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Understanding the option to tax and VAT on commercial property

  • Writer: Dan Burnell
    Dan Burnell
  • 5 days ago
  • 2 min read

VAT on commercial property is one of the more complex areas of tax and the decision to opt to tax can have long-term implications. Whether you're buying, selling, leasing, or refurbishing, understanding how the option to tax works is essential for cashflow, compliance, and strategic planning.


What is the option to tax?

By default, most commercial property transactions are exempt from VAT. That sounds beneficial, but it also means you can’t reclaim VAT on related costs like renovations, legal fees, or purchase VAT.

The option to tax (OTT) allows you to override this exemption. Once opted, you must charge VAT on income (e.g. rent or sale proceeds), but you can also reclaim VAT on expenses. It effectively turns an exempt property into a taxable one.


Why you might opt to tax

  • To reclaim VAT: If you’ve incurred VAT on refurbishment or purchase, opting to tax may allow you to recover it.

  • To improve cashflow: Reclaiming VAT can ease upfront costs, especially for capital-intensive projects.

  • To align with VAT-registered tenants: If your tenants are VAT-registered, they can reclaim the VAT you charge, making OTT a neutral or positive move.


Risks and considerations

  • Long-term commitment: Once opted, the decision lasts at least 20 years.

  • Tenant impact: Non-VAT-registered tenants can’t reclaim VAT, making your rent less competitive.

  • Mixed-use complications: If part of the building is used for exempt activities (e.g. charitable services), VAT recovery may be restricted.

  • Sale implications: Selling a VAT-opted property means charging VAT on the sale - which could deter non-registered buyers.


How to opt to tax

You must notify HMRC formally, following their prescribed process. You can opt for the whole property or part of it, depending on usage. Once accepted, you’ll need to account for VAT on income and submit quarterly VAT returns.


At BlueFox Accounting, we help property owners and charities assess whether the option to tax is right for them. We model the financial impact, guide you through HMRC’s process, and ensure your VAT strategy aligns with your long-term goals.

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