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March 2024

Option to tax maximising OTT

Option to Tax: Maximising VAT Efficiency in the Commercial Property Sector

By Customs Duty news|VAT news, Uncategorized|VAT news, VAT news

When it comes to Value Added Tax (VAT) management, businesses often encounter complex regulations and mechanisms that impact their financial operations. One such crucial aspect is the Option to Tax (OTT), which offers businesses opportunities to optimise VAT recovery in many cases in relation to non-residential property transactions. At The VAT Consultancy, we recognise the importance of understanding and effectively navigating OTT regulations to maximise VAT efficiency for our clients but also to ensure the many pitfalls in this area are understood so that VAT does not form an unnecessary cost.   In this article, we will delve deep into the intricacies of the OTT, providing invaluable insights and strategies to help businesses navigate the complexities in this area.

What is the Option to Tax (OTT)?

The Option to Tax (OTT) (also known as an ‘election to waive exemption’) is a fundamental provision within VAT legislation that allows businesses to elect to charge VAT on the sale or rental of non-residential property provided certain exceptions don’t apply. By exercising this option, businesses can transform what would otherwise be a VAT-exempt transaction into a taxable one, thereby enhancing their ability to recover VAT on associated costs. This strategic move opens up new avenues for VAT recovery, enabling businesses to optimise their financial resources and bolster their bottom line.  There are various considerations however which are set out below.

Example of the Option to Tax (OTT) with a £1 Million Property Valuation

Let’s consider a scenario where a property developer acquires a non-residential property valued at £1 million with the intention of renting it out to generate income. Upon acquisition, assuming the vendor has also opted to tax the building, the Developer is automatically charged standard rate VAT on the purchase price, which amounts to £200,000 (assuming a standard VAT rate of 20%).

If The Developer decides to rent out the property without exercising the Option to Tax (OTT), the rental income would be exempt from VAT. Consequently, The Developer would not be able to reclaim the £200,000 VAT incurred on the property purchase.

However, by opting to tax the property, The Developer can change the VAT treatment of the rental income from exempt to taxable. Let’s explore how this decision impacts VAT recovery and overall financial outcomes:

  1. Opting to Tax (OTT):
    • The Developer decides to exercise the Option to Tax (OTT) on the property.
    • He rents out the property to a commercial tenant for £100,000 per year, plus VAT at the standard rate of 20%.
    • With the OTT in place, The Developer can reclaim the £200,000 VAT incurred on the property purchase as input tax, subject to normal VAT rules.
    • Therefore, The Developer’s VAT position improves, as he can recover VAT on associated costs, including professional fees, maintenance expenses, and future capital investments related to the property.

If the Developer does not opt to tax the property, he is unable to reclaim the VAT he has paid on the purchase of the building so this forms a cost.  It is worth noting however that SDLT is payable on the VAT inclusive value of a property so this will increase if the option to tax has been exercised.

 

Duration and Implications of OTT

Once a business elects to opt for OTT, the regulations remain in effect for a significant period, typically spanning 20 years. During this period, the business gains the flexibility to charge VAT on relevant transactions, thus maximising VAT recovery opportunities. However, it’s essential to recognise that revoking the OTT option requires careful consideration and adherence to specific conditions. Failure to navigate this process accurately can have far-reaching implications, underscoring the critical importance of seeking specialist VAT advice to ensure VAT compliance and mitigate risks effectively.

 

The Decision-Making Process

Determining whether to opt for OTT entails a comprehensive evaluation of various factors, tailored to the unique circumstances of each business. At The VAT Consultancy, our team of experts assists businesses in navigating this decision-making process, taking into account factors such as the nature of the property, VAT incurred on costs, potential tenant or purchaser VAT recovery, and implications under the Capital Goods Scheme. By conducting a thorough analysis and providing strategic guidance, we empower businesses to make informed decisions that align with their VAT objectives and financial goals.

 

Notification and Application Process

Once a decision has been made to opt to tax land/buildings, it is important the correct protocols are followed in determining whether there is a need to simply ‘notify’ HMRC that the business has opted to tax its interest in the building, due to the fact automatic permission is granted due to the fact pattern present (eg no previous exempt income received in relation to the property), or whether it must instead ‘apply’ to opt to tax (in which case HMRC will consider factors relating to income and costs incurred to date in relation to the land/property).  Property transactions can be de-railed and the eleventh hour if the relevant notifications and evidence relating to VAT and the OTT are not available to the solicitors working on the transaction.  It is therefore recommended that this area is considered way in advance of the final stages.

 

Disapplication of Option to Tax

Complexity can arise when a property that has been opted to tax is sold or leased to a party that will use it for a specific purpose that results in the OTT being disapplied.  This includes the following and specialist VAT advice is recommended to ensure that the VAT cost impact is fully understood so that the sale/lease valuation can be properly determined:

  • Buildings to be converted to dwellings
  • Land to be used to construct a dwelling
  • Buildings to be used for certain charitable purposes
  • Buildings to be used for relevant residential purposes eg as a nursing home

 

HMRC Acknowledgement Process

Recent changes in HMRC’s acknowledgment process for OTT notifications have introduced additional complexities and considerations for businesses. While acknowledgment no longer serves as a legal requirement, it remains a valuable aspect of property transactions, providing assurance to businesses and stakeholders involved. Our team at The VAT Consultancy stays abreast of these changes and guides businesses through the acknowledgment process, ensuring compliance and minimising potential risks associated with VAT management.

 

The Importance of Expert Advice

Option to tax or OTT demands expertise and precision. At The VAT Consultancy, we recognise the critical importance of specialist VAT advice in achieving optimal VAT efficiency and compliance. Our comprehensive approach encompasses strategic planning and risk mitigation, ensuring that businesses navigate OTT regulations effectively and maximise VAT recovery opportunities. By partnering with us, businesses can benefit from our deep understanding of VAT regulations and our commitment to delivering tailored solutions that align with their unique needs and objectives.

 

Summing up OTT

In conclusion, the Option to Tax (OTT) represents a pivotal mechanism for businesses seeking to optimise VAT recovery in non-residential property transactions. At The VAT Consultancy, we are committed to empowering businesses with the knowledge and expertise needed to navigate OTT regulations effectively and maximise VAT efficiency. By leveraging our comprehensive guidance and strategic insights, businesses can navigate the complexities of OTT with confidence, safeguarding their financial interests and ensuring compliance with VAT regulations. Trust us to be your partner in VAT optimisation and compliance, driving sustainable growth and success in non-residential property transactions.

 

Get in contact

Ready to unlock the full potential of your domestic and commercial property transactions through strategic VAT management? At The VAT Consultancy, we specialise in providing expert guidance and tailored solutions to optimise VAT efficiency and compliance.

Whether you’re a property developer, investor, landlord, or tenant, our team of VAT experts is here to assist you every step of the way. From navigating the complexities of the Option to Tax (OTT) to maximising VAT recovery on property acquisitions, we have the knowledge and experience to meet your needs.

Don’t let VAT regulations hinder your property investment goals. Contact us today to learn how our consultancy services can help you unlock savings, mitigate risks, and achieve your financial objectives.

Click to email or call us on +44 203 2806902

vat training

Unlocking Success: The Indispensable Benefits of VAT Training for Businesses

By Customs Duty news|Featured|Uncategorized|VAT news, Customs Duty news|VAT news

Understanding the Complexity of VAT

VAT regulations can be intricate, with a myriad of rules, procedures, and controls that businesses need to navigate effectively to ensure the accurate and timely VAT treatment of transactions and filing of VAT returns. The complexities increase with the diversity of business activities, making it essential for employees to be equipped with the right skills and knowledge.  The transactional nature of VAT means it is not uncommon for staff outside the finance or tax team to be making VAT decisions, such as raising sales invoices, so it is important they are in a position to make the right decisions.

 

Tailored Training Solutions

One size does not fit all, especially when it comes to VAT and customs duty training. Generic VAT training courses are available, covering a range of issues, from giving a basic understanding of how VAT works and affects businesses, to more specific areas of VAT.  However, generic VAT training courses may not address the specific needs and challenges the business faces. This is where bespoke VAT training comes into play.  Companies like ‘The VAT Consultancy‘ offer customised workshops, tailoring sessions to the unique requirements and activities of the client.  This personalised approach allows for a more comprehensive understanding of the business’s VAT landscape.  Using specific commercial scenarios from the business means the technical VAT training is brought to life and is more readily understood.

 

Cost-Effectiveness of Bespoke Training

Investing in tailored VAT training is usually a cost-effective solution as you can invite as many people as you wish from the business and therefore don’t have multiple individual course fees to fund.  Off-the-shelf standard VAT training courses might not cover all the nuances of a particular business so attendees can leave the session still having a number of questions about the impact of VAT on their specific area of the business.  Bespoke training ensures that employees receive targeted education, potentially helping reduce VAT risk.  In our experience they are also more likely to ask questions throughout, aiding understanding.

 

Pre-Course Planning and Preparation

Before developing the training sessions, a planning call with the training provider helps establish the goals of the training, the level of VAT knowledge among attendees, and the specific areas to focus on. This preparation ensures that the training material, typically in the form of detailed PowerPoint slides, aligns with the unique needs of the business.   Crucially, the training should include real documents, such as invoices or import entries, to bring technical training to life, making the learning experience more practical and relevant.

 

Interactive Learning Environment

One of the key benefits of VAT training is the creation of an interactive learning environment. The VAT Consultancy actively encourages questions, comments, and real-life examples from delegates throughout the session. This not only enhances the effectiveness of the training but also increases the likelihood of delegates retaining the information. Interactive sessions make the learning experience more engaging and relevant to the day-to-day operations of the business.  Having a tailored session for the business rather than having staff attend generic training sessions with other businesses means they are more likely to raise questions and understand the logic of what they are being told rather than simply listening in a more passive way.  This means the business gets much more out of the investment in training.

 

Flexible Training Delivery

Modern businesses operate in dynamic environments, and flexibility with VAT training delivery is crucial. The VAT Consultancy, for instance, offers both on-site and remote training options (or a combination of the two). With the availability of remote sessions, businesses can ensure that their employees receive the necessary training regardless of their physical location. This adaptability is especially valuable in today’s global and decentralised business landscape and for teams operating a hybrid model of working post Covid.

 

Recent Training Courses

The variety of recent training courses conducted by The VAT Consultancy showcases the breadth of topics covered in VAT training. From ‘Customs Duty Essentials for Tax Teams’ to specific topics like ‘Accounts Payable and VAT Coding’, ‘Supply Chain VAT and Customs Duty’, ‘Tour Operators Margin Scheme (TOMS)’, and ‘VAT Accounting in the Travel Sector’, to the intricacies of ‘Property VAT’ training, businesses can tailor their training sessions to cover the areas most relevant to their operations.  We can also incorporate break out sessions into the training so that the session can be carved up to suit individual groups of attendees.  This means individual staff do not have to sit in on all elements of the session.

 

Benefits of VAT Training for Businesses

  1. Risk Mitigation:
  • VAT errors can lead to financial penalties and reputational damage. Training equips employees with the knowledge and skills to minimise errors, reducing the risk of inflated costs or accounting mistakes.  For larger businesses the tax authorities would expect staff making VAT decisions to be provided with appropriate support in the form of training to enable them to make accurate VAT decisions.
  1. Consistent Approach:
  • VAT processes often involve multiple employees across different areas of the business. Training ensures a consistent approach to VAT procedures, promoting uniformity across the organisation. This is crucial for SAO reporting processes, internal audits, and HMRC Business Risk Reviews.
  1. Evidence of Compliance:
  • VAT training can serve as tangible evidence that a business is taking reasonable care with its VAT responsibilities. In the event of errors, this evidence can work in the company’s favour, showcasing a commitment to compliance.
  1. Employee Confidence and Efficiency:
  • Well-trained employees are more confident in their roles, leading to increased efficiency. When employees understand VAT processes, they can carry out their responsibilities with assurance, reducing the likelihood of delays or mistakes.  This is particularly helpful for example in relation to the Accounts Payable team where a significant volume of VAT queries can arise in relation to the quality of invoices received from 3rd party suppliers.  Delays in resolving queries, either within the Accounts Payable team or as a result of them having to involve the finance/tax team to resolve, can result in delays with payments being made to suppliers.  The knock-on effect of this is an increase in queries from suppliers chasing payment, further impacting on resource.
  1. Adapting to Business Changes:
  • Businesses evolve, and so do their VAT requirements. VAT training ensures that employees are equipped to adapt to changes in business activities, acquisitions, or expansions, maintaining compliance and efficiency.
  1. On-Demand Access and Integration:
  • The availability of online, on-demand training modules allows businesses to integrate VAT training into their internal systems. Whether for onboarding new staff, annual training cycles, or addressing specific challenges, these modules provide flexibility and accessibility.

 

Summing up VAT Training

In conclusion, all VAT training can be beneficial to a business, but the approach taken by The VAT Consultancy offers more than a conventional training experience — our bespoke VAT and Customs Duty training combines the best of our technical knowledge and experience with your team’s specific commercial scenarios, meaning you have a training session that is truly relevant to your team.

This leaves your team with a clear understanding of the core processes that govern VAT determination. This isn’t just about meeting regulatory requirements; it’s about empowering your employees to navigate VAT processes with confidence, reducing the risk of errors and ensuring accuracy in VAT reporting.

 

Get in contact

Contact The VAT Consultancy today to start a consultation and explore our custom VAT training solutions. We specialise in delivering comprehensive training modules designed to enhance your team’s understanding of VAT processes.

Discover how our tailored VAT training can equip your employees with the knowledge and skills needed to navigate VAT regulations effectively.  Let The VAT Consultancy guide your team towards enhanced efficiency and compliance through our focused VAT training programmes.

Click to email or call us on +44 203 2806902