Revoking an Option to Tax

Tax Question

My client purchased a commercial property over 20 years ago and opted to tax it to claim the VAT he incurred. It has been rented out ever since and obviously he charged VAT on the rent and declared this to HMRC. After 20 years of making the option to tax he stopped charging and declaring VAT. He has now had a VAT inspection and HMRC are demanding VAT on the recent rent charges but his option to tax is now over 20 years old and expired, so why do HMRC still want VAT on the rent?

Tax Answer

Essentially speaking an option to tax lasts indefinitely but there is then the option to revoke it after 20 years. However, this is not automatic.

In order to revoke an option, you must notify HMRC that you are revoking it using form VAT1614J but you cannot revoke an option to tax retrospectively, so the earliest date from which an option can be revoked is the date on which the notification to revoke is made.

If you do not notify HMRC that you are revoking the option, then it remains in place and all supplies remain taxable until such time as you do notify them.

Unfortunately, if your client had not previously notified HMRC that he was revoking his option then HMRC are correct to want VAT on the rent to date.

Tony Pocock – Vantage Tax Consultant