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Have you ever wondered what happens to the tax rules when a business tears down or adds on to its building? Here’s a curiosity hook: even if you demolish a building that was once “opted to tax,” the option might stick around in some surprising ways!
What Does “Opted to Tax” Mean?
Normally, when a business sells or rents a commercial property, it doesn’t charge VAT (Value Added Tax). This means that the company cannot get back the VAT it paid on construction, repairs, or maintenance. But if the business opts to tax the property, it must charge VAT on any sale, lease, or rental. In return, the business can recover the VAT it spent on costs related to that property.
1. Demolishing an Opted Property
It is common for companies to demolish old buildings to either sell the bare land or build a new one. Here’s the incredible twist: if a business has opted to tax a building and then demolishes it, the option to tax remains in force on the bare land or any new building built on that site.
- Keep in Mind: If a company no longer wants the option to tax, it must wait 20 years from the date it opted to tax before it can cancel the option. To do this, they need to inform HMRC using the form VAT 1614J.
2. What About Pre-2008 Opting?
A number of businesses opted to tax their properties before 2008. On 1 June 2008, HMRC changed the rules:
- Before 2008: If a business opted to tax a building and then demolished it, the option would end. To use the tax benefit again, the business had to opt to tax the new building separately.
- After the Change: Now, if a company has opted to tax either the land or a building, the option stays in force even if the building is demolished and rebuilt.
There is a special rule for businesses that originally opted to tax only the building (not the land). If the notification clearly stated something like “Building at 22 High Street, Anytown,” HMRC understands that the tax option applied only to the building. In such cases, when that building is demolished, the business can cancel the option without extra notification—but it must keep proof of the original choice and the decision to cancel in case HMRC asks later.
3. Extending a Property
When a business extends a property that has already opted to tax, the tax option automatically covers the new parts—whether the building is extended upwards, downwards, or sideways. This means the VAT rules will apply to the new extensions just like the old parts.
However, if a business builds a completely new commercial building next to the existing one, the option to tax does not automatically extend to the new building. Even if the properties are later connected with a covered walkway, the new building remains unopened to tax. Similarly, if a group of separate units is later enclosed to form one big complex, the option to tax will not spread to the units that were not originally opted for.
Wrapping It Up: Understanding these rules can seem tricky at first, but knowing these six mind-blowing facts can save businesses a lot of hassle and money. By planning carefully—especially when demolishing or extending a property—they can better control VAT and make smarter financial decisions. This is one of those powerful secrets that can help businesses maximize their benefits while staying on top of tax rules!