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Property and VAT – what are the tax implications?

As part of our ongoing review into commercial property we look into the issues clients will be facing when considering the VAT implications of using a SIPP or a SSAS.

What effect does an option to tax have?

Supplies of land and buildings are normally exempt from VAT.

This means that no VAT is payable, but the person making the supply cannot normally recover the VAT incurred on their own expenses.

However, a decision can be made to opt to tax the land/buildings and once this is in place VAT must be added to any income generated from the subsequent sale or rental of the property.  This in turn allows the SIPP/SSAS to recover the VAT on cost related to the property.

 

What is covered by the option to tax?

If a building is opted to tax, the option will include the whole of the building, the land under the building and within its curtilage and any future extension of the property.

Should an area of land be opted, the option will cover the land and any building that may be constructed on the land in the future.

If the building is demolished or destroyed then the option will still apply to the land and any future buildings that are constructed.  If a new building is put in its place then it may be possible to revoke the option dependent upon certain conditions.

Does the option to tax automatically pass from one owner to a subsequent owner when the property is sold?

No, each successive owner of a property can choose whether or not it wishes to opt to tax.  However, it is important at the outset to determine the VAT liability of any property transaction and carefully consider whether to opt to tax.

If VAT is payable on the purchase of the property then normally the Scheme would wish to recover the VAT expenditure on the purchase price and to do this the Scheme would need to register for VAT (if not already registered) and to opt to tax the property.

Can you revoke an option to tax?

Yes, an option to tax can be revoked in the following circumstances:

  1. Within the six month “cooling off period” following the initial effective date of notification.  However, this is on the condition that no rental income has been collected within this period.
  2. Following the 20th anniversary of the initial notification of the option.  However, this is subject to conditions dictated by HMRC.
  3. Automatically six years after a property has been disposed of.

Can a SIPP/SSAS choose to de-register for VAT?

Yes, but if the SIPP/SSAS chooses to de-register because their rental income generated is lower than the VAT deregistration threshold (currently £79,000 in any rolling 12 month period) they will have to consider carefully the implications.  A ‘deemed supply’ will take place upon deregistration and consequently VAT would be payable to HMRC if a property has been opted to tax and VAT was charged (and claimed) when the property was first acquired by the SIPP/SSAS.  The Scheme would then have to declare and pay VAT on the full value of the property upon deregistration.

Should you have any further questions relating to this article please contact Karen Stettner, SIPP & SSAS Administrator on 01772 555073 or Karen.Stettner@taypat.co.uk.

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