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Property, VAT, SDLT and the “Sergeant Pepper” election

“It was twenty years ago today” begins the song…

With echoes of the iconic Beatles’ album ringing in your ears, when was the election made to charge VAT on the commercial property you are about to buy, sell or let?  If it was more than twenty years ago, you may be able to save some tax.  As a buyer, there may be a reduction in irrecoverable VAT, and possibly Stamp Duty Land Tax (SDLT), or you may simply be able to improve your cash flow.  As a seller, you may be able to make your property more attractive to buyers, possibly affecting both the price you can charge, and the speed of sale.

Generally, sales of buildings which are more than three years old, grants of leases, and rents, are exempt from VAT.  However, owners can waive this exemption.  This is known as the “option to tax”.  It has often been applied so that the owner of commercial property can recover VAT paid on the costs of managing or improving the building.   Once the option to tax has been made, VAT is chargeable on the rent charged to tenants.  It will also be applied to any subsequent sale price of the property.  

Some businesses are fully or partially exempt from VAT.  That means that they’re restricted, or barred entirely, from claiming back VAT on their purchases, or on the purchase of a building, or rent paid.  So, if you own a building which is subject to VAT, it could be a big disincentive to potential buyers or tenants.  

An option to tax, once made, applies to the building itself (not the owner).  Thus, any subsequent owner will also be bound by it.

However, an option to tax can now be revoked, once 20 years have elapsed since it was made.  Thus, where the election was made between the introduction of the law in 1989, and March 1993 (at the time of writing!), it can now be cancelled.

Even if the previous owner of your property made the option to tax, you can still revoke it, provided it has been in force for 20 years.  

So, when buying or selling a building where the option to tax has been made, it is always worth taking stock of the position.  Have 20 years passed since the option was taken?  Could there be any advantage, now, in revoking it?

As touched on above, there may be VAT cost and timing benefits in buying or selling a property that is not subject to an option to tax.  From the buyer’s point of view, the gilt on the gingerbread of revocation may be that it will also cut the amount of SDLT payable.   This is because SDLT is charged on the gross purchase cost of a property, inclusive of VAT.

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