Glossary · UK
What is Option to Tax (VAT on Property)?
An election allowing a business to charge 20% VAT on otherwise VAT-exempt supplies of commercial land or buildings, enabling recovery of related input VAT.
Full Definition
An Option to Tax (OTT) is a VAT election that allows a business to charge VAT at the standard rate (20%) on supplies of commercial land and buildings that would otherwise be exempt from VAT. Since exempt supplies do not allow input VAT recovery, a business incurring significant VAT costs (e.g. on construction, refurbishment, or professional fees) may find the option to tax commercially essential to recover those costs. Once made, the option applies to all future taxable supplies of that specific property for a period of 20 years and is irrevocable after the first 6 months (subject to HMRC permission to revoke thereafter). The option must be notified to HMRC in writing, normally within 30 days of making the option. The option cannot be made on property that is, or is intended to be, used for residential or charitable purposes. It does not affect residential property, which is always exempt or zero-rated depending on the supply. The option to tax is commonly used by commercial landlords, property developers, and businesses selling commercial premises. Once opted, the seller or landlord must charge VAT on rents and sale proceeds, and the buyer or tenant can reclaim that VAT if they are VAT-registered and use the property for taxable purposes.