It is common practice for owners of commercial property to “opt to tax” the property and charge VAT on rents or sale of the property. Normally such activity would be exempt and mean that the owner is likely to be unable to recover VAT on the related costs. An option to tax allows the owner to charge VAT and recover input tax on the relevant expenses.

The option to tax is disapplied when the property is leased or sold to a charity that is to use the building for a relevant charitable purpose (as described above) but not as an office. In order to disapply an option to tax, the charity would need to issue a certificate.

A charity can also make use of the option to tax where, for example, it is a landlord and wants to recover associated input tax and increase its overall tax recovery levels. However, care needs to be exercised when deciding to opt to tax because it can only be disapplied in certain circumstances and  selling or renting to another body that cannot recover VAT will result in an extra cost to the buyer or the tenant.

For further information see HMRC VAT Notice 742A: opting to tax land and buildings.