Understanding the Option to Tax and VAT on commercial property
If you’re involved in buying, selling or leasing commercial property, you’ve probably heard of Value Added Tax (VAT). One of the more complex aspects of VAT in this area is a scheme called Option to Tax (OTT). While it might seem technical, it can have a big impact on your business’s finances and future plans.
In this guide, we’ll walk you through what OTT means, including when and why you might consider it and cover some of the pros and cons. Whether you’re a property owner or developer, understanding the OTT scheme could save you time, money and unexpected challenges later on.
One important point before we dive in – once you choose to OTT, it’s a decision that sticks for at least 20 years, so it’s a decision that needs careful deliberation and professional advice.

22nd July 2025
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Chloe Talbot-Swain See profile
By default, most property transactions, especially sales and leases, are exempt from VAT. While on the face of it, this sounds good, it also means you can’t reclaim any VAT you’ve paid on costs related to that property (like purchase costs, renovations or repairs).
The OTT scheme allows a business to charge VAT on what would otherwise be a VAT-exempt transaction. In doing so, this unlocks the ability to reclaim VAT on associated costs.
In simple terms, OTT turns an exempt property into a taxable one, bringing VAT into play for both income and expenses.
Here are the key factors to consider when thinking about this scheme:
Reclaim VAT on costs:
If you’ve paid VAT on the purchase or refurbishment of a property, you might be able to reclaim it, which will aid your business’s cash flow. However, you will also need to complete quarterly VAT Returns to work out the net VAT due/repayable.
Charge VAT on rent:
Once you’ve opted to tax, you must charge VAT on rental income. This isn’t usually a problem for VAT-registered tenants, as they can reclaim the VAT. But it might not suit smaller tenants who aren’t VAT-registered, since they’d have to absorb the extra cost, making your rent less competitive to those who have not opted to tax their building. So, it’s important to take into consideration your likely tenant when deciding if you wish to opt to tax a building.
Selling the property:
If the property is opted to tax, you’ll need to charge VAT on the sale. If the buyer is also VAT-registered, this can be managed smoothly. But if they’re not, the extra VAT might make the deal less attractive.
Opting to Tax isn’t automatic. You need to make a formal declaration to HMRC, following their set notification process. You can choose to opt for the entire property or just part of it, depending on how it’s used. It’s also important to ensure all future use of the property lines up with VAT rules – especially if the property will have both taxable and exempt uses.
Things can get especially tricky if a building has mixed uses – for example, if part of it is used for a VAT-exempt activity and part for a taxable one. This is where partial exemption rules come into play, and things can get complicated quickly.
You may need to use specific calculations or apportion costs to figure out how much VAT you’re allowed to reclaim. If you have a mixed-use building, it is imperative that you seek professional advice on this matter.
Pros:
- VAT recovery on costs and cash flow:
Great for businesses with big outlays on property purchases, refurbishments or developments. This can greatly aid a business’s cash flow by being able to recover the VAT. - Appealing to VAT-registered tenants:
These tenants will be able to reclaim the VAT, so won’t affect your competitive edge.
Cons:
- It’s an irrecoverable claim:
Once you opt into the scheme, you’re committed for 20 years. If your plans or tenant mix change, you can’t just reverse it. After 20 years, you can apply to revoke the OTT status, but this isn’t an automatic reversal. - Can make you less attractive to non-VAT registered buyers and tenants:
If your buyer or tenant isn’t VAT-registered, they’ll feel the cost of the VAT you’re charging. That could narrow your potential market and make you less competitive. - It’s tricky to get right:
VAT compliance becomes more involved. You’ll need to keep clear digital records, ensure you account for VAT correctly every quarter, and stay on top of HMRC rules and changes. - Partial exemption challenges:
If your building is used for both exempt and taxable activities, VAT recovery can be messy and technical, which will require specialist help to help you get to grips with the nuances of the partial exemption rules.
The OTT scheme is a powerful tool, but it’s not suitable for everyone. It can unlock significant VAT savings – but it also brings added complexity and long-term commitment.
Before deciding, you need to speak to a VAT specialist and your accountant, who can look through your specific business and advise you on how the scheme would work within your business. With the right advice, you can make the most of this option and avoid unexpected pitfalls.
If you would like to know more on this scheme, please get in contact and we’d love to help you explore if this scheme can help your business.
At Old Mill, we are more than happy to speak to you about your personal tax circumstances. Please do not hesitate to contact us, click here…