The option to tax is a VAT election that allows businesses to treat supplies of most non-residential land and buildings as taxable rather than VAT exempt. Once an option to tax is made, supplies in relation to that property are generally subject to VAT at the standard rate.
One of the key advantages of opting to tax a property is that it can allow businesses to recover input VAT on related costs, such as the purchase, development and refurbishment of a property, subject to the normal VAT recovery rules.
The decision to opt to tax is normally binding for 20 years and can only be revoked in limited circumstances. It is therefore an important VAT election that should be considered carefully.
HMRC guidance highlights a number of points to consider where changes are made to a property after an option to tax has been exercised:
- Extensions: Where a building that has been opted is later extended, the option to tax will generally apply to the entire extended building.
- Linked buildings: Where two completed buildings are later connected (for example via a covered walkway or internal access), the original option does not automatically extend to the newly linked building if it was previously separate.
- Forming a complex: Where separate units are later combined into a single building or complex, an option to tax made on one part does not automatically apply to the remaining un-opted parts.
The VAT treatment will therefore depend on the physical and legal structure of the property at the time the option is made and any subsequent changes.
Proper advice should always be taken before opting to tax, as it can have long-term VAT implications for both income and capital transactions.