In our pre-sale due diligence, where appropriate, we ask clients whether the land being sold has been “opted to tax”. Very often clients are puzzled by this query and so in this short article I hope to clarify what we mean when we ask this question and what opting to tax is.
Value Added Tax (VAT) does not automatically apply to the purchase or rental of land, although in a few cases (such as in the sale of newly built commercial properties) the seller must impose the standard rate of VAT (which is currently 20%). In the case of other property transactions involving commercial and sometimes rural property, a seller may have chosen to opt to tax the land and hence on sale will have to charge VAT on the price of the land being sold. In choosing to opt to tax the land the seller will be able to recover any VAT they have paid on goods or services relating to that property. We are more likely to see land that has been opted to tax in land and farming transactions where there has been diversification and/ or where building costs have been involved.
This article is not about how to opt to tax but seeks to highlight what is meant by opting to tax is and why it is vital that the solicitors and land agents know if land has been opted before it is put on the market. It is essential quite simply because VAT will have to be charged on the price of any land or buildings that are opted to tax and purchasers need to know that they will need to pay this extra cost. The option to tax does not follow the property and a purchaser will need to decide whether or not to opt to tax themselves to enable the VAT to be recovered (opting to tax may not always be appropriate for a purchaser).
Clients sometimes say they do not know if the land has been opted to tax and confuse this with a query about whether their business is registered for VAT. Once a decision has been made to opt the land to tax VAT must be added to a sale price or rent and formal notification must be made to HM Revenue & Customs (HMRC). This is normally dealt with by the seller’s accountant or tax adviser. The seller or their accountant should therefore know if land has been opted to tax and have a record of correspondence with HMRC.
Another issue that solicitors and land agents may need to consider at the pre-sale stage, is whether a property sale can be treated as the ‘transfer of a business as a going concern’ (TOGC). If for example a commercial property is being sold that has tenants in situ with an existing lease this may be a TOGC.
Such sales do not attract VAT, although a number of conditions need to be met for the sale to be a TOGC. For example, if the seller is registered for VAT and has opted to tax the building the buyer must do the same and the option to tax must be received by HMRC by the date of transfer. Where there is a potential sale of a TOGC your solicitor will liaise with your accountant as to whether the sale should be conducted in this way and appropriate clauses should be inserted into the contact to ensure that the tax issues are dealt with accordingly.
The purchase of residential properties and the purchase of certain properties for charitable use may either be exempt or subject to VAT at the zero rate.
I hope that this article clarified the position but if you need more information or have any queries please contact Linsey Barclay-Smith or our Tax Director, Alison Pryde who will be happy to assist you.
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