Property development: VAT and Option to Tax

Many businesses are looking to make the most out of redundant buildings by turning them into commercial lets. One aspect of this which is often overlooked is VAT and the misunderstood Option to Tax. Here are the basics:

  • When you rent out a commercial property, the rent is normally exempt from VAT. This means you charge no VAT on the rent.
  • However, as the supply of rent is exempt from VAT, you cannot normally reclaim the VAT incurred in building or converting that property.
  • In order to fully reclaim this VAT you may ‘opt to tax’ the land and the buildings on it. This has the effect of making all supplies associated with that property standard-rated for VAT. So you would charge 20% VAT on rent and also 20% VAT if you were to sell the building. You will then be able to reclaim all associated input VAT such as on building costs and ongoing running costs.
  • You must HMRC within 30 days of the decision to opt to tax. HMRC can accept late registration in limited circumstances.
  • Once 6 months have elapsed, the option to tax cannot be revoked until after 20 years.
  • You do not need to own the land. For example, you may be a tenant on a long-term tenancy who has converted a building and wishes to opt to tax that property.
  • If you do not opt to tax the property, you still may be able to reclaim the input VAT on the ongoing costs associated with the property if they fall with certain limits under the partial exemption scheme. This is something you should discuss with your accountant.

Timing is everything. If you build a commercial property, claim the input VAT but then do not charge VAT, it can be very difficult for HMRC to accept you have opted to tax. All the VAT incurred on building that property may then become irrecoverable.

Always seek advice on VAT and other taxation implications before embarking on property development as the tax-traps are many!

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