Option to Tax (OTT)

aimeeMLVC

I'm not sure if this is the correct section for such a question, but I was wondering if anyone could help me out.

I rent a holiday home and have just cancelled my VAT registration due to the close in business. The letter I received from HMRC keeps referring to "Option to Tax", and when I asked what this term meant they just replied that their policy "prevents them from providing a definite response" and directs me to Public Notice 742a (Opting to Tax Land and Buildings). I've had a read of this and I can't make heads nor tails of it and was wondering if anyone who knows their VAT terminology could help explain.

Thanks in advance.

xylophone

http://www.ibblaw.co.uk/downloads/brochures/2010-05-27-13-15-34-vat_and_property_option_to_tax_nicola_walsh.pdf

Does this help at all?

JasonLVC

Rent of a commercial or domestic propety is naturally an exempt supply for VAT purposes, that means you do not charge VAT on the rent but you cannot reclaim any VAT incurred on purchases either.

For a domestic property (Buy to Let), rent will always be exempt, but where you have a commercial property (factory, warehouse, industrial unit, etc), the owner can choose to "Opt to Tax" the property, this turns the rent from being an exempt supply to a taxable one. Basically, the rent becomes subject to VAT @ 20% and then means the owner can reclaim input tax on purchases.

The supply of renting a holiday home is automatically a standard rated supply. It does not require an option to tax, I very much doubt you will have opted to tax the property becuase it involves a formal notification to HMRC by completing a form VAT1416A. So you'd remember doing this.

When deregistering, HMRC will send a form asking about your option to tax, it is routine and you can ignore it if you have not opted to tax the property.

When you registered for VAT you reclaimedinput tax on purchases on the proviso you charged VAT on the rental. When you deregister for VAT, there are clawback provisions that might kick in, depending upon the reason for deregistering. You state the business has closed.

At point of deregistration you may be required to pay back VAT on VAT previously reclaimed (ie, depends on values involved) and you may also have to declare output tax on the property value itself if when you acquired the property you were charged VAT by the vendor. If you acquired the property with no VAT originally then you can disregard this last bit.

(VAT must be accounted for on tangible assets on hand (intangible assets such as goodwill are excluded) and positive rated interests in land on hand at deregistration where the VAT due would exceed £1,000. Therefore, the VAT-inclusive value would have to be £6,000 or more if all the assets were standard rated with VAT at 20%. It is important to include any relevant assets previously acquired in a transfer of a going concern, even though no VAT would have been charged at the time. However, assets may be excluded if VAT was not deductible on their original purchase)

You do need to go and speak to an Accountant to look into this as holding property when VAT registered can be complicated. Are you a sole trader or Ltd Co by the way?