Option to Tax on Commercial Property: A VAT Guide for Trade Businesses (2026)

The default position: commercial property is VAT-exempt

Here is the part that surprises people. By default, the sale or letting of commercial property in the UK is exempt from VAT. That sounds like good news — no VAT to charge, simpler invoices. But "exempt" is not the same as "zero-rated", and the difference is everything.

When you make exempt supplies, you cannot recover the VAT on costs related to those supplies. So if you buy a £400,000 unit, spend £100,000 refurbishing it, and pay £15,000 in legal and professional fees, the VAT buried in those costs is normally lost. On a £100,000 refurb alone, that's £20,000 of VAT you simply cannot claim back if the property is being used for exempt supplies.

That's the problem the option to tax exists to solve.

What "opting to tax" actually means

Opting to tax — sometimes called "electing to waive exemption" — is a formal decision you make to remove the VAT exemption on a specific property. Once you opt, your supplies of that property (selling it, or charging rent on it) become standard-rated at 20% instead of exempt.

Why would you volunteer to charge more VAT? Because making taxable supplies unlocks your right to recover the input VAT on related costs. Opt to tax your new workshop, and suddenly the £20,000 of VAT on that refurbishment, the VAT on the purchase, and the VAT on your professional fees all become recoverable. The option flips the property from being a VAT dead-end into a VAT-recoverable asset.

A crucial detail: an option to tax attaches to you and a specific property (or a defined area of land) — not to the building generally. If you sell the property, your option does not transfer to the buyer. The new owner makes their own decision about whether to opt.

Why a trade business would opt to tax

The driving reason is almost always input VAT recovery on a large spend. Common scenarios for trades:

• Buying a unit that needs work: You buy a tired industrial unit for £350,000 and spend £120,000 turning it into a proper workshop with offices. Opting to tax lets you recover roughly £24,000 of refurbishment VAT.
• Buying an opted property: If the seller has already opted to tax, they must charge you 20% VAT on the purchase price. On a £400,000 unit that's £80,000 of VAT up front. Opting to tax yourself is usually how you recover it.
• Renting out surplus space: You have a large yard or a mezzanine you sub-let to another trade. Opting lets you recover VAT on the costs of that space, and you charge VAT on the rent.

For a VAT-registered trade business whose customers are also VAT-registered, opting is often a clear win — the VAT you charge is recoverable by your tenant or buyer, so it's cash-flow neutral for them, while you get to reclaim your input VAT.

The downside: you must then charge VAT

Opting to tax is not free of consequences. Once you opt, you are committed to charging 20% VAT on every supply of that property — every rent invoice, and the eventual sale price.

This matters enormously if your tenant or buyer is VAT-exempt or not VAT-registered and therefore cannot recover the VAT you charge. Think of a tenant who is a financial services firm, an insurance broker, a small care provider, a charity, or a sole trader below the registration threshold. To them, your 20% VAT is a real, unrecoverable cost. A £24,000-a-year rent becomes £28,800 — and they may simply walk away and rent an un-opted unit down the road instead.

The same applies on sale. Adding 20% VAT to a £450,000 building means a £90,000 VAT charge. A VAT-registered buyer recovers it; an exempt buyer eats it, and it also inflates their Stamp Duty Land Tax because SDLT is charged on the VAT-inclusive price. That can knock real money off what a buyer is willing to pay you.

So the decision is a balance: weigh the input VAT you recover now against the future VAT you'll be forced to charge to people who may not want it.

How to opt: notifying HMRC and the VAT1614A

Opting to tax is a two-step process that people frequently muddle:

• Step 1 — make the decision. You (or the company's officers) decide to opt to tax the property. This is an internal decision and should be minuted or recorded.
• Step 2 — notify HMRC. You must tell HMRC, normally on form VAT1614A, within 30 days of making the decision. Notification is what makes the option effective.

Timing is critical. The option only takes effect from the date you decide to opt (provided you notify within 30 days) — you generally cannot backdate it to recover VAT on costs you incurred before that date, unless you obtain HMRC's permission or the "automatic permission" conditions are met. The practical lesson: opt to tax before you start incurring big costs, not after the refurb is finished.

HMRC no longer routinely issues acknowledgement letters confirming an option, so keep your own dated records, a copy of the VAT1614A, and the email confirmation. You'll need this evidence years later when you sell.

The 20-year rule and the 6-month cooling-off period

An option to tax is a long-term commitment. Once made and notified, it is normally irrevocable for 20 years. You cannot simply change your mind in year three because a desirable exempt tenant appears.

There are two main escape routes:

• The 6-month cooling-off period: You can revoke an option within six months of it taking effect, provided no tax has become chargeable on a supply of the property and you haven't recovered VAT under it (and certain other conditions are met). This is your one easy way out — useful if circumstances change quickly.
• After 20 years: Once an option has been in place for more than 20 years, you can revoke it, subject to conditions and notifying HMRC. This is rarely relevant to a typical trade business in the short term but matters for long-held property.

Because the commitment is so long, treat opting as a strategic decision, not an administrative box-tick. If you might sell or let the property to exempt buyers within 20 years, think hard before opting.

TOGC: buying a tenanted property

If you're buying a commercial property that already has tenants in it — say a small parade of units with sitting tenants — you may be able to treat the purchase as a Transfer of a Going Concern (TOGC). A TOGC is outside the scope of VAT, meaning no VAT is charged on the sale at all. That's a major cash-flow and SDLT advantage.

For a property-rental business to qualify as a TOGC where the seller has opted to tax, several conditions must be met, including:

• The buyer must be VAT-registered (or registerable) at completion.
• The buyer must opt to tax the property and notify HMRC before completion (technically, before the "relevant date").
• The buyer must notify the seller that their option will not be disapplied by the anti-avoidance rules.
• The same kind of business — letting the property — must continue.

Get the timing wrong — for example, opting to tax one day after completion instead of before — and the deal fails the TOGC test, VAT becomes chargeable on the whole purchase price, and you have an £80,000+ cash-flow problem and a bigger SDLT bill. This is one of the most common and most expensive VAT errors in property deals, so coordinate the option timing with your solicitor and accountant well in advance.

The capital goods scheme: properties over £250,000

If you spend £250,000 or more (excluding VAT) on acquiring, constructing or refurbishing a commercial property, it falls within the Capital Goods Scheme (CGS). The CGS forces you to keep an eye on how the property is used over a 10-year adjustment period rather than just claiming all the VAT once and forgetting about it.

Each year, you compare the taxable use of the property against the use in the year you first claimed. If the mix of taxable and exempt use changes, you adjust your VAT recovery up or down for that year. So if you opt to tax, recover the VAT in full, then later use part of the building for exempt purposes, the CGS can claw back a slice of your recovery each year for the remainder of the 10 years.

For a single-trade business that opts to tax and uses the whole property for standard-rated letting or its own taxable trade, CGS adjustments are usually nil — but you still have to monitor and keep the records. If you ever change the use, sell, or let part to an exempt tenant, the scheme bites.

Worked example: opting vs not opting

Imagine you buy a £400,000 unit (the seller has opted, so you pay £80,000 VAT on top), then spend £100,000 plus £20,000 VAT on a refurb, and £15,000 plus £3,000 VAT on fees. You plan to let it to a VAT-registered joinery firm at £30,000 a year.

With a VAT-registered tenant, opting recovers £103,000 and costs the tenant nothing in real terms. Change the tenant to a VAT-exempt care provider and that £6,000 a year becomes a genuine extra cost to them — and now the decision is far less clear-cut.

Common pitfalls

• Confusing decision with notification. Deciding to opt does nothing on its own — you must notify HMRC within 30 days using the VAT1614A.
• Opting too late. Incurring big refurb costs before you opt can leave that VAT stranded. Opt first.
• Forgetting the tenant. Opting when your likely tenants or buyers are VAT-exempt can make your property harder to let or sell, and you're locked in for 20 years.
• Botching TOGC timing. On a tenanted purchase, the option and notification must be in place before completion, or you lose TOGC treatment and face VAT plus extra SDLT.
• Losing the paperwork. HMRC may not acknowledge your option in writing. Keep your VAT1614A, dated records and confirmation safe — a future buyer's solicitor will ask for it.
• Ignoring the capital goods scheme. Spend £250,000+ and you must monitor use for 10 years, even if no adjustment is due in year one.

Quick reference: the option to tax process

FAQ

Does opting to tax apply to residential property?

No. The option to tax only applies to commercial property and land. The sale and letting of residential property follows different VAT rules, and an option to tax has no effect on dwellings.

If I opt to tax, do I have to charge VAT on rent immediately?

Yes. Once the option takes effect, all your supplies of that property — including every rent invoice — must carry 20% VAT. You also need to be VAT-registered to charge and account for it.

Can I opt to tax just part of a building?

An option to tax normally covers the whole of a building and the land it sits on. It is generally not possible to opt for only a single floor or unit within one building — though separate buildings on the same site can sometimes be treated individually. Take advice before assuming you can carve it up.

What happens to my option if I sell the property?

Your option does not pass to the buyer. They decide independently whether to opt. But your option still affects the sale — if you opted, you must charge VAT on the sale price (unless TOGC treatment applies), which is exactly why TOGC timing matters so much on tenanted deals.

Should I always opt to tax?

No. Opting is usually beneficial when your tenants or buyers are VAT-registered and can recover the VAT, and when you have significant input VAT to reclaim. It can be a poor choice if your likely tenants are VAT-exempt and you'd be locking yourself into charging them irrecoverable VAT for 20 years. Run the numbers for your specific situation with your accountant.

This article is general information for UK trade businesses and not tax advice. VAT on property is genuinely complex — always confirm your position with a qualified accountant or VAT adviser before acting.