What is the option to tax and when should a business exercise it?
The option to tax (OTT) allows a business to elect to charge VAT on otherwise VAT-exempt supplies, typically of land and commercial property. By opting to tax, the business can recover associated input VAT that would otherwise be blocked under the partial exemption rules. The option is irrevocable for 20 years in the UK and affects all future supplies of that asset.
How is the option to tax exercised?
In the UK: notify HMRC within 30 days of making the election by submitting form VAT1614A. The election applies to the specific land or building identified. In the EU, similar mechanisms exist under Article 137 of the VAT Directive, but implementation varies by member state. Once elected, all future supplies of that property must include VAT. The option cannot normally be revoked within 20 years.
Frequently Asked Questions
- Does the option to tax affect residential property?
- No. The option to tax cannot be applied to residential property or property intended for charitable use in most jurisdictions. It applies primarily to commercial property, industrial units, offices, and bare land. Residential conversions of commercial property may require specialist advice, as a conversion may affect the option to tax.
- What happens when a property with an option to tax is sold?
- When a property with an option to tax is sold, the sale is standard-rated for VAT purposes, so the buyer pays VAT on the purchase price. The buyer may recover that VAT if they are also VAT-registered and use the property for taxable purposes. Alternatively, the sale may qualify as a Transfer of a Going Concern (TOGC) if the buyer takes over the option to tax and the property is occupied by a business.