Option to Tax Proves Expensive


A recent Scottish case shows how strictly extra-statutory tax concessions are likely to be interpreted by the courts.
It involved a property owner, who had registered for VAT in 2007. The owner decided to exercise the ‘option to tax’ on the property for VAT purposes. It had incurred considerable expenditure with regard to the property and sought to recover the input VAT, which had been incurred over a long period.
VAT relating to services cannot be claimed if it is incurred more than six months prior to registration, but there is an extra-statutory concession which allows the recovery of ‘older’ VAT if the business becomes VAT registered as a result of exercising the option to tax. The idea behind this concession is to put businesses that must register for VAT as a result of making an option to tax on an equal footing with those that were already registered.
Regrettably for the property owner, deciding to exercise the option to tax was not the reason why the registration had taken place: the business was already VAT registered when the option was exercised. The ‘old’ input VAT could not therefore be recovered.
Says <<CONTACT DETAILS>>, “The correct VAT treatment almost always depends on the letter of the VAT law and the exact wording of any concessions. In this case, the recoverability or otherwise of the input VAT depended on a strict compliance with the text of the relevant publications. If you are planning property transactions, understanding the VAT position is often very important. Contact us for advice.”

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