VAT is a complicated tax and a misunderstanding of the rules can be very costly.

This is particularly true in relation to the option to tax, where a business can lose a large sum of money simply by forgetting to deal with the paperwork.

Julian Moran, tax director at Lupton Fawcett, explains what the option to tax is and what can happen when a business fails to make one.

Any letting or sale by a business of a commercial building which is over three years old will be exempt from VAT unless an option to tax is made by the business.

An option will mean that any tenants will have to pay VAT on the rents but often they will be able to reclaim this cost via their VAT return.

The advantage for the opting business is that it can recover any VAT it incurs in relation to the property, such as building and maintenance work and professional service costs.

The most common situation where an option to tax blunder can be made is when buying a commercial property rental business.

Imagine you’re at an auction, you’ve identified a suitable commercial rental property with tenants in situ.

The sale materials advise bidders to make their own enquiries as to VAT, but you’re familiar with the principle that the purchase of a letting business as a going concern is outside of VAT, so you don’t give it any further thought.

Your bid is successful, the contract is drawn up as a transfer of a going concern and no VAT is paid on the price.

Around six months later the seller contacts you to say that HMRC are denying going concern treatment because you didn’t opt to tax the property before the purchase was completed, and can you kindly transfer a further £60,000.

What you didn’t realise is that where the seller has made an option to tax prior to the sale, a purchase of that property can only qualify as a transfer of a going concern and be outside of VAT where the buyer also makes an option before buying. This is a costly error because the £60,000 cannot be reclaimed.

Another situation is where a trading business buys new premises for its trading activities.

The purchase price is £1m plus VAT. The business pays £1.2m and reclaims the VAT as a cost relating to its vatable trading business.

The business grows quickly and after five years decides to sell the premises and move to a larger site.

The sale is made without any option to tax in place (which keeps the stamp tax down for the buyer) but this results in HMRC demanding £100,000 of previously recovered VAT.

These kinds of errors can be a blow for a business but they can be easily avoided by getting some good and timely tax advice before the transaction takes place.

For further help or advice, contact Julian Moran, head of tax at Lupton Fawcett, on 01904 611411 or

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