VAT Question Of The Week: Scope of the Option to Tax

My client purchased a small industrial unit in 2010 on which he was charged VAT.  He lodged an option to tax on the building and charged the tenant VAT on the rent.  The last tenancy expired in 2014 but he found he could not get a new tenant easily because the unit was built in the early 1970s and businesses looking to rent space were more attracted by newer units with modern facilities.  My client decided that to reap real benefit from the investment he would demolish the existing unit and build a new one on the site, which would then command a higher rental figure. He has now done this at a cost of around £100,000 and is ready to market the unit for rental.  He is assuming that he will not charge VAT on rents to any new tenant as he has not lodged an option to tax on the new property.  Is he able to do this?

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A. Legislation on the option to tax underwent some changes in 2008 and since then it has no longer been possible to opt land and buildings separately.  This means that the option to tax made on the unit in 2010 covers not only the original unit, but also the land on which it was built and also to any buildings later constructed on that land if the original building is demolished. Therefore in your client’s case, as he opted to tax the unit, the option is still in force and will apply to his supplies of the new unit, and allow him input tax recovery on the redevelopment.

The corollary is also true that if he had placed an option to tax on the land then that option would apply to any buildings on the land at the time of the option and to any future buildings constructed on the land.  However, where the option to tax has been made on land, rather than on a building, it is possible to exclude a new building constructed on the opted land from the option to tax, provided the new building is not within the curtilage of any existing building. Notice 742A explains how this is done in paragraph 2.7.


If you have a VAT query why not contact the VAT Advice Line on 0844 892 2470 to discuss the implications. Our team of experts have a wealth of experience and can also provide a written consultancy service at £180 per hour plus VAT.

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VAT Advice Consultant
0844 892 2470


Hilary is a qualified chartered accountant and member of the tax faculty.  Before joining Croner Taxwise she qualified with a national accountancy firm and after some time in practice worked as Group Finance Director of an SME private group with a wide range of activities. Hilary also undertakes a volunteer role as a trustee of a charity with some complex VAT issues.

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