The VAT option to tax on commercial property is an election a property owner makes under Schedule 10 of the Value Added Tax Act 1994 to charge VAT at 20% on supplies of a building or land that would otherwise be exempt, in exchange for the right to recover input VAT on costs relating to that property.1Legislation.gov.uk. Value Added Tax Act 1994 Schedule 10 – Buildings and Land Once made and notified to HMRC, the election normally binds the property for 20 years, so the decision is a long one.
The Core Trade-Off
Supplies of land and buildings are generally VAT-exempt by default. That sounds attractive until you look at the cost side: an exempt supplier cannot reclaim the VAT charged on construction, refurbishment, professional fees, agents, or maintenance. For a landlord spending significant sums on a fit-out, that irrecoverable VAT sits on the bottom line.
Opting to tax reverses the position. Rent, lease premiums, and freehold sales become standard-rated at 20%, and the input VAT on related expenditure becomes recoverable.2GOV.UK. VAT Rates The cost of that switch falls on your occupiers. A VAT-registered tenant making taxable supplies recovers the VAT you charge and is broadly indifferent. A tenant who is not VAT-registered, or who makes exempt supplies — charities, financial services firms, insurers, medical practices — cannot recover the charge, and 20% becomes a permanent extra on the rent.
New commercial buildings less than three years old are standard-rated by law, so the election adds nothing to those sales. It matters most for older buildings, continuing leases, and any situation where you want reliable input tax recovery on capital spending across the life of the asset.
What the Election Actually Covers
The option applies to land and to everything on it — freehold sales, leases, and licences to occupy. Opt over a parcel of land, and any building later constructed on it is automatically covered.1Legislation.gov.uk. Value Added Tax Act 1994 Schedule 10 – Buildings and Land
You cannot narrow the scope. An option in relation to a building extends to the whole building and to all land within its curtilage; you cannot opt over one floor and leave the rest exempt. The election is also personal. If you own three buildings and opt over one, the other two stay exempt until you file separately for each. A different owner of the same building has to make their own election.
Developers and groups with sizeable portfolios can make a single real estate election covering all their property interests using form VAT1614E rather than filing property by property.3GOV.UK. Tell HMRC About a Real Estate Election
Notifying HMRC
Making the election is a two-step process. You decide to opt, and then you notify HMRC. The notification must normally reach HMRC within 30 days of the decision date.4GOV.UK. Opting to Tax Land and Buildings (VAT Notice 742A) The effective date can be the decision date or a later date you specify.
Notifications go to the Option to Tax National Unit, and HMRC prefers email. Send the completed form VAT1614A to optiontotaxnationalunit@hmrc.gov.uk, with the property address, postcode, and effective date in the subject line.5HM Revenue & Customs. Revenue and Customs Brief 1 (2023) – Changes in Processing Option to Tax Forms You will get an automated acknowledgement confirming the receipt date. Keep it. Postal submissions receive no acknowledgement unless HMRC needs more information.6GOV.UK. VAT: Option to Tax Enquiries
Form VAT1614A asks for the identity of the opter, the full postal address of the property, the effective date, and any Land Registry title number.7GOV.UK. Tell HMRC About an Option to Tax Land and Buildings Complex boundaries or multiple buildings need a clear map. A defective property description can lead HMRC to treat the election as invalid, which suspends input tax recovery until the problem is fixed.
Missing the 30-Day Window
HMRC has discretion to accept a belated notification if you can show that a genuine decision to opt was made at the earlier date. Useful evidence includes correspondence referring to the opted status, output tax properly charged and accounted for from the decision date, or a written declaration from a director confirming when and why the decision was taken.8HM Revenue & Customs. VAT Land and Property – Option to Tax: Belated Notification of an Option to Tax HMRC will refuse where the late notification is linked to tax avoidance, where the evidence contradicts itself, or where the effect is a retrospective option designed to reclaim VAT on historic costs.
When You Need HMRC’s Prior Permission
Usually you notify and the election takes effect. But if you have made, or intend to make, exempt supplies of the property within the 10 years before the proposed effective date, you must obtain HMRC’s written permission before opting.4GOV.UK. Opting to Tax Land and Buildings (VAT Notice 742A) This typically catches investors buying tenanted stock that has been let exempt for years.
A set of “automatic permission” conditions excuses you from applying, including:
- Mixed-use schemes where the only exempt supplies related to dwellings within the development.
- Cases where you do not want to recover any pre-option input tax, the only consideration received has been rent or service charges, and future recovery is limited to overheads like repairs and maintenance.
- Cases where no taxable supply from the option will go to a connected person, and no exempt supplies were made in respect of occupation rights continuing after the option takes effect.
- Situations where the earlier exempt supplies were incidental to the main use of the property, such as an advertising hoarding or a radio mast. Letting to a tenant is not incidental.
Notifying without permission when it was required makes the option invalid from the outset. HMRC may treat it as valid where there was a minor error, but that is discretionary.4GOV.UK. Opting to Tax Land and Buildings (VAT Notice 742A)
When the Option Is Disapplied Anyway
Certain supplies remain exempt even when your election is valid and in force. Charging VAT where the law says you cannot creates a liability for the incorrect tax.
Residential Property
The option does not apply to supplies of buildings designed as dwellings, buildings intended for a relevant residential purpose (nursing homes, children’s homes, student halls), commercial buildings sold for conversion into dwellings, land sold to a housing association for residential construction, land sold to an individual for self-build of their own dwelling, and residential caravan pitches or houseboat moorings where year-round occupation is not prevented.4GOV.UK. Opting to Tax Land and Buildings (VAT Notice 742A) Several of these require the buyer or tenant to give the supplier a certificate — VAT1614D for conversion, VAT1614G for housing associations — before the supply takes place. No certificate, no disapplication.
Charitable Use
The option is disapplied for a building intended solely for a relevant charitable purpose, provided it is not used as an office.9HM Revenue & Customs. Option to Tax: Supplies Not Affected by an Option: Buildings to Be Used Solely for Relevant Charitable Purpose HMRC applies a 5% tolerance to “solely” and treats “office” as general administrative functions like payroll and HR, not, say, a charity call centre taking donations. The charity must tell the landlord or seller of the intended use in writing before the supply. Silence means the option stands and VAT is charged.
Anti-Avoidance
Paragraph 12 of Schedule 10 disapplies the option where the supply is to a connected person who will not use the property wholly or mainly for taxable purposes and the arrangement is designed to secure a tax advantage.10Legislation.gov.uk. Value Added Tax Act 1994 Schedule 10 Paragraph 12 – Anti-Avoidance The classic case is a company opting and then leasing to a connected exempt entity, creating input tax recovery that would not otherwise exist. If HMRC invokes the provision, the supply is exempt despite the election and any input tax already claimed on the strength of the option may have to be repaid.
Selling as a Going Concern
When a property-letting business is sold as a going concern, the sale can fall outside the scope of VAT entirely — meaning no VAT on the price. Where the seller has opted, the buyer must:11GOV.UK. Transfer a Business as a Going Concern (VAT Notice 700/9)
- Opt to tax the property and notify HMRC in writing no later than the time of supply, normally completion.
- Notify the seller that their own option to tax will not be disapplied by the anti-avoidance provisions.
The seller is responsible for the correct VAT treatment and should get a copy of the buyer’s notification and the written non-disapplication confirmation. If the buyer opts too late, TOGC treatment falls away, the sale becomes standard-rated, and the buyer faces a surprise 20% on top of the price. This is one of the more expensive errors in commercial property transactions.
The Capital Goods Scheme
Spend £250,000 or more excluding VAT on buying, constructing, or refurbishing a building and the Capital Goods Scheme applies.12GOV.UK. The Capital Goods Scheme for VAT Your initial input tax claim is then adjusted over a 10-year period based on how the property is actually used each year.13GOV.UK. Capital Goods Scheme (VAT Notice 706/2)
For opted buildings, any drift toward exempt use — for instance, a new letting caught by a disapplication — triggers a clawback for each remaining year in the adjustment period. Recovery follows actual use over time, not the position at purchase.
Getting Out of the Election
Reversal is difficult by design. Two routes exist.
Six-Month Cooling-Off
Within six months of the effective date you can revoke on form VAT1614C, but only if:14GOV.UK. Revoke an Option to Tax for VAT Purposes Within the First 6 Months
- No VAT has become chargeable as a result of the option — you have not charged VAT on any rent or sale.
- You have not recovered any input tax that would not have been recoverable without the option.15HM Revenue and Customs. VAT1614C – Opting to Tax Land and Buildings
- You notify HMRC before the six months expire.
Realistically this only helps where the deal or development that prompted the option collapsed before any taxable supply. Issue one VAT invoice and the window closes.
Revocation After 20 Years
The main exit needs more than 20 years to have passed since the effective date. You then apply on form VAT1614J.16GOV.UK. Revoke an Option to Tax After 20 Years Have Passed Through the intervening two decades you must keep charging 20% VAT on relevant supplies and accounting for it. Retain the original notification, HMRC’s automated acknowledgement, and any board minutes for the full period; losing evidence of the original election date makes the eventual revocation harder.
Before You Opt: Who Pays
Your decision has a direct cost for every person who rents or buys from you. Fully taxable, VAT-registered occupiers recover the VAT and barely notice. Occupiers below the registration threshold, and any tenant making exempt supplies, absorb the 20% as a permanent cost of occupation. That can make an opted building uncompetitive against a comparable un-opted one.
Buyers face the same maths. A buyer not registered for VAT, or planning exempt use, pays 20% more on a freehold unless a disapplication or TOGC applies. A buyer who plans to keep letting on a taxable basis will usually want the seller’s option in place, because it lets the sale qualify as a TOGC and avoid VAT on the price entirely.
Look 20 years ahead before you file. If your property is well suited to occupiers making exempt supplies, the VAT on their rent may cost you more in lost lettings than you gain in input tax recovery.