyer that the anti-avoidance legislation will not apply to the transaction in order for TOGC treatment to apply. In a simplified summary, these are:
1. If the buyer of the property rental business will lease the property to a connected party, it must consider the partial exemption status of its connected tenant. If the connected tenant will use the property for more than 20% exempt business use, this will result in the option to tax being dis-applied and VAT would become due on the sale.
2. If the person financing the deal will occupy more than 10% of the property, the option to tax will be dis-applied.
Also note, the buyer would not be able to recover some or all of the VAT charged by the vendor, as it would be used either partly or wholly for the making of exempt supplies.
Evidence of the vendor’s option to tax
The buyer should always obtain evidence that shows that the vendor opted to tax the property with HMRC, which ideally would be HMRC correspondence on the matter (e.g. a copy of the option to tax form (1614A) and evidence that it has been submitted or written confirmation of option from HMRC) (except for new commercial properties, see paragraph below). Just because the landlord has been charging VAT on the rent to the tenants does not automatically mean that the vendor correctly administered the option to tax with HMRC.
‘New’ commercial property
Commercial property is automatically standard rated for the first three years after completion. The vendor must charge VAT on the disposal of the property in this timeframe, but would not be required to opt to tax the commercial property. Where a ‘new’ commercial property forms part of a TOGC of a property rental business, the buyer must opt to tax the property if they want it to be included within the TOGC VAT free rules. On this occasion, the vendor will not have evidence of an option to tax but will be able to evidence the building’s construction completion date. If the buyer does not opt to property, the vendor must charge VAT on the sale.
Interaction with SDLT
SDLT is calculated on the gross selling price of an opted property. However, the benefit of a transfer of a going concern treatment means that the sale of the property can be VAT free where the TOGC conditions are met, so there is an opportunity to reduce the SDLT liability. Please note that if the option to tax treatment has not been completed correctly and output VAT subsequently becomes due, additional SDLT will also become payable by the buyer, which is an absolute cost.
Capital Goods Scheme (CGS)
A buyer must confirm the CGS position (generally properties over £250k value) with the vendor on any commercial opted property as they may take on the responsibility for accounting for any VAT adjustments in the remaining interval years. The payback or clawback conditions may become applicable to the buyer.
I would always recommend that any commercial property disposal or purchase is considered for VAT purposes prior to getting to the point of the exchange of contracts, and in particular where that property forms part of a transfer of a going concern. We do not want your clients to be added to the team’s collection of war stories of where things have gone wrong. Please note that this article should not form the basis of advice to a client without the involvement of a VAT consultant. The VAT position of a transaction depends on exact circumstances, which must be considered on a case by case basis, and the article is not able to cover all scenarios.
For further information please contact Jayne Simpson at firstname.lastname@example.org