An Option to Tax arises only with commercial property or land, and when you decide to sublet it or sell it on. It would mean being able to reclaim all the value added tax (VAT) on the purchase of the property and land, as well as any professional costs and ongoing expenses. This type of transaction can prove complicated, however, and will nearly always involve a large amount of money. As a result, it’s always worth getting professional advice before making any decisions.

Once a decision is made, it usually applies for 20 years, and can usually only be revoked if the building or land has been leased out as exempt for tax in the past. Even then, it would require the approval of HM Revenue & Customs. Another exception is being revoked within the first six months of the option, so long as no VAT has been claimed. In most cases though, this wouldn’t make commercial sense.

When you should consider ‘opting to tax’

  • If you had to pay VAT when buying the property or land and you want to get this back;
  • If you intend to rent it out with a full tenant repairing lease i.e. where the tenant is responsible for repairs and the buildings insurance of the building;
  • If you want your tenant or buyer to be able to claim back VAT on the rental or sale of the building i.e. if the property is being rented to a business which is VAT-registered (as most are).

When you shouldn’t ‘opt to tax’

  • If the property comes under the Capital Goods Scheme. By opting to tax you would have to pay HMRC the VAT received on property costs.

Meanwhile, there is no need to opt to tax if the commercial premises are to be developed into a residential home, or if the building is to be used by a charity.

How to get an option to tax

Once you’ve made your decision to opt to tax the land or property you’ve just purchased, you should notify HMRC (This is done by completing a form called VAT 1614A) within 30 days of the decision date. The only exception is where a commercial property with a tenant is sold on as an ongoing concern (TOGC). Once the form is submitted, HMRC will usually acknowledge receipt within 15 days.

Tips on opting to tax

Even if a business has only one occupant i.e. it’s a five-floor office building and only has a tenant on the first floor, then it will still be classed as an ongoing concern.

A building which has been ‘opted to tax’ can prove attractive to a buyer because he won’t have to wait to claim tax on his next VAT return. This means his or her cash flow will be better.

Missing the 30-day date to ‘opt in’ isn’t the end of the world. HMRC will still allow it to go ahead, provided you can prove the decision was made at the right time (this usually means a written record of a board meeting).