Renting out or selling commercial property or land is usually automatically exempt from VAT, but you may be able to waive this exemption. Rather like voluntarily registering for VAT, the ‘option to tax’ is mainly a question of tax efficiency.

The option to tax simply means you can decide to waive the VAT exemption which normally applies to commercial property or land. By doing so, you will be able to:

• Charge VAT on the sale or letting of the property, using the standard rate
• Reclaim the VAT that you pay in relation to the property

The short answer is that ‘it depends’. A VAT registered business charges VAT on any taxable sales it makes to customers, and reclaims the VAT it pays on purchases. If the amount of VAT charged is higher than the amount of VAT paid on purchases, you’ll pay the difference to HMRC. If you paid more VAT than you collected, you can reclaim the difference.
 

 
The key point here, is that you can’t reclaim VAT on an exempt property, and you can’t charge VAT selling or letting it.

Opting to tax by waiving the VAT exemption would mean you could start doing both of those things, which might be beneficial. For instance, if the VAT you pay on construction costs or repairs is regularly more than the VAT that you would charge, you would be able to start reclaiming the VAT.

But, like all business decisions, there are two sides to the story when considering the option to tax.

How long does an option to tax last?

Waiving the VAT exemption is a long-term decision – a 20 year one, in fact. Once you go down the road of option to tax, it’s in place for 20 years. It’s also worth noting that the option applies to the land itself. So, if you buy land that has a building on it, and knock it down to put something else in its place, it’s still taxable as long as it’s still for commercial usage.

You may be able to revoke your option to tax within 6 months of the date it becomes effective, but you’ll need permission from HMRC.
 

Who are your customers?

If you waive the VAT exemption on the property, you’ll charge VAT when selling or letting. If your customer isn’t registered for VAT, they won’t be able to reclaim what they pay, which means their costs increase. Even if they are VAT registered, the effect on their cash flow might be an issue.

How do I option to tax?

You’ll need to keep a written record of your option to tax, including details of the property or land it affects. You must apply to HMRC using a VAT1614a form within 30 days of your decision.

 
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