Eamon McNicholas Tax Barrister, Accountant

Westwood Chambers

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VAT Traps and the Option to Tax Land

As a tax barrister I am often asked about VAT and the option to tax. VAT law has a lot of potential traps for both purchasers and vendors around the option to tax land. The option to tax (also called election to waive exemption) is an oddity in VAT law which says a taxpayer can, subject to conditions, opt to tax normally exempt supplies of mainly non-residential land and buildings. Effectively the vendor can change the VAT status from exempt to taxable. This means relevant input tax can be claimed back against the output tax charged on sale. But their are pitfalls and the devil is in the detail.

The main area an option to tax does not cover is dwellings, for example a shop above a flat in an otherwise opted building. But there are others too, like conversion to a dwelling or a relevant housing associations.

Checking the Scope of the Option to Tax

Another potential pitfall if knowing exactly what an option to tax does and does not cover. There have been cases where a landowner has inadvertently opted to tax more or less land than they thought, or the vendor has been caught out by what the thought was exempt land and buildings turning out to be taxable. For commercial premises with VAT at 20% this can have huge implications.

So a top tip is always to check, and double check, the option to tax. A potential purchaser needs to ask a possible vendor about this early on in negotiations. Ask for a copy of any option to tax, which is a vital document, making a 20% difference remember. Good due diligence is to cross-check the option if you can with HMRC. This applies even more so if the vendor only mentions a supposed option to tax very late in negotiations. Potential purchasers should be alert to not being rushed into going ahead on a vendor's timetable when the price has suddenly gone up. It is no use subsequently relying on a vendor vaguely saying that the tax can be claimed back when often it cannot. By the time HMRC are chasing a purchaser, with a query or assessment to tax, the vendor may be long gone.

Halifax Principle and Option to Tax

A big problem HMRC have had over the years is with some traders, such as fundamentally exempt businesses, pushing at the option to tax rules. The problem for an exempt business is that any tax it pays when buying opted land or buildings sticks, it is just an extra cost, as input VAT cannot be claimed back against exempt supplies. This has led to some very imaginative schemes, some successful, a lot not. The whole "Halifax principle" on VAT and abuse of right arose out of a scheme for a financial institution.

As a result the law on option to tax has become ever more complex as Parliament have tighten-up on the rules to close loopholes and stop possible abuse. The result though is that the rules are now so complex there is an even more pressing need for any trader to very carefully consider the legal ins and outs of the option to tax rules.


The whole option to tax area is very complicated and fact specific. Any decision whether or not to opt or to buy land and buildings that are, or may become, opted to tax is a major decision with long-term tax consequences. This article is to make taxpayers aware of just some of the issues and is not to be relied on as advice for a specific or contemplated transaction.

Note: Liability is excluded. The above is not to be taken as nor used as a substitute for specific advice.

Option to Tax