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When is an option to tax not an option to tax?

When is an option to tax not an option to tax?

We regularly deal with issues concerning VAT and property and often advise on problem areas which arise in connection with the option to tax over commercial property.

There are many common misconceptions around what the option to tax is and how it operates.

In recent weeks, we have dealt with a number of cases where the option to tax has been “disapplied”. Unless you are a tax specialist, this is likely to seem like a very peculiar concept.

Think of it like this: you are about to make a supply of a property which would ordinarily be VAT-exempt, you opt to tax to turn that supply into a taxable one, then (if the disapplication provisions apply) the legislation kicks in to make your supply exempt again!

The disapplication provisions are extremely complex and we highly recommend that you seek specialist advice if you think your transaction might be affected by them.

Very broadly, the disapplication provisions may apply in any of the following circumstances:
-the property is acquired for conversion into a dwelling, or for relevant residential or relevant charitable use;
-the property is sold by way of a TOGC;
-the option to tax anti-avoidance rules come into play. (These anti-avoidance provisions are complex and we recommend considering them in any case where the property is or will become a capital goods scheme item and the property will be used wholly or mainly for exempt purposes).

Where an option to tax is disapplied it can have major (and possibly unanticipated) consequences in relation to the recovery of input VAT and can in some cases lead to significant additional VAT costs.

If you are planning any significant transactions involving opted property, we recommend that you check the VAT position at the earliest opportunity.

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