The Option to Tax Form VAT1614A is the HMRC form used by a property owner to elect to charge VAT at the standard rate of 20% on land or commercial property transactions that would otherwise be VAT exempt. Making an option to tax converts an exempt supply into a taxable one, allowing the owner to recover input VAT on related costs such as construction, refurbishment, and professional fees. The form must be submitted to HMRC within 30 days of the decision to opt, and the election normally remains in force for at least 20 years.

What Is an Option to Tax

An option to tax is a formal election made by a person with an interest in land or commercial buildings to charge VAT at the standard rate of 20% on supplies that would otherwise be exempt from VAT. The election is made under Schedule 10 of the Value Added Tax Act 1994 and is notified to HM Revenue and Customs using Form VAT1614A. The term “option to tax” is used because the default VAT treatment of most land and property transactions is exemption. The election is therefore a choice to override that default position and impose VAT.

An option to tax does not apply to residential buildings, charitable use buildings, or buildings converted to residential use. The election is personal to the opter and attaches to the specific land or building in question. Once made, the option to tax creates ongoing VAT obligations that are binding for a minimum of 20 years unless specific conditions for revocation are met.

What Is an Option to Tax Under Schedule 10 of the VAT Act 1994?

Schedule 10 of the Value Added Tax Act 1994 is the legislative provision that governs the option to tax land and buildings in the United Kingdom. Schedule 10 establishes the framework for the right to make an option to tax. The conditions under which the option has effect, the notification requirements to HMRC, and the circumstances in which HMRC’s prior written permission is required before an option can be made.

Schedule 10 operates alongside HMRC’s Option to Tax: Land and Buildings guidance document (VAT Notice 742A), which sets out HMRC’s administrative interpretation of the statutory provisions. The Notice was most recently updated in 2021. The interaction between the primary legislation in Schedule 10 and HMRC’s published guidance is central to understanding the procedural requirements imposed on property owners and their advisers, including the obligation to use Form VAT1614A as the prescribed notification mechanism.

Why Are Most Supplies of Land and Buildings VAT Exempt?

Most supplies of land and buildings are VAT exempt because land is treated as a passive asset that does not involve the supply of goods or services in the conventional commercial sense. The VAT exemption for land and property is rooted in EU VAT Directive 2006/112/EC, which the United Kingdom adopted before EU exit and which remains reflected in the domestic VAT Act 1994. The policy rationale is that taxing land transactions would compound stamp duty land tax (SDLT) and other transaction costs.

Exempt supplies of land include the grant of a freehold interest in land, the grant of a lease or licence over land, and the sale of a building. Where the building is not a new commercial building or a new residential building. The practical consequence of this exemption is that a landlord or property developer who makes only exempt supplies of property cannot recover input VAT on construction, refurbishment, or professional costs. A commercially significant restriction that the option to tax is designed to address.

Why Would a Property Owner Opt to Tax Commercial Land or Buildings?

A property owner opts to tax commercial land or buildings primarily to recover input VAT on costs incurred in developing, refurbishing, or managing the property. Without an option to tax, a commercial landlord making exempt rental supplies cannot reclaim the VAT incurred on construction.

The 3 principal commercial reasons for making an option to tax are:

1. Recover significant input VAT on capital expenditure such as construction or fit-out works where the VAT cost would otherwise be a permanent loss.
2. Charge VAT on rental income, enabling a fully VAT-registered tenant to reclaim the VAT, making the option commercially neutral for that tenant
3. Charge VAT on the sale of a commercial property, which enables the vendor to structure the transaction as a Transfer of a Going Concern (TOGC) and avoid a VAT liability on the sale price where qualifying conditions are met.

The following table illustrates the financial impact of opting to tax on a commercial property development scenario:

Source: GOV.UK – HMRC VAT Notice 742A

What Is Form VAT1614A and When Must It Be Submitted to HMRC?

Form VAT1614A is the prescribed HMRC notification form used to notify an option to tax land and buildings and must be submitted to HMRC’s Option to Tax National Unit within 30 days of the date on which the decision to opt was made. The form is the formal mechanism through which the second stage of the option to tax process, notification, is completed. Without a valid and timely submission of Form VAT1614A, the option to tax has no legal effect, regardless of any internal decision or board resolution.

Form VAT1614A must be submitted to the HMRC Option to Tax National Unit, Birmingham. Submissions are accepted by post or email. The form requires the declarant to provide the VAT registration number of the business making the option. The address and description of the land or building being opted, and the date of the decision to opt. Confirmation of whether exempt supplies have been made on the property in the preceding 10 years, and a declaration that the information provided is true and complete.

What Are the Two Stages of Opting to Tax (Decision and Notification)?

The option to tax process consists of 2 legally distinct stages: The decision to opt, and notification of that decision to HMRC. Both stages must be completed for the option to tax to be valid and effective. The decision stage precedes notification and must be capable of being evidenced by contemporaneous records.

The decision stage is the point at which the business or individual formally resolves to exercise the option to tax over a specific parcel of land or building. For a limited company, this typically takes the form of a board resolution or a director’s decision recorded in writing. The date of the decision determines the 30-day notification deadline and is the date that must be declared on Form VAT1614A. The notification stage is completed by submitting Form VAT1614A to HMRC within 30 days of that decision date.

What Records Must Be Kept to Evidence the Decision to Opt?

Records required to evidence the decision to opt to tax include a written board resolution or decision document. The date of the decision, the identity of the person authorised to make the decision, and a description of the property to which the option applies. HMRC may request evidence of the decision date during a VAT inspection or compliance check. Particularly where there is a dispute about the effective date of the option or where input VAT has been reclaimed in reliance on an option that HMRC challenges as invalid.

Supporting records that strengthen the evidential position include contemporaneous correspondence with solicitors or surveyors referring to the intention to opt. Board minutes, internal accounting entries recording the change in VAT treatment, and the retained copy of the submitted Form VAT1614A. HMRC’s VAT Notice 742A recommends retaining all records relating to an option to tax for the duration of the option and for a minimum of 6 years thereafter.

What Is the 30-Day Time Limit for Notifying HMRC?

The 30-day time limit for notifying HMRC of an option to tax runs from the date on which the decision to opt was made and requires Form VAT1614A to be received by HMRC’s Option to Tax National Unit within that period. A notification received after the 30-day deadline is treated as a late notification. HMRC may accept a late notification in certain circumstances. Still, acceptance is not guaranteed and requires the business to demonstrate that a valid decision to opt was made within the relevant period.

Late notification does not automatically invalidate the option to tax but creates a period of uncertainty during which the VAT treatment of supplies made after the decision date. But before HMRC’s acceptance of the late notification may be disputed.

What Information Must Be Correctly Declared on Form VAT1614A?

Form VAT1614A requires the following 6 categories of information to be correctly declared:

1. The VAT registration number of the person making the option.
2. The full address and description of the land or buildings being opted for.
3. The date of the decision to opt to tax.
4. Confirmation of whether exempt supplies have been made on the property in the 10 years preceding the option.
5. Confirmation of whether HMRC’s prior written permission is required before the option can take effect
6. Signed declaration of accuracy.

Errors or omissions on Form VAT1614A carry material VAT consequences. An incorrectly stated decision date can affect input VAT recoverability for costs incurred before the option date. Failure to disclose prior exempt supplies can invalidate the option or expose the opter to a clawback of previously reclaimed input tax.

Have Any Exempt Supplies Been Made in the Previous Ten Years?

Declaring whether exempt supplies have been made on the property in the 10 years before the option date is a mandatory requirement on Form VAT1614A. Prior exempt supplies trigger the requirement to obtain HMRC’s prior written permission before the option can take effect. An exempt supply in this context includes any VAT-exempt grant of a lease, licence, or tenancy over the property, or any other exempt supply relating to the land or building in question.

The 10-year look-back rule is one of the most frequently overlooked requirements in the option to tax process. A property owner who has previously granted even a short-term exempt licence or informal tenancy arrangement must disclose that fact on Form VAT1614A.

When Is HMRC’s Prior Written Permission Required?

HMRC’s prior written permission to opt to tax is required when the person making the option has made exempt supplies of the property in the 10 years before the date of the decision to opt. Also, where the land or building has been used for a purpose that would give rise to a clawback of input VAT under the Capital Goods Scheme. The option to tax cannot take effect until HMRC has issued a formal written permission, and no VAT should be charged on supplies of the property until that permission is received.

Applications for HMRC’s prior written permission are made using Form VAT1614B. The process involves setting out the history of VAT-exempt supplies made on the property and demonstrating that the opter does not intend to use the option to create an artificial VAT recovery advantage. HMRC’s response time for permission applications is typically 30 working days, though complex cases may take longer.

What Does the Option to Tax Apply To?

The option to tax applies to the specific land or building described in Form VAT1614A and, unless the opter specifies otherwise, extends to all buildings on that land regardless of when they were constructed. The scope of the option is determined by the land description provided in the notification and not by the physical boundaries of any existing structures. An option made over a plot of land applies to future buildings erected on that land unless a specific exclusion is made at the time of notification.

Does the Option Apply to Commercial Property Only?

The option to tax applies to commercial land and buildings and cannot be made over land or buildings used for residential purposes or charitable non-business purposes. Residential property, including houses, flats, care homes, and student accommodation, falls outside the scope of the option to tax. The exemption from the option to tax for residential use is statutory under Schedule 10 of the VAT Act 1994 and cannot be overridden by agreement between the parties.

A building that is partly commercial and partly residential requires careful analysis to determine the extent to which an option to tax is effective. An option can be made over the commercial element of a mixed-use building.

Does the Option Apply to an Interest in Land Rather Than the Land Itself?

The option to tax applies to the person’s interest in the land rather than to the land itself. This distinction means that 2 different persons with different interests in the same land. For example, a freeholder and a leaseholder may each make their own independent option to tax. Each option is personal to the interest holder and has effect only in relation to supplies made in connection with that person’s interest.

The interest-based nature of the option has particular relevance in commercial property transactions where the freehold and leasehold interests are held by separate entities within a corporate group or where sub-leases are granted at different times. Each transaction in the chain of interests must be separately assessed to determine whether an option has been made by the relevant interest holder.

Does the Option Transfer to a New Owner on Sale?

The option to tax does not automatically transfer to a new owner on the sale of the property. An option to tax is personal to the person who made it. On sale of the freehold or assignment of a lease, the purchaser or assignee acquires the property free of the vendor’s and must make their own independent decision.

This is a critical point in commercial property transactions. A purchaser acquiring a property subject to a vendor’s option to tax will have received a VAT-bearing supply on the purchase price. The purchaser’s ability to reclaim that input VAT depends on the purchaser themselves making taxable supplies of the property going forward. Where a TOGC is structured, the purchaser typically makes their own option to tax as part of the transaction mechanics, before completion.

What Happens to the Option if a Building Is Demolished or Rebuilt?

The option to tax continues to apply to the land following demolition of a building and extends to any replacement building constructed on the same land. Demolition does not extinguish an existing option to tax. The option remains in force over the land itself and automatically applies to any new building erected on that land. It’s provided that the land description in the original VAT1614A encompasses the area on which the new building is constructed.

This continuity rule is commercially significant for developers who demolish and rebuild commercial property. The existing option to tax means that VAT at 20% is chargeable on rents and disposals of the rebuilt structure from the date it becomes available for occupation. Developers must account for this when structuring purchase and development agreements and when advising prospective tenants or purchasers.

How Does the Option to Tax Affect Input VAT Recovery?

The option to tax enables the opter to recover input VAT incurred on costs directly attributable to the opted property, provided those costs are used to make taxable supplies. Without an option to tax, supplies of the property are exempt, and input VAT on associated costs is irrecoverable under the partial exemption rules. Following a valid option to tax, supplies become standard-rated taxable supplies and input VAT on attributable costs is fully recoverable, subject to the normal rules on business use and partial exemption.

Input VAT directly attributable to an opted property includes VAT on: construction and refurbishment costs, architect and surveyor fees, legal fees on acquisition or disposal, letting agent fees, property management costs, and repair and maintenance expenditure. Input VAT is recoverable to the extent the costs relate to taxable (opted) supplies and is subject to adjustment under the Capital Goods Scheme (CGS) for capital items costing over £250,000 (exclusive of VAT) over a 10-year adjustment period.

The Capital Goods Scheme requires annual CGS adjustments where the proportion of taxable use changes over the 10 years. A change of use, for example, from commercial to residential, may trigger a clawback of previously recovered input VAT.

How Does the Option to Tax Affect VAT on Rent and Sale Proceeds?

Following a valid option to tax, VAT at the standard rate of 20% must be charged on all rental income and sale proceeds derived from the opted property. It includes the grant of any lease or licence. The landlord or vendor must account for the output VAT charged to the tenant or purchaser on the relevant VAT return and remit the net VAT liability to HMRC. The purchaser who is VAT-registered can reclaim the VAT as input tax, making the option commercially neutral where the counterparty is fully taxable.

The obligation to charge VAT applies to all supplies of the opted property made after the effective date of the option. The landlord must inform the tenant that VAT will now be charged and issue a VAT invoice.

What Are the Risks of Incorrect or Incomplete Notification to HMRC?

Incorrect or incomplete notification of an option to tax to HMRC using Form VAT1614A carries 4 principal risks: the option may be treated as invalid, previously reclaimed input VAT may be clawed back with interest, HMRC penalties may be imposed for inaccurate returns, and the intended VAT treatment of transactions may be disrupted. An option that is invalid due to a defective VAT1614A submission means that all supplies made in reliance on that option have been incorrectly treated as taxable.

Can HMRC Rely on the Information Declared on VAT1614A?

Yes, HMRC is entitled to rely on all information declared on Form VAT1614A as accurate and complete at the time of submission. The option to tax operates within a self-assessment framework in which the taxpayer takes responsibility for the accuracy of their declarations. HMRC does not routinely verify the contents of a VAT1614A notification at the time of receipt.

The consequence of HMRC’s entitlement to rely on the declared information is that errors cannot be corrected by informal correspondence. Corrections to Form VAT1614A require formal engagement with HMRC’s Option to Tax National Unit and must be supported by contemporaneous documentary evidence.

What Is the Taxpayer’s Responsibility in a Self-Assessment System?

In a self-assessment VAT system, the taxpayer bears full responsibility for the accuracy of all declarations made to HMRC, including those made on Form VAT1614A. HMRC’s role is not to pre-approve the option to tax or to validate the information provided on the form. The taxpayer must therefore ensure that the form is completed accurately. Submitted within the 30-day deadline, and supported by adequate contemporaneous records demonstrating the decision to opt.

The self-assessment principle is reinforced by the Rolldeen Estates decision and by HMRC’s published guidance in VAT Notice 742A. Businesses that outsource their VAT compliance to advisers remain legally responsible for the accuracy of submissions made on their behalf.

When Can an Option to Tax Be Revoked or Disapplied?

An option to tax can be revoked in 3 specific circumstances: within the 6-month cooling-off period following notification, after 20 years from the date the option first had effect. Outside these circumstances, an option to tax is irrevocable. The binding nature of the option for a minimum of 20 years underlines the importance of taking professional advice before making the election.

What Is the Six-Month Cooling-Off Period?

The 6-month cooling-off period allows an opter to revoke an option to tax within 6 months of making the notification. Provided no taxable supplies have been made of the opted property, and no input tax has been claimed in reliance on the option. The cooling-off period is available under paragraph 25 of Schedule 10 of the VAT Act 1994. Revocation within the 6-month window restores the property to its default exempt status as if the option had never been made.

The requirement that no taxable supplies have been made and no input tax has been claimed is strictly applied. A single VAT invoice issued to a tenant after the option date, or a single VAT return on which input VAT attributable to the opted property was reclaimed.

Can the Option Be Revoked After Twenty Years?

Yes. An option to tax can be revoked after 20 years from the date the option first had effect by submitting Form VAT1614J to HMRC’s Option to Tax National Unit. The 20-year period runs from the date the option took effect, which is the date of the decision to opt declared on Form VAT1614A, not the date HMRC received the notification. Revocation after 20 years is at the opter’s discretion and requires no reason to be given to HMRC.

The property reverts to its default exempt status. Supplies of the property made after the revocation date are no longer subject to VAT. Input VAT on costs incurred after revocation is not recoverable unless another taxable activity generates a recovery entitlement.

Is the Option Automatically Revoked When the Relevant Interest Ceases?

An option to tax is not automatically revoked when the relevant interest in the land ceases. For example, on the sale of the freehold or expiry of a lease, the option is personal to the interest holder and ceases to have relevance once that interest no longer exists. A new interest holder must make their own option to tax if they wish to charge VAT on future supplies.

The distinction between revocation and cessation of relevance is important where the same entity reacquires the property at a later date. The entity would not be reinstated under the prior option, a new option to tax would be required. The historic option records should be retained to confirm the prior position for the benefit of HMRC if a compliance query arises.

What Compliance and Due Diligence Steps Should Be Taken Before Opting to Tax?

The 6 compliance and due diligence steps that should be taken before opting to tax commercial property are:

1. Confirming eligibility and that no residential or charitable use exclusions apply.
2. Reviewing the prior 10-year supply history to determine whether HMRC’s prior written permission is required.
3. Assessing the VAT recovery position of prospective tenants or purchasers.
4. Confirming whether the property falls within the Capital Goods Scheme.
5. Checking for any existing contractual restrictions on charging VAT.
6. Obtaining a VAT cost-benefit analysis from a qualified tax adviser.