VAT on commercial property is one of the few areas where the default position actively works against you, and where a single decision, made once and easily forgotten, governs the tax treatment of an asset for the next two decades. If you are buying, refurbishing or letting commercial premises, the option to tax deserves proper thought before contracts are signed.
The default: exempt, and why that is a problem
Most supplies of land and buildings, selling a commercial property, granting a lease, charging rent, are exempt from VAT. No VAT on the rent sounds like a benefit to your tenant, and it is. The problem is on your side of the transaction: because exempt supplies carry no right to input tax recovery, you cannot reclaim the VAT you incur on the property.
That VAT is rarely trivial. On a £600,000 commercial purchase where the seller has opted to tax, there is £120,000 of VAT. On a substantial refurbishment there is 20% on every builder's invoice, plus the surveyors, solicitors and agents. Left unrecovered, that is a permanent cost buried in the asset.
What opting to tax does
An option to tax (still widely called "electing to waive exemption") converts your exempt supplies of that land or building into standard-rated supplies. You charge 20% VAT on the rent and on any future sale, and in exchange you gain the right to recover the input VAT attributable to the property, the purchase, the refurbishment, the professional fees, the ongoing running costs.
Two stages: decide, then notify
People routinely treat this as one step. It is two, and missing the second is the classic error:
- The decision, taken by someone with authority to take it, typically minuted.
- The notification to HMRC, which must normally be made within 30 days of the decision. HMRC can accept a late notification, but only if satisfied the decision genuinely was made at the earlier time. That is a discretion, not a right.
Where the notification is missing or cannot be evidenced, the VAT you have been charging on rent may have been charged without authority, while the input tax you reclaimed was never recoverable. Both sides of that unwind badly.
The reasons not to opt
Opting to tax is not automatically correct, and there are situations where it damages the value of the property:
- Your tenants may not be able to recover the VAT. Banks, insurers, independent financial advisers, charities, care providers, dentists and schools make exempt supplies. For them, your 20% is a real 20% increase in occupancy cost. Against a comparable unopted unit next door, your property is materially more expensive to occupy.
- SDLT is charged on the VAT-inclusive figure. Opting increases the consideration on which a buyer pays Stamp Duty Land Tax, so it raises the cost of acquisition.
- Cash flow and financing on the buyer's side, they must fund the VAT up front and wait to recover it.
- Residential and certain charitable use can disapply the option entirely.
The right answer turns almost entirely on who your likely occupier is. Offices and warehouses let to fully taxable trading businesses, opting is usually straightforward. A high-street unit that would suit a building society or a dental practice, think much harder.
It is personal, and it lasts
Two features surprise people. First, an option to tax is made by a person over specific land, it does not run with the property. A buyer does not inherit the seller's option; if they want to charge VAT, they must opt and notify themselves.
Second, it is effectively permanent for 20 years. There is a six-month cooling-off period in which an option can be revoked in limited circumstances (form VAT1614C), and after that you are generally locked in until more than 20 years have passed, at which point revocation becomes possible (form VAT1614J). A decision taken to solve a short-term recovery problem governs the asset far beyond the transaction that prompted it.
Selling a let property: the TOGC interaction
Sell a tenanted commercial property and you may be able to treat it as a transfer of a going concern, so that no VAT is charged on the sale price at all, a substantial cash flow and SDLT saving for the buyer. Where the seller has opted to tax, TOGC treatment generally requires the buyer to have opted to tax and notified HMRC by the relevant date, and to confirm their option will not be disapplied. The timing here is unforgiving, and it is normally handled in the days before completion, when there is least room to fix a mistake. Get it wrong and 20% appears on a seven-figure sale.
Before you commit
The option to tax is a commercial decision with a tax mechanism attached, not a compliance formality. It should be taken before you exchange, with a clear view of the likely tenant profile, the recovery at stake and the exit. We advise on property VAT alongside the wider transaction through our VAT and business advisory teams. If you are acquiring or refurbishing commercial premises, talk to us before contracts are exchanged, not after.