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HMRC have published a report on the impact of the VAT option to tax, the measure introduced in 1989 to alleviate the burden on UK businesses.
A supplier of land can opt to tax to recover the VAT incurred as input tax. The system removes the VAT cost for developers and investors, but they must charge output tax on onward sales and leases.
HMRC have published a report on the impact of the VAT option to tax, the measure introduced in 1989 to alleviate the burden on UK businesses.
A supplier of land can opt to tax to recover the VAT incurred as input tax. The system removes the VAT cost for developers and investors, but they must charge output tax on onward sales and leases.
The study by the IFF Research agency on behalf of the Revenue included in-depth interviews with tax agents who provide clients with information on the option to tax. It also took a survey of 838 firms affected by the option to tax.
The key conclusions are:
- where supplier businesses use the option to tax for properties leased to tenants, most opt all their leased property;
- where supplier businesses had sold property, they generally chosen to opt all their sold properties;
- it is common for recipient businesses to lease both opted and non-opted property;
- recipients, who cannot fully reclaim VAT, encounter the option to tax regularly. Just under half of property leased from landlords by this group is opted, and around a fifth of purchased property is opted;
- recovering input tax is seen by tax agents as the key reason for opting. The main reason for deciding not to opt a property is to accommodate potential tenants or purchasers who may be in VAT-exempt sectors;
- tax agents feel anti-avoidance rules in relation to the option to tax can be complicated; and
- although the administrative burden on suppliers could be reduced by real estate elections, few were aware of the option, and advisers are not inclined to work to increase awareness.
