VAT option to tax

If you have owned your commercial building for 20 years or more, you should review its VAT status. Such older buildings won’t have VAT attached to their sale or rent, unless the owner or leaseholder has opted to apply VAT, the so-called “option to tax”.

So ask yourself these questions about your commercial property:

  • Have you ever made an option to tax on this property?
  • If you opted to tax, can you prove that? The evidence would be a copy of form VAT1614 and acknowledgment from HMRC.
  • If you opted to tax the building more than 20 years ago, is it now appropriate to revoke that election?

You will need quick answers to all of these questions if you want to sell the property, as the buyer’s legal team will certainly ask for evidence that VAT on the sale is being correctly charged. Not all businesses can recover VAT, so some purchasers will want to buy or lease a building which doesn’t have VAT added to the price.

If you think an option to tax is in place, but you don’t hold the evidence, you could write to HMRC asking for a copy of the election. However, HMRC will take weeks to reply, and when the election was made many years ago they may not have the paperwork either.

If you have never let the property, and it was acquired with no VAT charged on the purchase, it’s probably safe to assume that an option to tax has never been made.

A common misunderstanding is that once a property is the subject of an option to tax it remains an “opted property” when it is sold. This is not the case. Each subsequent owner can make an independent decision as to whether to opt to tax the building or not.