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Introduction to this document

Option to tax letter

Renting out land or buildings is usually exempt from VAT. This means you don’t charge VAT to your tenants. The downside is that you might not be entitled to reclaim VAT on your property running expenses. By “opting to tax” the property VAT becomes payable on the rents you charge and the sale of the property. The advantage of opting to tax is that you will be allowed to claim VAT back on related purchases such as maintenance costs.

VAT on property

Unless you “opt to tax” a property (HMRC sometimes refers to this as “electing to waive your exemption”) you must not charge VAT on any property-related supplies you make to your tenants or other persons. The option can usually be made without obtaining permission from HMRC. From the date it applies you must charge VAT on all supplies linked to the property, e.g. rents or lease premiums.

You should notify your tenant as far in advance as possible where you intend to opt to tax.

You must notify HMRC that you have opted within 30 days of it being effective. This should be done by completing a Form VAT1614A (https://www.gov.uk/government/publications/vat-notification-of-an-option-to-tax-land-andor-buildings-vat1614a).

Clearance from HMRC is only required where you have made exempt supplies of the property and certain conditions set out in VAT Notice 742A Section 5 are not met. In these circumstances you must ask HMRC for approval before you can opt.

The consequences of opting to tax can be complex and far reaching and we recommend getting advice from a tax advisor before going ahead. However, once the decision is made you can use our Option to Tax Letter to inform HMRC and enclose the completed VAT1614A.