Option to Tax (Election to Waive Exemption)

An irrevocable election made by a landlord to charge value added tax on exempt supplies of buildings (rents). This enables the otherwise irrecoverable input VAT on costs relating to the property to be reclaimed by the landlord against the output tax charged on the rents.
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Definition

Option to Tax (Election to Waive Exemption) is an irrevocable election made by a landlord to charge value added tax (VAT) on rents of buildings that would typically be exempt from VAT. This election allows landlords to reclaim the input VAT on costs related to the property, which would otherwise be irrecoverable, against the output tax charged on the rents.

Key Aspects

  • Irrevocable Election: Once made, the election to tax cannot be reversed.
  • Reclaim Input VAT: Enables landlords to recover VAT paid on related costs.
  • Output Tax Charged: Tax is charged on the rents received, thus converting an exempt supply into a taxable one.

Examples

Commercial Property Rentals

A landlord leases a commercial building and opts to charge VAT on the rent. This election allows the landlord to claim back the VAT paid on the renovation and maintenance costs of the building.

Mixed-Use Developments

In a mixed-use development where parts of the property are rented for commercial purposes, opting to tax those parts enables the landlord to recover the VAT incurred on development costs.

Frequently Asked Questions

Q1: Can the option to tax be reversed?

A1: No, once the option to tax is made, it is irrevocable and cannot be reversed.

Q2: How does the option to tax benefit landlords?

A2: It allows landlords to reclaim input VAT on costs associated with the property, which would typically be non-recoverable if the supply remained exempt.

Q3: Is the option to tax applicable to all types of properties?

A3: The option to tax generally applies to commercial properties, as residential lettings often remain exempt from VAT.

Q4: Are there any exemptions to the requirement to charge VAT once an election is made?

A4: Certain exemptions may apply, such as supplies made to a tenant who is a fully taxable business.

Q5: Where can landlords make the option to tax declaration?

A5: The declaration is typically made through the relevant tax authority, such as HMRC in the UK.

  • Value Added Tax (VAT): A consumption tax levied on the sale of goods and services.
  • Exempt Supplies: Transactions that are not subject to VAT but disallow the recovery of input VAT.
  • Input VAT: VAT paid on purchases and expenses, which can be reclaimed if related to taxable supplies.
  • Output Tax: VAT charged on sales or rents provided by a business.
  • Capital Goods Scheme: A system to adjust the amount of VAT recovered on high-value property and other assets.

Online References

Suggested Books for Further Studies

  1. “Value Added Tax: A Comparative Approach” by Alan A. Tait
  2. “VAT and Property: Guidance on the Building of Houses and Other Constructions” by Rebecca Cave
  3. “Practical Guide to VAT” by Thomas A. Horngren

Accounting Basics: “Option to Tax” Fundamentals Quiz

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