As part of the expansion of the tax, the Option to Tax land and properties was introduced in 1989
VAT is one of the most complex taxes we have. Anthony Barber the Chancellor of the Exchequer said that VAT would be a “simple tax” when he oversaw its introduction in 1973. How the world has turned since then.
VAT is a self-assessing tax applied to business transactions that take place (in the main) in the UK. The VAT rates that exist today are 0% zero rate, 5% reduced rate and 20% standard rate. These rates are called “taxable rates”. If a business has net taxable income in any 12-month rolling period that exceeds £83,000, then it must register for VAT.
Provided that the business sells its goods or services at any of the taxable rates, it is entitled to reclaim VAT on all its business expenditure.
There are some sales which are not subject to VAT; these are exempt from VAT by law. These include finance, education, health and welfare, insurance, sport, charity fundraising, postage, burials, and cremations etc. It also includes specific land and property transactions.
If a supply is exempt from VAT, no VAT is being charged to the customer and, therefore, nothing is paid over to HMRC. As HMRC get nothing on the sale, any VAT incurred on expenditure/costs related to the exempt sale is not recoverable. (If a business has both taxable and exempt supplies please see our Spring Newsletter on partial exemption).
The Option to Tax is a declaration mechanism that allows a business to add VAT to the supply of non-residential land or property. By adding VAT to the land or property, VAT is charged on any sale/lease of the land which is paid over to HMRC. As HMRC are receiving VAT on the sale, it is permissible to claim VAT on expenditure/costs on a VAT return.
An Option to Tax is a voluntary declaration – you do not have to add VAT to the land and property unless you really want to.
To find out more, please contact our specialist VAT Team