Option to Tax: What’s that?

Understanding Land and Property VAT

Land and property VAT is complex. The starting position is that the grant of a right or interest over land—such as selling, leasing, or renting property—is exempt from VAT. This means no VAT is charged, which initially may seem like good news.

However, making an exempt supply means the person granting that interest (the seller or lessor) cannot normally reclaim VAT on related costs, such as maintenance, building works, or professional fees, subject to the de minimis rules.

There are exceptions to this general rule, and one of the most common is the Option to Tax.

What is an Option to Tax?

The Option to Tax allows a VAT-registered entity with an interest in commercial property or land (for example, an owner, developer, or leaseholder) to choose to charge VAT at the standard rate on the sale or rental.

The Option to Tax allows a VAT registered entity with an interest in commercial property or land to choose to charge VAT at the standard rate on the sale or rental.

In return for charging VAT on the income, the entity can usually recover VAT on expenditure linked to that property.

The 20-Year Commitment

Once you Opt to Tax a property, the decision normally remains in place for at least 20 years. Because of this long-term commitment, it is vital to consider future tenants, buyers, and how the property will be used in the decades to come.

Common Pitfalls and Considerations

• Notification Delays: Making a decision but failing to notify HMRC via form VAT1614A within the 30-day limit.
• Poor Record Keeping: Failing to keep a clear written record of the decision. This leads to confusion and delays when providing evidence to a lessee or buyer.
• Scope of the Option: Not understanding the physical areas impacted. An Option to Tax generally covers the entire building; it is usually impossible to opt to tax only a specific part of a structure.
• Individual Interests: Misunderstanding "who" needs to opt. Each person with an interest in the property (e.g., freeholder, head lessee, sub-tenant) makes their own independent decision.
• Impact on Third Parties: Failing to consider the impact on your envisaged tenant or buyer.
• Anti-Avoidance Rules: Overlooking complex anti-avoidance provisions, especially where connected parties are involved and not all are entitled to recover VAT.
• Capital Goods Scheme (CGS): Not considering the interaction with the CGS, which can require VAT adjustments for up to 10 years if the taxable use of the property changes.
• Disapplying the Option: Failing to recognise that certain buyers, such as charities, residential developers, and housing associations, may have the ability to disapply an Option to Tax.

The Bottom Line

The Option to Tax can be hugely beneficial, but because it has long-term consequences and detailed rules, it is important your specific circumstances are reviewed carefully before opting.

If you’re not sure whether you should exercise an option to tax, or need help figuring out next steps on a land and property transaction, please get in touch for a free initial discussion.