01st May 2018
Timing is everything when opting to tax (OTT)
The recent case of Clark Hill Ltd – v – HMRC determined by the First Tier Tribunal re-affirmed that the timing of the decision to opt to tax and the relevant effective date of that OTT are vital to protect the status of property transactions that are undertaken as Transfers of Going Concern (TOGC) and therefore outside the scope of VAT.
Why a TOGC?
- A property on which an option to tax exists attracts a VAT charge at the standard rate on any consideration paid on its sale or dealing.
- TOGC provisions can apply to a property which involves the transfer of a business or part of a business where the buyer intends to use the property for the same kind of business as the seller.
- If specific conditions are met no VAT charge arises on the disposal.
- The buyer must be registered for VAT
- The decision by the buyer to opt to tax must have been made and notified to HMRC within 30 days of the decision but before the ‘relevant date’.
- The ‘relevant date’ is the date of supply. This occurs on exchange of contracts where a deposit is paid to the seller as agent. Where paid to a third party as stakeholder this occurs when released to the seller, usually on completion.
- On two properties sold at auction a deposit was paid to CH’s solicitors as agent. The Tribunal determined that these transactions were not TOGCs. The relevant date was the date the deposit were paid (as they were paid as agent) and at that point there was no OTT.
- The third property was also sold at auction but under the common auction conditions with the deposit being paid to the auctioneer. No buyer’s OTT was in place prior to the auction however it was notified and in place prior to the auctioneer releasing the deposit to the sellers solicitors. The sellers solicitors held the deposit as agent however, TOGC conditions were met as the relevant date was when the deposit was paid to the solicitors as agent not the date of the auction or payment by the buyer to the auctioneer .
- A contract for the sale of the fourth property by private treaty also failed to meet the TOGC conditions. Here the contract was novated and it was held that the OTT notification had not been made before the relevant date . The argument that completion was the relevant date was rejected and VAT on the consideration was due.
- An OTT can be made at any time even if a buyer has no legal interest in a property at that time
- Notification can be made immediately the decision to OTT is made and if requested the effective date can be the date of decision.
- It is recommended that OTT decision and notification to HMRC occurs before exchange of contracts.