Pros and Cons of the Option to Tax on a Property

The "Option to Tax" on a commercial property or land allows commercial property developers and owners to opt to charge VAT on certain property transactions that would otherwise be VAT exempt. This choice can bring advantages in specific circumstances but also entails potential drawbacks.

By opting to tax, the property owner effectively makes transactions subject to VAT, enabling them to reclaim VAT on allowable expenses. 

Pros of the Option to Tax

The option to tax on a property turns the potential exempt supply into a standard-rated taxable supply. The business is then able to reclaim the VAT incurred on the costs of construction or refurbishment and management relating to the property. It will however have to charge VAT on the subsequent sale or rental of the property.

This can improve the cash flow position assuming HMRC do not challenge the VAT reclaims and it is worth noting that most potential customers are themselves registered for VAT and in a position to reclaim the VAT incurred on the purchase or rental of the premises.

Cons of the Option to Tax

There are a number of situations where it is not necessary to opt to tax, or it may be considered disadvantageous.

If a business purchases a property that it intends to trade from there is no need for them to opt for themselves, as long as they are “fully taxable” with no VAT exempt income. They can still reclaim the VAT on costs including purchase.

An option to tax can be applied at a later stage if there are changes to your plans.

The option may deter some customers who do not have full VAT recovery from leasing or purchasing the commercial property, because the option increases the rent by 20%.

The decision to make an Option to Tax requires careful consideration so we recommend that you discuss the VAT issues with our experienced Indirect Tax Services team.