How One Missed Form Nearly Cost a Business Thousands in Stamp Duty: A VAT Story

Posted: 1st August 2025

So, you’ve had a great idea for a new business or investment. Maybe you’re buying a commercial property or setting up a rental. You’ve done your research, spoken to the estate agent, the bank, a solicitor, and your general accountant. That should be enough, right?

Not quite.

If you’re planning to rent a commercial property and charge VAT on the rent to recover the input VAT, it’s always wise to speak with an experienced tax advisor early in the process.

We often hear from people who’ve bought property without getting tax advice first. Many end up handling the income incorrectly for tax purposes or structuring the purchase in a way that leads to unexpected tax bills.

This week, a prospective client contacted us, who seemed to have a straightforward transaction. They had purchased a building which they intended to rent to their business, a standard arrangement. They had spoken to the seller’s solicitor, who confirmed that the property had an option to tax in place. VAT would be charged on the selling price.  Our client had not considered the possibility that, as the property was an existing rental business with an option to tax in place, it would qualify as a Transfer of a Going Concern (TOGC) and that no VAT would need to be charged on the sale.

Our client thought that, as they were intended to charge VAT on the rent, they would be able to recover the input tax on the purchase, once their VAT registration took effect.  But, although they asked the accountant to register the business for VAT, they had failed to ask them to apply to Opt to Tax the property.

This oversight meant that there was no possibility of treating the purchase as TOGC for VAT purposes. As a result, they would have no option but to incur VAT on the purchase price. This pushed up the Stamp Duty by around £2,900.00.

Once the purchase was complete, they raised numerous rental invoices and correctly charged VAT.  At this point, you would think that, as they are making a taxable supply, they would be able to recover the input VAT on the property. However, although they were raising invoices, the business didn’t pay, choosing to pay the mortgage on the property instead. 

The accountant in this case correctly recorded these mortgage payments through the Director’s Loan Account. Yet, when they submitted the first VAT return on a cash accounting basis, because the rent hadn’t been paid, there was no output tax to include in the VAT return—but they did claim the input VAT on the property purchase.

This raised a red flag with HMRC. They opened an enquiry because there was a large input tax claim with no output tax being declared. HMRC advised that they should submit an Option to Tax over the property, which was subsequently denied by HMRC because they didn’t believe that there was an intention to make taxable supplies.

You might be wondering: why did the business pay the mortgage if they weren’t paying the rent? Why did they not offset the mortgage payments against the rental invoices and declare the VAT? Surely this would’ve avoided the hassle of an HMRC enquiry. 

You’re not alone. Unfortunately, this isn’t the first time we’ve seen well-meaning accountants unintentionally cause tax issues.

Thankfully, this situation had a few quick fixes:

• The business could pay the rent instead of the mortgage, thus having output tax to account for on subsequent VAT returns.
• The director could resubmit the Option to Tax and request that HMRC invoke the concession. This would allow them to backdate, as they could show that they always intended to charge VAT on the rent.
• This would show that the property was being used to make taxable supplies.
• The director could then declare the output VAT and reclaim the input VAT on the purchase.

You might think this was just a paperwork issue—and in some ways, it was. But when it comes to Options to Tax, getting the paperwork right is crucial. These rules add complexity and cost when buying rental properties where VAT is involved.

This entire situation could have been avoided with a quick conversation with a VAT advisor. That one step could have saved the business owner time, stress, and potentially thousands of pounds in additional Stamp Duty and professional fees. Whilst the VAT is ultimately recoverable, the additional Stamp Duty and professional costs are lost.

With HMRC’s systems becoming more advanced, it is now more important than ever to get advice from an experienced tax advisor, and to get it early. Unfortunately, we are seeing an increase in cases where clients have blindly followed the advice of their well-meaning accountants, or “the man down the pub”, which, unlike this case, has resulted in a prolonged and in some cases a very expensive tax bill.

So, if you’re thinking of making a decision like this for your business and want to make sure all the i’s are dotted and t’s crossed, get in touch today.