The VAT Option to Tax Explained
Written by Scott Jones, founder of CommercialPropertyKiln · Last updated
Spot something wrong? Report an error. We reply within 48 hours.
The option to tax turns an exempt commercial property into a standard-rated one, so you charge 20% VAT on rent and sale but can recover VAT on your costs. It is powerful and long-lasting, so understand it before you opt.
Why opt to tax
The main reason is to recover input VAT, for example the VAT on a purchase or a major refurbishment. Without an option, that VAT is a sunk cost. Opting lets you recover it, at the price of charging VAT going forward.
How to opt
Opting is a two-stage process: make the decision, then notify HMRC within 30 days by emailing optiontotaxnationalunit@hmrc.gov.uk. HMRC no longer issues acknowledgement letters, so keep the automated email response as your evidence. If the property has generated exempt income before, you may need HMRC's permission first.
The 20-year commitment
Once made, an option to tax is generally binding for 20 years. There is a six-month cooling-off period in which you can revoke it without conditions, and after 20 years it can be revoked if conditions are met. Otherwise you are committed.
The downside
Charging 20% VAT can deter tenants who cannot recover it, such as charities, banks and some medical users, effectively raising their rent by a fifth. It can also block an exempt residential conversion. It is a decision to model carefully and take advice on, weighing the input VAT recovered against the effect on lettability and any future sale. See TOGC for selling a tenanted property VAT-free.
How long does an option to tax last?
It is generally binding for 20 years, with a six-month cooling-off period in which you can revoke it without conditions.
How do I notify HMRC of an option to tax?
Notify within 30 days by email to optiontotaxnationalunit@hmrc.gov.uk, and keep the automated response as your evidence.