Beware of disapplied VAT option to tax

Option to tax ‘disapplications’

When a commercial property is sold the default position is that this will be exempt for VAT purposes and therefore that no VAT will be payable on the transaction. This does not apply if the property has been ‘opted to tax’. In that case the purchaser will generally either pay VAT on the transaction or alternatively avoid VAT by coming within ‘transfer of going concern’ provisions. There are however exceptions to this rule. Some buyers issue a certificate 1614D to the seller prior to sale and this allows the sale to take place without VAT. This effectively disapplies the option to tax.

Such a ‘disapplication’ of the option to tax may apply in circumstances where the property is intended to be designed or adapted, and/or is intended for use as a dwelling or number of dwellings; intended to be used for another residential building such as care homes or student accommodation, intended for use for a charitable purpose; the sale is to a housing association; it is intended to be used for construction of a building intended for use as a dwelling by an individual; or it is intended to be used as a caravan pitch or houseboat mooring.


Hidden trap

On more than one occasion we have seen cases of an unwary seller simply accepting the certificate, taking the VAT-free proceeds and thinking that that is the end of the story. That is until HMRC come knocking to recover VAT on the following:

  1. Professional costs associated with the sale (it was an exempt transaction!)
  2. Capital goods scheme claw-back!

The capital goods scheme will have been applicable if the seller reclaimed VAT on the acquisition of the building because this reclaim is only conditionally available on the building being used for a VATable supply for a 10 year period. The sale to the 1614D buyer will have stopped the VATable supply and resulted in HMRC’s knock on the door (assuming that this has taken place within the 10 year period).


Forbes Dawson tip

Any mention of certificate 1614D should lead sellers (or their advisors) to establish the hidden VAT cost of making an exempt disposal of a VAT opted property. Any costs can then form part of the negotiation process and at the very least there should be no hidden surprises!




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