ACCA ATX ^UK Syllabus A6. Value Added Tax - Land and Buildings - Notes ^{1 / 4}

Buildings may be zero or standard rated

Residential and charitable buildings are zero rated.

• Commercial buildings owned for less than 3 years are standard rated.

  This means that on sale proceeds and rental income, output VAT will be charged at 20%. 

  Input VAT on expenses can be reclaimed.

• Commercial buildings owned for more than 3 years are exempt but have an option to tax.

  This means that they are normally out of the scope of VAT, therefore no output VAT is charged and no input VAT is reclaimed.

  However, if the option to tax is used, then on sale proceeds and rental income, output VAT will be charged at 20%, and input VAT on expenses can be reclaimed.

  Purchasers may choose to opt to tax so that they can recover the input VAT paid on the purchase of a property that has an opt to tax already on it. By doing this though, they are promising to charge output VAT on all transactions relating to that property including any future sale.

Illustration

A commercial building owned for 4 years will be sold for £1,000,000 (excl.)

Expenses relating to the sale amount to £100,000 (excl.) and its purchase cost is £500,000 (excl.)

Should the opt to tax election be made?

• Solution

  Normal treatment

  Sale proceeds £1,000,000
  Less expenses (£100,000)
  Less cost (£500,000)
  Profit £400,000

• Special treatment/opt to tax

  Output VAT (20%*£1,000,000) = £200,000
  Less Input VAT (20%*£100,000) (£20,000)
  Less Input VAT (20%*£500,000) (£100,000)
  Net VAT payable £80,000

  Therefore, the election should not be made as it will result in a VAT payment.