Option To Tax - To VAT or Not to VAT?

On 1st June 2008, new VAT legislation came into force to revise the procedure relating to the right to “waive exemption to VAT”. To reflect the changes in legislation the procedure also has a new name, it is now referred to as the “option to tax”.

Among the legislative reforms are:

”Cooling Off” Period

Under the previous legislation it was possible to revoke an Option to tax within 3 months of making it. Under the new regime, the "cooling-off" period during which an Option can be revoked will be extended to 6 months.

Revocation

The rules permitting businesses to opt to tax have been around for many years but 1st August 2009 will be the first opportunity to revoke options under the “20 year rule”. In anticipation, rules have been devised governing the revocation of an earlier option to tax. Where the specified conditions are met the option may be revoked without HMRC's permission, although written notification of the revocation must be given to HMRC.

In practice, this procedure might have limited application because few taxpayers will be able to satisfy all the criteria, however for those that can:

• by revoking the option to tax, VAT ceases to be payable on rent;

• tenants which cannot fully recover their VAT (e.g. banks, insurance companies and small businesses) will, in effect, see a reduction in their rent;

• landlords of such tenants should attempt to negotiate a rental increase as a condition of revoking an earlier option to tax.

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