Option to Tax
The exemption from VAT of supplies of land and buildings (outlined above) can cause problems, and have a financial impact, due to the fact that any input tax related to the exempt supply is irrecoverable. Waiving the exemption, or opting to tax the property, can be useful when exempt supplies of land and buildings are made. The effect is to change the supply of the land and buildings from exempt to taxable, therefore allowing recovery of directly attributable input tax.
Making an election to tax a property can be a useful planning tool when exempt supplies of land and buildings are made. This could be appropriate if significant expenditure is planned on a particular property.
For example, if the University rents a property to an external party, for VAT purposes this will be an exempt supply, unless an election to waive the exemption has been made.
Without any election being made, the VAT incurred on any VAT bearing costs will be irrecoverable as it relates to an exempt supply
Waiving the exemption, or opting to tax the property, changes the supply of the land and buildings (in this case a leasehold interest, for which a rent is payable) from exempt to taxable. The University would commence to charge VAT on rental invoices charged to the customer, and be able to recover VAT, when incurred, on any costs associated with the property.
It is important to consider the status of the tenant before making any election, as depending on the onward supplies made by the tenant, any VAT charged to them may not be recoverable, and represent an additional charge. In fact a lease agreement may prevent the University from opting to tax during the term of the lease. For example, insurance services and financial services are both exempt supplies. Therefore, if the tenant happened to be a bank or insurance company, they would suffer any VAT charged by the University as an irrecoverable cost.
Further matters
In addition to the above,
- ‘Election to waive exemption’ or ‘opt to tax’, mean exactly the same thing
- Once an election is made, it will apply to all future supplies that are made in respect of that building by that taxable person
- An election remains in place for 20 years
- Election must be notified to HMRC within 30 days of having been made
The Tax Section is currently trying to establish whether the option to tax has been applied to any University properties.
