HMRC has updated its guidance on the VAT treatment of land and buildings subject to an option to tax, clarifying that where an opted property remains in the business at the point of VAT deregistration, output tax must be accounted for.
An “option to tax” is an election that allows a property owner to charge VAT on supplies relating to commercial land or buildings that would otherwise be exempt from VAT. Businesses often opt to tax property to recover VAT incurred on purchase, construction, refurbishment or ongoing costs.
What has HMRC clarified?
The update, made to section 12.2 of VAT Notice 742A, serves as a reminder that businesses may still face a VAT liability when they cancel their VAT registration if they continue to own property that is subject to an option to tax.
Although this is not a change in the law, the clarification has been added to HMRC’s main guidance on opting to tax land and buildings, bringing greater visibility to an issue that can sometimes be overlooked when a business deregisters for VAT.
What action should businesses take?
While HMRC’s update does not change the underlying VAT rules, it serves as a timely reminder for businesses and property owners to review their position before cancelling a VAT registration.
In particular, businesses should consider:
- Whether they own any commercial land or buildings that are subject to an option to tax;
- The potential VAT liability that could arise on any opted property retained at the point of deregistration; and
- The timing of any proposed deregistration and whether alternative approaches may be available.
Taking advice before submitting a deregistration application can help identify unexpected VAT costs and ensure that all property-related VAT obligations have been considered.