Knowing whether a commercial property is opted to tax is essential when selling or leasing, as errors can trigger substantial VAT penalties. The case of Kog v His Majesty’s Revenue and Customs (HMRC), where a substantial personal liability notice was upheld, shows just how costly failing to confirm or understand a property’s VAT status can be.
What does “opting to tax” mean?
Normally, the sale or lease of commercial land and buildings is exempt from VAT, but it can be standard-rated if it’s a new building (under 3 years old) or where the seller chooses to “opt to tax” a property. This is a formal election made to HMRC to charge VAT on the sale or rental of that property, even though it would usually be exempt.
The main reason for opting to tax is to recover VAT incurred on property-related costs, such as:
- Acquisition, construction or refurbishment costs; and
- Professional fees (e.g. architects, surveyors, legal advisers).
The trade-off is that VAT must then be charged on any rent or sale of the property and paid over to HMRC. Opting to tax is often a strategic decision to maximise VAT recovery, but it comes with long-term consequences. Businesses need to factor in the potential 20-year obligation to charge and account for VAT on income and disposals relating to the property.
Once a property is opted to tax:
- The business must charge VAT on taxable supplies relating to the property, including rents and sales;
- VAT returns (typically submitted quarterly) must accurately reflect the VAT due for each period; and
- Any VAT charged (known as “output tax”) must be paid to HMRC by the relevant deadline.
Mistakes can be costly. If a company has opted to tax a property but fails to account for VAT on a sale or rental income, HMRC can assess the unpaid VAT and impose penalties. In certain cases, where a company’s deliberate inaccuracy is attributable to an officer (Director or Company Secretary) of the company, HMRC can issue a personal liability notice. This makes the officer personally liable for all or part (potentially up to 100%) of the penalty.
Specifics of the Kog v HMRC appeal
- The company purchased a property and wrote to HMRC requesting that its letter be accepted as an option to tax over the property;
- HMRC subsequently confirmed that the property was subject to an option to tax;
- In its quarterly VAT return for the period in which the property was purchased, the company reclaimed the input tax incurred on the acquisition;
- The company rented out surplus space at the property but did not account for VAT on the rental income; and
- When the property was sold, no VAT was charged to the purchaser, and the company did not file a VAT return accounting for VAT on the sale.
The appellant argued that the company’s failure to submit a VAT return recording its liability on the sale was not intentional on his part. However, the First Tier Tribunal determined that he had “blind-eye knowledge” of the position – meaning he suspected that relevant facts existed but made a deliberate decision not to confirm them.
This case highlights the importance of fully understanding whether a property is opted to tax. Companies must proactively verify a property’s VAT status. Failure to do so – or ignoring the facts – can lead to serious compliance risks and allegations of filing inaccurate returns.
Key considerations
Deciding whether to opt to tax a property is a key commercial decision. It requires careful consideration of future transactions, both rental and sale, because VAT may need to be charged.
In many cases, VAT can be recovered if the supply is made to a VAT-registered business providing that they will be using the land or property to make taxable supplies themselves. However, additional costs can arise if:
- The buyer is not VAT-registered, or cannot register because they make exempt supplies; and
- Stamp Duty Land Tax (SDLT) is payable on the VAT, which can increase the overall cost to the buyer.
Both of these factors can influence the rent level or sale price.
It is also essential to keep proper records. Even when operating through a limited company, HMRC can hold directors personally responsible if it believes they have deliberately acted to avoid tax. Careful documentation and transparency are key to staying compliant.
How M+A Partners can help
VAT is a complex area that benefits from careful planning. We advise on all aspects of VAT, from day-to-day compliance and VAT returns to more complex issues such as opting to tax and structuring transactions in a VAT-efficient and compliant way.
If you would like advice on whether to opt to tax a property, or support with VAT treatment more generally, please get in touch with one of our specialists.
