When the option is the right call, three questions decide whether it works: who your tenants will be, whether the anti-avoidance rules disapply your option (relevant if you or a connected party will occupy), and when you notify HMRC (30 days from the decision, form VAT1614A). The choice locks in for 20 years, so it earns careful thought.
You have just exchanged on a commercial property, or you are about to. The question of whether to opt to tax comes with a lot of half-truths floating around: that you have to opt to reclaim the VAT on the purchase, that the seller's option carries over, that it is a one-way street. None of that is quite right. What matters is running three tests on your specific situation, in the right order, before the 30-day notification window starts to matter.
- Assuming you must opt to tax to recover VAT on the purchase. If you will use the property yourself for wholly taxable business activities, no option is needed. You can recover the input VAT directly under the normal rules. The option only matters when you plan to make onward supplies (rent, resell) that would otherwise be exempt.
- Thinking the seller's option carries over to you. Each person with an interest in a building makes their own separate decision. The seller's option to tax has no effect on the buyer's VAT position. The buyer must decide, and separately notify HMRC on their own VAT1614A within 30 days, if opting is the right route for them.
- Overlooking the anti-avoidance rules on connected occupiers. If the property is going to be occupied by you (or a business financing you, or someone connected with either) AND that occupier makes exempt supplies, the option can be disapplied, blocking VAT recovery entirely. This is the classic Mike & Marie trap in Notice 742A section 13.
- Missing the 30-day notification window. The decision to opt and the notification to HMRC are two separate steps. Miss the 30-day notification window and your option is not valid until HMRC accepts a belated notification, which is not guaranteed. In the meantime, any input tax claims tied to the option are exposed.
- Forgetting the option lasts 20 years. Once notified, the option cannot normally be revoked for 20 years, other than the 6-month cooling-off period. If the property is going to change use, tenant profile, or trading structure within that window, that lock-in becomes a real constraint on future flexibility.
Is the question really relevant to you?
The starting point is what you plan to do with the property. If you are buying it to use yourself for a business that makes wholly taxable supplies (a wholesaler running a warehouse, a consultancy renting itself an office through a group VAT arrangement, a manufacturer using a factory), you can usually recover the VAT on the purchase price under the normal input tax rules, with no option to tax needed.
The mechanism is simple: your business is registered for VAT, the property is a business asset used for taxable trading, and the input tax on the acquisition is recoverable in the usual way. The option to tax is designed for the situation where your onward supply of the property (rent to a tenant, resale) would otherwise be exempt, and the input tax would be blocked. If there is no exempt onward supply because you are the end user, there is no problem to solve.
In practice, we see business owners default to opting to tax "to be safe" and lock themselves into 20 years of charging VAT on a rent they never planned to collect. Before the notification goes in, ask the simple question: what supplies of this property will I actually make?
Test 1: what is the profile of your future tenants?
Assuming you do plan to rent the property out, the first serious test is who will be paying you rent. When you opt to tax, all your rents on that property become standard-rated at 20%. Tenants who are VAT-registered and make wholly taxable supplies (typical trading businesses, retailers with taxable sales) recover that VAT as input tax with no economic cost. For them, the option is invisible.
The problem arises with tenants who cannot recover the VAT you charge them:
- Small businesses under the VAT registration threshold (£90,000 taxable turnover), which cannot register
- Financial services businesses (banks, insurance brokers, wealth managers) making exempt supplies
- Charities for their non-business activities
- Medical, dental, education, and other exempt-supply businesses
For these tenants, your 20% VAT is a real cash cost. It shows up as a 20% rent increase they cannot recover. In a competitive letting market, this makes your property harder to place at the target rent, which is the practical downside advisers underweight in the pre-decision maths. The expensive mistake is opting to tax on a mixed-use commercial building and only realising afterwards that most viable tenants are exempt-supply businesses.
Test 2: the anti-avoidance rule that catches connected-occupier setups
Section 13 of VAT Notice 742A (backed by paragraphs 12 to 17 of Schedule 10 to the VAT Act 1994) contains an anti-avoidance rule that catches a specific type of structure: where the property is used by the opter themselves, by a business financing the opter, or by a party connected with either, AND that occupier makes exempt supplies.
The classic pattern is the one Neil Warren illustrates in Tax Adviser: Mike and Marie buy a commercial property in a special-purpose limited company they jointly own, then rent it to their trading partnership which runs a children's nursery (an exempt supply under Group 7 of Schedule 9). The company opts to tax, expects to recover the input VAT on the acquisition, and charges VAT on the rent. The anti-avoidance rule then disapplies the option: the SPV cannot register for VAT solely on the strength of the opted rent, and the input tax on the purchase becomes irrecoverable.
The rule bites where all three conditions are met:
- The property is or will be within the Capital Goods Scheme (broadly, cost £250,000 or more excluding VAT)
- The occupier is the opter, a party financing the opter, or someone connected with either
- The occupier makes any exempt supplies from the property
If the trading business at the other end is wholly taxable (a computer wholesaler renting from an SPV they own, for instance), the anti-avoidance rule does not bite and the setup works. If it is exempt, it does. The distinction is critical and worth stress-testing with a VAT specialist before the corporate structure is finalised, not afterwards.
Buying commercial property and worried the OTT decision might miss the anti-avoidance rule? Our VAT Expert Call walks through your setup before you notify.
Test 3: timing, before or after the purchase?
The decision to opt to tax can be made before or after the acquisition of the property. Both routes work, but they carry different practical implications for VAT recovery on the purchase itself.
Before the acquisition. If you opt to tax before the exchange (or at least before the completion date), and notify HMRC on VAT1614A within 30 days of the decision, the option is in place when the seller invoices you. Your intention to make taxable supplies is documented, and the input VAT on the purchase price is claimable on your first VAT return covering that acquisition, provided the general recovery rules are met. This is the cleanest route and is standard practice on TOGC transactions where the buyer's option must be in place before the tax point to preserve the TOGC treatment.
After the acquisition. You can also opt to tax after buying, provided you notify within 30 days of the decision. You will need to demonstrate that when you incurred the input VAT on the purchase, you already intended to make taxable supplies of the property. If your intention has changed since the acquisition, the payback and clawback rules under Regulation 108 of the VAT Regulations 1995 apply, and adjustments to previously recovered VAT may be needed.
Since 1 February 2023, notifications go by email to HMRC's National Option to Tax Unit. HMRC no longer sends an acknowledgement letter, only an automated receipt confirming the notification is on file. Keep that receipt for at least 6 years alongside the decision record: it is your primary evidence if the option is ever queried by HMRC or a buyer's solicitor at future sale.
What stays true 20 years later
Once the option is notified and the 6-month cooling-off period has passed, you are committed. The option cannot be revoked for 20 years, unless the automatic 6-year revocation applies (where you have not held an interest in the property for 6 continuous years, the option lapses on its own). This 20-year lock-in is the single most important thing to weigh against the up-front cash benefit of recovering VAT on the purchase.
Three practical consequences worth thinking through:
- Every future rent is standard-rated. Even if the tenant profile of the property changes over the years (a shift from taxable trading tenants to exempt-supply ones), you cannot unwind the option to attract those tenants without a competitive VAT cost to them.
- Any future sale is standard-rated too, unless the sale qualifies as a TOGC or the buyer intends to convert the property to a use that disapplies the option (residential dwelling, relevant charitable purpose). This affects your buyer pool and can affect the sale price.
- Selling and repurchasing does not by itself reset the option. Selling the property does not end your option, and repurchasing it does not start a new one. Your option stays alive until either you revoke it, or you go 6 continuous years without holding any interest in the property. That is the automatic lapse under Schedule 10 paragraph 26. Repurchase before that window closes and your original option, and its 20-year clock, are still running.
None of this is a reason not to opt. It is a reason to opt only when the analysis says the input tax benefit clearly outweighs the 20-year cost, and to write down the reasoning at the time of the decision. That written note is what a future purchaser's VAT specialist will ask for.
When you might need expert VAT advisory
The three-test framework covers the standard patterns, but real acquisitions carry the kind of nuances a senior specialist earns their fee on. The situations below are where a second read materially improves the outcome:
- You are buying through a special-purpose company and want the anti-avoidance rules stress-tested against your intended occupier structure before the deal completes
- The property is part of a Transfer of a Going Concern and your option must be in place and notified before the tax point to preserve the TOGC treatment
- You are considering a mixed-use building (shop with flat above, commercial with residential upper floors) and need the option scope defined precisely on the plan sent to HMRC
- The property has an existing option to tax notified by the seller and you need a clear read on your own separate position and the disapplication scenarios that could apply
- You are an accountant advising a client on a property acquisition and want a sense-check on the OTT decision before the 30-day clock starts
- The property will be occupied by a connected party making exempt supplies (professional practice, education, medical, financial services), and the risk of the option being disapplied is real
Whether you're a business owner or an accountant working on a client case, we focus on the VAT questions where extra expertise pays off, and we work in plain English.