View the related Tax Guidance about Option to tax
Option to tax ― overview
Option to tax ― overviewThis guidance note provides an overview of the option to tax or election to waive exemption in relation to the supply of land and property.For in-depth commentary on the option to tax, see De Voil Indirect Tax Service V4.114.What is the option to tax?The option to tax is a choice (or election) by a business to waive the VAT exemption on the supply of certain land and buildings. Supplies of land and buildings which are covered by the option to tax are therefore standard-rated rather than exempt. There are potential advantages and disadvantages to this waiving of exemption and each case has to be considered on its merits. A key advantage is that the option to tax may entitle a business to recover additional input tax. If a decision is made to opt to tax land and buildings then that decision needs to be notified to HMRC and sometimes HMRC’s permission must also be sought before the option can be applied. HMRC’s published guidance on the option to tax can be found primarily in Notice 742A and the following internal manuals:•VATLP22000•VATLP23000
Option to tax ― what is covered by an option?
Option to tax ― what is covered by an option?This guidance note discusses what is covered by an option to tax. It also describes when supplies will not be affected by an option to tax.For an overview of the option to tax more broadly, see the Option to tax ― overview guidance note.For in-depth commentary on the legislation and case law around the option to tax, see De Voil Indirect Tax Service V4.115C.What is the scope of an option to tax?An option to tax has effect over the land or a building which is specified in the option. When a person opts to tax a building, the option will continue to apply to the land on which the building stood if the building is demolished and any future buildings which are constructed on the land. In other words, the option has effect over the whole of the building (it is not possible to opt just part of the building) and all the land within its ‘curtilage’ (which is the land immediately around the building including, for example, forecourts and yards). Where a person opts to tax land (but not by reference to a building or part of a building), the option to tax will also apply to any buildings on the land and to future buildings constructed on the land. However, it is possible to specifically exclude new buildings from the effect of an option despite the rules set out above (this is described in more detail below). Because
Option to tax ― notifying HMRC and obtaining permission to opt
Option to tax ― notifying HMRC and obtaining permission to optThis guidance note looks at how a business should notify HMRC of its decision to opt to tax land and buildings. It also examines when a business has automatic permission to opt and when permission must be sought from HMRC.For an overview of the option to tax more broadly, see the Option to tax ― overview guidance note.In-depth commentary on the legislation concerning the notification of the option to tax is found in De Voil Indirect Tax Service V4.115C.How do I opt to tax and notify HMRC?There are technically two stages to opting to tax:•the business makes the decision to opt (keeping a clear written record)•the business notifies HMRC of its decision to opt to taxVATA 1994, Sch 10, Pt 1, paras 18–20; Notice 742A, para 4.1; VATLP22360The decision to opt will often be made at a board meeting or similar with the written record being minutes of the board meeting which clearly stipulate what is to be covered by the option (more details on the coverage of the option can be found in the Option to tax ― what is covered by an option? guidance note).Form of the notificationWhilst not technically required in law, it is generally advisable to notify the option using form VAT1614A as this will help to ensure that HMRC has all the information required. It is also important to include maps / plans clearly showing the opted land within the notification where
Option to tax ― when can an option be revoked?
Option to tax ― when can an option be revoked?This guidance note looks at the circumstances under which an option to tax may be revoked.For an overview of the option to tax more broadly, see the Option to tax ― overview guidance note.In-depth commentary on the legislation concerning the revocation of the option to tax is found in De Voil Indirect Tax Service V4.115D.Introduction to the revocation of the option to taxThe option to tax is normally a long-term decision and therefore not one to be taken lightly. The advantages and disadvantages should be weighed up carefully since once the option has been taken, the circumstances in which it can be revoked are narrow. These advantages and disadvantages are explored in the Option to tax ― deciding whether to opt guidance note.Broadly, the situations in which the option to tax can be revoked can be divided into the following categories (the conditions of which are explored further in this guidance note):•revocation in a six-month cooling off period•revocation where no interest has been held in the property for six years•revocation after 20 yearsNote that as well as there being a possibility of revoking the option to tax in the circumstances above, there are also circumstances where the option to tax is not effective / is disapplied. These circumstances are covered separately in the Option to tax ― what is covered by an option? guidance note.Revoking the option to tax in a six month cooling off periodIt is
Option to tax ― deciding whether to opt
Option to tax ― deciding whether to optThis guidance note discusses some of the key considerations that a person should take into account when deciding whether to opt to tax land and buildings.For an overview of the option to tax more broadly, see the Option to tax ― overview guidance note.For in-depth commentary on the legislation and case law around the option to tax, see De Voil Indirect Tax Service V4.115C.Advantages of opting to tax land and buildingsInput tax recoveryThe main advantage of opting to tax property is securing VAT recovery. Generally, VAT which is incurred on costs used to make exempt supplies of land and buildings is irrecoverable. By opting to tax, supplies of the property become standard-rated and VAT on costs used to make the supplies becomes recoverable, subject to the normal input tax recovery rules. For input tax recovery generally, see the Input tax ― overview guidance note.To assess how worthwhile it is to opt to tax, a business needs to consider how much input tax is at stake (ie how much input tax can be recovered if the business opts compared with how much would be recovered if it does not opt to tax). The option to tax is likely to be more desirable where large amounts of input tax have been suffered.Circumstances in which large amounts of input tax may be incurred may include (for example) VAT being charged on the initial purchase of a property, or VAT being incurred on significant works done
Option to tax ― real estate election (REE)
Option to tax ― real estate election (REE)This guidance note looks at real estate elections.For an overview of the option to tax more broadly, see the Option to tax ― overview guidance note.For in-depth commentary on the legislation around the real estate election, see De Voil Indirect Tax Service V4.115C.What is a real estate election?An REE is a formal decision made by a business that (with certain exceptions) it will be treated as having opted to tax every property in which it (or a member of its VAT group) subsequently acquires an interest. An REE differs from what is known as a ‘global option to tax’. A global option applies to a large number of properties that are not specifically identified (for example ‘all current property holdings and future acquisitions’). A global option has a significant downside being that it cannot be revoked on a property-by-property basis. This is different to an REE where individual options can be revoked, subject to meeting the normal conditions for revocation. Although some global options still exist, it is no longer possible to opt to tax all current holdings and future acquisitions in this way. Theoretically, a business could still opt to tax a large area (eg the whole of the UK) but this is unlikely to be desirable given it is considerably less flexible than an REE. If a global option is already in place, it may be possible (and desirable) to convert this into an REE. Where a business wants to
Reverse charge ― buying in services from outside the UK
Reverse charge ― buying in services from outside the UKThis guidance note covers the reverse charge that applies to services that have been bought in from outside the UK. For an overview of VAT and international services more broadly, see the International services ― overview guidance note. For in-depth commentary on the legislation and case law in relation to the reverse charge, see De Voil Indirect Tax Service V3.231.Reverse charge ― the basicsCertain services are subject to a reverse charge when they are bought in from outside the UK. This means that instead of the supplier being required to register and account for VAT on its supply of services as normal, the obligation to account for VAT on the services is actually shifted to the customer. The customer therefore treats the service as if it were supplied both to and by itself. In other words, the customer must ‘self-account’ for the VAT on its purchase. The customer is still able to recover the VAT that it charges to itself under the reverse charge subject to the normal VAT rules for input tax recovery. This means that if the customer is entitled to recover all of its VAT, the reverse charge ends up being a simple administrative entry on its VAT return. However, if the customer is not entitled to recover all of its VAT (for example because it is partly exempt), then the reverse charge will have the effect of increasing the amount of VAT due to HMRC. The
Flat rate scheme (FRS) — operating the scheme
Flat rate scheme (FRS) - operating the schemeThis guidance note sets out how to operate the flat rate scheme (FRS). For an overview of the FRS more broadly, see the Flat rate scheme (FRS) - overview guidance note.See also De Voil Indirect Tax Service V2.199B and V2.199C.Operating the FRS - the basicsA business operating the flat rate scheme (FRS) must choose, from a prescribed list of sectors, the sector which most closely describes its type of business. A set ‘flat rate percentage’ is applicable to each sector.In simple terms, this flat rate percentage is applied to the VAT inclusive turnover of the business to calculate VAT due to HMRC for a period. This means that the business is not required to keep detailed input tax records to work out exactly how much VAT can be reclaimed on costs. Instead, a notional amount of VAT recovery is built into the flat rate percentage.For example, an accountant operating the FRS is likely to choose ‘accountancy or book-keeping’ as its type of business. The applicable flat rate percentage is 14.5%. If the accountant has a VAT inclusive turnover of £120,000, VAT due will be £17,400 (£120,000 x 14.5%).Various factors can complicate the basic operation of the FRS. For example, when choosing an appropriate sector there may be multiple possibilities or a business may have more than one kind of business activity. There are also special ‘limited cost trader’ rules which mean that businesses with low levels of costs must use a higher
Cancelling a VAT registration number
Cancelling a VAT registration numberThis guidance note provides:•guidance regarding when a person must deregister from VAT on a compulsory basis•guidance regarding when a person can deregister from VAT on a voluntary basis•practical points to consider in relation to the cancellation of a VAT registrationFor in-depth commentary on VAT deregistration please refer to De Voil Indirect Tax Service V2.151 to V2.155.When must a person deregister from VAT on a compulsory basis?The VAT registration ― voluntary guidance note explains when a person is entitled to be registered for VAT. A person who is registered for VAT and ceases to be entitled to be registered must notify HMRC within 30 days from the date they ceased to be entitled to be registered. HMRC can cancel the registration of a person who has ceased to be entitled to be registered for VAT, even if the person has not notified HMRC. A failure to notify HMRC may result in a penalty. If the reason the person is no longer entitled to be registered is because they have transferred their business as a going concern the VAT registration number may, subject to the agreement of the person acquiring the business and HMRC, be transferred to the person acquiring the business. The request for the VAT registration number to be transferred should be submitted to HMRC using the form VAT68. In all other circumstances the VAT registration number must be cancelled, although HMRC may agree to a request for the deregistration to be
Sector summary ― retail
Sector summary ― retailIntroduction to the sectorThe retail industry includes any businesses involved with selling products directly to consumers for use or consumption, rather than for resale. Traditionally, the retail sector encompassed shops, department stores and supermarkets. However, online retail is a prolific and growing segment of the market. This guidance note covers the key areas of consideration within VAT and indirect taxes for the retail sector. This guidance note acts as a useful starting point for advisers preparing for a meeting with a retail client, as well as in-house VAT teams.Key considerationsTopicOverviewCommon issuesLinks to further guidanceVAT liability of productsEnsuring that the correct VAT rate is applied to each product can be a significant challenge for retailers. Regular VAT liability reviews should be performed and product files updated to reflect any changes in the applicable VAT rate. This will be a particular focus for retailers selling:– food– pharmaceutical products (including contraceptives and smoking cessation products) – children’s clothes or safety equipment– books / magazines– women’s sanitary products– ensuring the correct VAT rate is applied to new products (it is not sufficient to rely on the VAT rate applied by the manufacturer) – monitoring changes to VAT rates – single vs multiple supplies. For example, applying the correct VAT rate to meal deals or products which are bundled (eg a free toy with a magazine)VAT rates applicable to goods and services ― overview; Single or multiple supplies ― overviewRetail
Tax legislation doesn't stand still, and neither should you. At Tolley we're constantly building tools to give you an edge, save you time and help you to grow your business.