Special VAT rules allow businesses to standard rate the supply of most non-residential and commercial land and buildings (known as the option to tax). This means that subsequent supplies by the person making the option to tax will be subject to VAT at the standard rate.

The ability to convert the treatment of VAT exempt land and buildings to taxable can have many benefits. The main advantage is that the person making the option to tax will recover VAT on costs (subject to the usual rules) associated with the property, including the purchase and refurbishment of the property.

However, any subsequent sale or rental of the property will attract VAT. The purchaser or tenant can recover the VAT charged, which is not usually an issue. However, where the purchaser/tenant is not VAT registered or not fully taxable (such as a bank), the VAT can become an additional (non-recoverable) cost.

Once a tax option has been made, it can only be revoked under limited circumstances, so proper consideration of the issue is essential. This includes:

– within a specified ‘cooling off’ period in the first six months,
– an automatic revocation where no interest has been held for more than six years, and
– after 20 years has elapsed.