What is the option to tax for commercial property?
Answered 17 March 2026
The Option to Tax for Commercial Property
What the law says
The option to tax is governed by Part 1 of Schedule 10 to the Value Added Tax Act 1994 (VATA 1994), as rewritten by the Value Added Tax (Buildings and Land) Order 2008 (SI 2008), which came into force on 1 June 2008.
The key legislative provisions are:
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Any person may opt to tax any land. The default VAT position is that supplies of land (including commercial property) are exempt from VAT (VATA 1994, Schedule 9, Group 1). A taxable person may nevertheless opt to tax, with the effect that those otherwise exempt supplies become taxable supplies (Schedule 10, paragraph 2).
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Excluded grants: Certain grants are excluded from the effect of the option, meaning the option cannot make them taxable. These include supplies relating to: dwellings, buildings converted for use as dwellings, charities, residential caravans, residential houseboats, relevant housing associations, and grants to individuals for construction of a dwelling.
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Anti-avoidance (disapplication): Paragraphs 12–17 of Schedule 10 provide that the option to tax is disapplied (i.e., the supply remains exempt) in certain anti-avoidance situations — principally where a developer of the land intended or expected the land to become "exempt land".
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Scope, notification, revocation: Schedule 10, paragraphs 18–30 deal with the scope of the option, the day from which it has effect, notification requirements, elections to opt to tax land subsequently acquired, revocation of the option, its effect on new buildings, and requirements for prior HMRC permission where exempt grants were made before the option was exercised.
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Part 1 of Schedule 10 gives HMRC the power to introduce tertiary legislation for certain specific purposes.
HMRC guidance / practice
Why the option to tax exists
The option to tax was introduced on 1 August 1989 following major VAT liability changes. Before 1 April 1989, most property transactions were exempt or zero-rated. After an ECJ ruling that much of this treatment was unlawful, the UK introduced standard-rated VAT on the construction and freehold sale of new commercial buildings, and changed long lets of commercial buildings from zero-rated to exempt. This meant landlords began incurring irrecoverable input tax on construction costs or freehold purchases. The option to tax was introduced to mitigate this effect.
What it does in practice
If you sell, lease or let commercial land or property, you can choose to waive the exemption and charge VAT at the standard rate. This is known as opting to tax land and buildings. Once opted, VAT incurred in making those taxable supplies can be reclaimed as input tax.
For example, in the context of a commercial property sale: the supply is normally exempt, but if an option to tax has been made (subject to disapplication rules), the supply becomes standard-rated.
Terminology
Before 1 June 2008, the legal term was "election to waive exemption"; the term "option to tax" was only used informally. The term "election to waive exemption" is no longer used in the legislation but may still appear in older documents.
Notification
All options made on or after 1 March 1995 must be notified to HMRC, except (from 1 June 2008) in cases where prior permission is required or where the option arises as a result of a Real Estate Election.
Scope
An option on land includes all buildings and future buildings on that land. If the option covers a building, it automatically applies to the whole of that building and its curtilage, even if only part of the building is referred to in the notification.
Revocation
From 1 June 2008, an option may be revoked: as a result of making a Real Estate Election (REE), under "cooling-off" provisions (extended to 6 months), automatically where there has been no interest for 6 years, or after 20 years.
Key HMRC reference: The primary HMRC guidance is contained in VAT Notice 742A: Opting to tax land and buildings.
Citation sources
Before 1 March 1995, a person did not have to notify Customs & Excise of an option to tax if the sum of all the supplies in respect of properties which they had opted to tax was expected to be less than £20,000 in the next 12 months. This applied even if a person had requested and been granted permission to opt to tax. The law changed on 1 March 1995, and all options made on or after this date have to be notified to HMRC, except, with effect from 1 June 2008, in cases where prior permission is r
The facility to ‘opt to tax’ land and buildings was introduced on 1 August 1989 after some major VAT liability changes. Before 1 April 1989, the UK exempted or zero rated most property transactions, but after the ECJ ruled that much of this treatment was unlawful, the UK introduced standard rated VAT to the construction and freehold sale of new commercial buildings and changed the liability of long lets of commercial buildings from zero rated to exempt. Landlords therefore started to incur irrec
Citation, commencement and effect 1 1 This Order may be cited as the Value Added Tax (Buildings and Land) Order 2008 and comes into force on 1st June 2008. 2 This Order, apart from article 4, has effect in relation to supplies made on or after 1st June 2008. 3 Article 4 has effect in relation to supplies made on or after 1st June 2020. 4 Paragraphs (2) and (3) are subject to Schedule 2 (transitional provisions and savings). Rewrite of Schedule 10 to VATA 1994 2 For Schedule 10 to VATA 1994 (buil
wed the hearing to be far more streamlined than we had envisaged at the outset (for which we are grateful), although we do note that it rendered a lot of the material in our hearing bundle wholly superfluous. As we heard no argument on the other possible routes through the legislation, we cannot comment on HMRC’s decision to focus solely on this one route. 17. As a result of HMRC’s approach, we can set out the relevant law in summary as follows: (1) The default position is that the supply of lan
This section supplements the guidance in section 2, Notice 742A, on the scope of an option to tax. As is explained in that section, a person may opt to tax with reference to a particular building or to an area of land. If land is specified, the option will apply to the land specified and any buildings and future buildings on the land. If the option covers a building, it will automatically apply to the whole of that building and its curtilage even if only part of the building is referred to in th
This may occur when the proprietors of existing freehold properties apply for commonhold status because they have communal facilities such as shared roadways, paths or services. This could entail some or all of the existing freeholders giving up title to areas of their land (constituting what are to become the common parts). Any payment made to a former freeholder is likely to be seen as consideration for the surrender of the freehold interest. The liability being as follows: commercial property
02 The automatic permission conditions specified in Notice 742A amended. Amongst changes, term ‘day to day overheads’ removed (condition 2), term ‘incidental’ more clearly defined (condition 4). Notice 742A 18 March 2004 Anti avoidance provisions extended (effective 18 March 2004) to prevent schemes that avoid disapplication of the OTT by transferring taxed leases to special purpose subsidiary businesses. The test at 2(3AA) now includes persons making supplies under a grant originally made by an
If you sell, lease or let commercial land or property, you can choose to waive the exemption and to charge VAT at the standard rate. This is known as opting to tax land and buildings. VAT incurred in making taxable supplies can be reclaimed.
Until 31 March 1989 most property transactions were exempt from VAT or zero rated. On 21 June 1988 the ECJ ruled that some of the UK zero rates were unlawful because they did not benefit the final consumer or follow a clearly defined social policy. This ruling necessitated major changes to the UK legislation. With effect from 1 April 1989, the construction and freehold sale of new commercial buildings and civil engineering works became standard rated and long lets of new commercial buildings bec