VAT on commercial property is genuinely high-stakes. The decision to opt to tax — or not — lasts 20 years, can swing six-figure sums of input VAT recovery, and meaningfully affects who will take a lease and at what rent. Get it right, and you recover the VAT on acquisition and refurbishment. Get it wrong, and you can permanently lock exempt tenants out of the building or write off hundreds of thousands of pounds of irrecoverable VAT. For the broader commercial property tax picture, see our complete UK commercial property tax guide.
Quick answer: By default, commercial property transactions are VAT-exempt — no VAT on rents or sale, but no recovery on input VAT. An option to tax (OTT) converts the property to 20% VAT supplies and unlocks input recovery. The OTT is near-irrevocable for 20 years, transfers with neither buyer nor seller automatically, and interacts with the Capital Goods Scheme on properties or works above £250k. Decide before any major VAT spend, and model the tenant mix carefully.
1The default VAT position on commercial property
The starting point under UK VAT law is that supplies of commercial property are exempt from VAT. This applies to:
- Rents on commercial leases
- Sales of commercial property (with some exceptions — see below)
- Most service charges on commercial property
Exempt sounds attractive at first — the tenant or buyer doesn’t pay VAT — but it has a significant downside: the owner cannot recover input VAT on costs associated with that exempt supply. On a £2m acquisition, that’s £400k of irrecoverable VAT. On a £500k refurbishment, that’s £100k. The option to tax exists precisely to deal with this.
Exceptions to the exempt default
- New commercial buildings (sold within 3 years of completion) are mandatorily standard-rated regardless of OTT. For property developers managing construction VAT (0%, 5% or 20%), see our property developer tax service.
- Civil engineering works on roads, bridges, etc.
- Hotels, holiday accommodation and similar short-stay supplies are standard-rated
- Parking pitches let on a short-term basis
- Boxes and rights to occupy at sporting events are standard-rated
2What the option to tax actually does
The option to tax (OTT) is a notification made by the property owner to HMRC. It elects to treat what would otherwise be exempt supplies of that particular property as standard-rated (20% VAT). The effect:
| Aspect | Without OTT | With OTT |
|---|---|---|
| VAT on rents | Exempt (no VAT) | 20% VAT charged |
| VAT on sale | Exempt (no VAT, except new builds) | 20% VAT charged |
| Input VAT recovery | Not recoverable | Fully recoverable |
| VAT registration | Property activity ignored for threshold | Counted toward £90k threshold |
| Reversibility | n/a | 20-year lock-in |
How to notify HMRC
An OTT must be notified to HMRC within 30 days of the decision to opt, using form VAT1614A. There are two stages:
- Make the decision to opt to tax (internal/Board decision)
- Notify HMRC in writing within 30 days using form VAT1614A
Since 2023, HMRC no longer routinely issues acknowledgements. You should retain proof of notification (email or postal receipt) on file.
What the OTT applies to
An OTT applies to a specific property and to “the land or building, or part of either”, as described in the notification. It does NOT automatically extend to:
- Other separate properties owned by the same entity
- Future acquisitions of nearby property (unless specifically opted)
- Residential parts of a mixed-use property (residential is excluded from OTT)
3When to opt — the decision framework
An OTT is usually beneficial when significant input VAT has been or will be incurred AND the tenants are VAT-registered businesses who can recover the VAT charged to them. It is usually wrong when tenants are VAT-exempt or partially exempt and would either refuse to lease or insist on a rent discount equivalent to the irrecoverable VAT.
The four main scenarios
✓ Strong case to opt
New build commercial with VAT on construction; major refurbishment programme with material input VAT; tenants are predominantly VAT-registered businesses (offices, industrial, B2B retail).
✗ Strong case NOT to opt
Tenants are VAT-exempt (banks, insurers, charities, healthcare, education, residential users); no significant VAT recovery available; planning to convert to residential.
⚠️ Marginal — model carefully
Mixed tenant base (some exempt, some taxable); held for short-term sale to unknown buyer; minor refurbishment only; partial-exemption position already complex.
⚠️ Don’t opt yet
Pre-acquisition with uncertain plans; pre-letting with unknown tenant covenant; commercial uncertainty about ultimate use of the building.
The “rent uplift” question
Where an OTT is in place but a prospective tenant cannot recover VAT, two outcomes are common: either the tenant negotiates a rent reduction equivalent to the irrecoverable VAT (effectively transferring the burden to the landlord), or the tenant walks away. Many landlords find that opting reduces lettability to certain tenant categories — charities and healthcare are especially difficult to let opted-to-tax property to.
⚠️ The 20-year lock-in
Once an OTT is made, it cannot be revoked for 20 years except in very limited circumstances. The “cooling-off period” allows revocation within 6 months — but only if no input tax has been recovered and no taxable supplies have been made. Once you\'ve recovered any VAT under the OTT, the cooling-off window closes immediately. After 20 years, the OTT can be revoked by notification.
Modelling an OTT decision?
We model the input VAT recovery, the tenant impact and the 20-year exposure before any election is filed. Fixed-fee.
4The Capital Goods Scheme — the 10-year shadow
For commercial property and certain refurbishment works above £250,000 (excluding VAT), the Capital Goods Scheme (CGS) tracks the recovered input VAT over a 10-year adjustment period (or shorter for some items). If the use of the property changes during the window — for example, an exempt tenant moves in where previously a taxable tenant occupied — the previously recovered VAT is partially clawed back.
What triggers CGS
- Acquisitions of land/buildings above £250,000 (excluding VAT) where input tax has been recovered
- Construction works on commercial property above £250,000 (excluding VAT)
- Refurbishment on commercial property above £250,000 (excluding VAT)
How the adjustment works
The 10-year period is split into 10 annual intervals. At the end of each interval, you compare the actual use of the property (taxable vs exempt) to the use assumed when the initial VAT recovery was claimed. If usage has shifted, a one-tenth slice of the original input VAT is adjusted up or down for that interval.
Example: £500k of input VAT recovered on a refurbishment. After year 5, an exempt tenant moves in and the property is now 50% exempt vs originally 100% taxable. The adjustment for year 5 is £500k ÷ 10 × 50% = £25k clawback. The same adjustment continues for years 6–10 if the exempt use persists.
CGS on disposal
If a CGS item is sold during the 10-year window, the remaining adjustment period accelerates and the seller settles the position based on the sale treatment. If the sale is a TOGC (Transfer of a Going Concern — see below), the CGS history transfers to the buyer who continues the tracking.
💡 Pre-acquisition CGS due diligence
When buying a commercial property, request the seller\'s CGS history. The remaining adjustment period and any baseline usage assumptions affect your post-acquisition position. This is routinely missed in commercial property due diligence and creates avoidable VAT surprises 1–2 years post-completion.
5Transfer of a Going Concern (TOGC)
The Transfer of a Going Concern rules can apply to the sale of a tenanted commercial property, allowing the sale to fall outside the scope of VAT entirely. The benefits are significant: no VAT to fund on completion, no SDLT charged on top of VAT (which would otherwise increase the SDLT base), and simpler settlement statements.
TOGC conditions for commercial property
For a property TOGC to apply, the following must all be satisfied:
- The property is sold with the benefit of an existing tenancy (it is a continuing rental business)
- The buyer is registered for VAT at completion
- The buyer notifies an option to tax over the property by completion, AND notifies the seller that no anti-avoidance condition will be triggered
- Both seller and buyer are intending to continue the rental business in the same manner
- There is no break in the rental income flow
If TOGC applies, the sale is treated as a non-supply for VAT. No VAT is charged, no input recovery is needed on the sale, and the buyer steps into the seller’s CGS position.
6Practical pitfalls
- Missing the 30-day notification window after deciding to opt — HMRC may dispute the effective date.
- Recovering VAT before making the OTT — your supplies are still exempt, so input VAT recovery is wrong. The clean sequence is: decide to opt; complete the acquisition or works; recover VAT for periods after the OTT effective date.
- Forgetting the OTT doesn’t pass to the buyer on sale — the buyer must make their own OTT, including for TOGC purposes.
- Not tracking CGS post-acquisition — the buyer inherits the remaining adjustment period and must continue annual reviews. CGS interacts with the capital allowances position too — see our capital allowances on commercial property guide for the full picture.
- Opting where tenants are exempt — reduces lettability and rent recovery.
- Failing to consider the anti-avoidance test on TOGCs where the buyer is connected to a tenant.
7Worked example: refurbishment OTT decision
A company owns a city-centre office building worth £4m. The property is currently let to a single tenant (a VAT-registered software company). The company is planning a £1.2m refurbishment with VAT of £240k. The existing 8-year lease has 3 years remaining.
Scenario A: Do not opt to tax
- VAT on refurbishment: £240k irrecoverable (added to capital cost)
- Rents continue to be exempt; no VAT charged
- On future sale: exempt, no VAT
- Effective cost of refurbishment: £1.44m
Scenario B: Opt to tax before refurbishment
- VAT on refurbishment: £240k recovered
- Rents on existing lease: VAT now added at 20% (recoverable by tenant)
- Future leases: VAT at 20% on rents (recoverable by VAT-registered tenants; not by exempt)
- Future sale: VAT at 20% on sale price (unless TOGC applies)
- 20-year CGS exposure if usage changes
- Effective cost of refurbishment: £1.2m (£240k saved)
Scenario B saves £240k of cash up-front. The 20-year risk is that the next tenant after the current lease is VAT-exempt — in which case the property becomes harder to let, OR the rent must be discounted to compensate for the tenant’s irrecoverable VAT. For a London office in a strong B2B market, that risk is usually acceptable; for a building suitable for a healthcare or financial services tenant, the calculation may shift.
The right decision in any specific case depends on the tenant covenant, the catchment area, the building’s alternative uses, and the owner’s long-term plan.
📋 Key takeaways
- Default VAT position on commercial property is exempt — no VAT on rents/sale, but no input recovery
- An OTT converts the supply to 20% VAT-rated, unlocking input recovery in exchange for a 20-year lock-in
- Opt when significant VAT is incurred AND tenants are VAT-registered; don’t opt when tenants are exempt
- Capital Goods Scheme tracks the recovery position over 10 years for properties / works above £250k
- OTT does NOT transfer on sale — buyer must make their own. TOGC rules can take the sale outside VAT entirely
- The cooling-off window closes the moment any input tax has been recovered — model before electing, not after
Frequently asked questions
What is an option to tax?
An election made by the property owner to HMRC that converts an otherwise VAT-exempt commercial property into a standard-rated (20% VAT) one. Once opted, rents and sale proceeds carry 20% VAT — but the owner can recover input VAT on acquisition, refurbishment and running costs.
How long does an option to tax last?
Essentially irrevocable for 20 years. Limited exceptions: a 6-month cooling-off period (provided no input tax has been recovered and no taxable supplies made), and a 20-year revocation by notification to HMRC.
When should I opt to tax?
Usually yes when significant VAT has been or will be incurred AND tenants are VAT-registered businesses. Usually no when tenants are VAT-exempt (banks, insurers, healthcare, charities) or the property may be sold to a non-recovering buyer.
What is the Capital Goods Scheme?
The CGS tracks VAT recovery on commercial property and refurbishment works above £250,000 ex-VAT over a 10-year adjustment period. If the property\'s use changes (taxable vs exempt), some of the recovered VAT is clawed back. CGS history transfers to a buyer on a TOGC sale.
Do I charge VAT on commercial rents?
By default, no — commercial rents are exempt. If you have made a valid OTT over the property, you must charge 20% VAT on rents. VAT-registered tenants can recover this; exempt tenants cannot, and may negotiate a discount or refuse to lease.
Can I revoke an option to tax?
Within the first 6 months if no input tax has been recovered and no taxable supplies have been made (cooling-off period). After 20 years, by notification to HMRC. Otherwise the OTT runs for the full 20-year period.
What happens to the option to tax on sale?
The OTT does NOT transfer to the buyer — it is personal to the seller who made it. The buyer must consider whether to make their own OTT after acquisition. The TOGC rules can apply to the sale of a tenanted property where both parties have notified options to tax, allowing the sale to be outside the scope of VAT entirely.