Can You Remove VAT from an Opted to Tax Property Sale

A 20% VAT charge can turn a good property deal into a difficult negotiation. If the buyer cannot recover VAT, they may ask for a price cut. That can feel like the only practical fix, but it is not always the best one.

Where a property has been opted to tax, the sale proceeds are usually standard-rated for VAT. Yet the option to tax is not always the final word. In the right circumstances, you may be able to revoke, cancel or disapply the option, or structure the deal so VAT is not charged on the transfer.

The key is to check the VAT position before agreeing a discount. A legitimate VAT solution can help the buyer, protect your price, and reduce Stamp Duty Land Tax exposure at the same time.

This article is for general information only and is not tax advice. VAT on land and property is technical, so take advice on the specific facts before exchanging contracts.

Mixed-use buildings often need a split VAT treatment.

What opting to tax does

Most supplies of commercial land and buildings are exempt from VAT unless the owner has made an option to tax. Once an effective option to tax is in place, income from that property is normally subject to VAT at 20%.

That can include:

• rent from commercial tenants

• premiums for leases

• sale proceeds when the property is sold

• some other property-related charges

  
  

Why would anyone choose that? The usual reason is input tax recovery.

If you buy a commercial property, refurbish it, repair it, or carry out capital works, the VAT on those costs can be significant. By opting to tax, you turn future supplies into taxable supplies, which can allow you to reclaim VAT on related costs.

In many commercial property cases, this works well. A VAT-registered tenant charges VAT on its own income and can reclaim the VAT you charge on rent. The VAT is a cash-flow issue, not a real cost.

The problem appears when the tenant or buyer cannot recover VAT. Common examples include:

• insurance businesses

• finance businesses

• health and welfare providers

• education providers

• charities with exempt activities

• businesses buying for non-business or partly exempt use

  
  

For those buyers, the VAT on the price can be a real extra cost. On a £1 million sale, VAT could add £200,000 before any SDLT impact. That is why the buyer may push for a lower price.

Why a simple price reduction may be the wrong answer

A buyer who cannot recover VAT often sees the negotiation in simple terms. If VAT adds 20%, they want the seller to reduce the base price.

That may solve the buyer’s cost problem, but it can be expensive for the seller. If the property value is sound and the tax issue can be dealt with another way, a discount gives away value unnecessarily.

There is also a second tax cost for the buyer. SDLT is charged on the VAT-inclusive consideration. If VAT is properly chargeable, it increases the amount on which SDLT is calculated.

That means even a buyer who can recover VAT might still care about whether VAT is charged. Recoverable VAT still has to be funded on completion. It may then be reclaimed on a later VAT return, but the cash-flow gap can be uncomfortable.

So removing VAT from the transaction, where the law allows it, can produce three benefits:

• the buyer avoids irrecoverable VAT

• the buyer may reduce SDLT exposure

• the seller may preserve the commercial sale price

  
  

The question is whether the VAT can be removed properly. That depends on the property, the buyer’s intended use, the age and status of the option, and whether the sale meets any special rules.

The VAT position should be checked before agreeing the price.

Start by checking what is actually being sold

Before looking at revocation or disapplication, check whether the option to tax applies to all parts of the property.

An option to tax is mainly relevant to commercial land and buildings. It is overridden for many residential supplies. If part of the property is residential, that part may remain exempt from VAT even though an option to tax exists.

A common example is a mixed-use building:

• ground floor restaurant

• first floor flat

  
  

The commercial element may be subject to VAT if opted. The residential element will often fall outside the option to tax treatment. The sale price must then be apportioned between the commercial and residential parts on a fair and supportable basis.

This matters because charging VAT on the full price may be wrong. If only part of the property is commercial, only that part may be affected by the option.

Why apportionment matters

Apportionment is not just an accounting exercise. It affects:

• the VAT charged to the buyer

• the buyer’s SDLT calculation

• the seller’s VAT return

• the contract wording

• the evidence needed if HMRC asks questions

  
  

The apportionment should reflect the real value of each part. Floor area might be a starting point, but it is not always enough. The commercial part and residential part may have very different values per square metre.

A valuation from a surveyor can be helpful, especially where the numbers are material.

Can the option to tax be revoked?

In some cases, the seller can remove the option to tax by revoking it. This is usually the cleanest answer if the conditions are met.

There are two broad situations to check.

Revocation during the early cooling-off period

There is a limited cooling-off period after an option to tax is made. If the option was made recently, it may be possible to revoke it, provided the conditions are satisfied.

This route is narrow. It will not usually help where the property was bought years ago and has been let or used with VAT charged.

The practical point is simple: if the option was recent, check the date and the conditions immediately. Do not wait until completion is close.

Revocation after 20 years

Once an option to tax has been in place for 20 years, it may be possible to revoke it without HMRC permission, provided the required conditions and notification process are followed.

This can be a valuable planning point for older property investments. If you opted to tax when you bought the property more than 20 years ago, the buyer’s VAT problem may have a lawful solution.

That said, revocation is not just a formality. You need to check:

• when the option took effect

• whether the correct property is covered

• whether there have been later changes to the land or building

• whether past input tax recovery creates any adjustment issues

• whether the revocation can take effect before the sale

  
  

The timing matters. If the option is still effective at the tax point for the sale, VAT may still be due. Paperwork should be dealt with well before completion.

Older options to tax may create revocation opportunities.

Can the option to tax be disapplied?

Disapplication is different from revocation. With revocation, the seller removes the option. With disapplication, the option exists but is ignored for a particular transaction.

This can apply in specific cases, often linked to what the buyer will do with the property.

Examples may include situations where the buyer intends to use the building for:

• residential conversion

• certain charitable non-business purposes

• certain relevant residential purposes

• certain relevant charitable purposes

  
  

The buyer may need to give the seller a certificate before the supply is made. The certificate tells the seller that the buyer’s intended use means the option to tax should be disapplied.

This is often where both parties need careful advice. The seller does not want to omit VAT and later discover that VAT was due. The buyer does not want to give a certificate unless the facts support it.

The buyer’s intended use is central

Disapplication usually depends on the buyer’s intended use. That makes evidence important.

For example, if the buyer says they will convert a commercial building into flats, the seller should not rely on a casual statement in an email. The parties should consider:

• planning position

• contract terms

• certificates required by VAT rules

• the buyer’s actual plans after completion

• whether the property will be used for qualifying purposes

  
  

If disapplication applies, the deal can become much more attractive. The seller may receive the same net price, while the buyer avoids irrecoverable VAT and may reduce SDLT.

Could the sale be a transfer of a going concern?

A separate possibility is that the sale qualifies as a transfer of a going concern, often called a TOGC.

A TOGC is not a sale where VAT is exempt. Instead, it is treated as outside the scope of VAT. In property transactions, this may apply where the seller transfers a property rental business to the buyer.

For example, a let commercial property is sold with tenants in place, and the buyer continues the letting business after completion.

Where the conditions are met, VAT is not charged on the property transfer. That can help the buyer with cash flow and SDLT, even where the buyer could otherwise recover VAT.

But TOGC treatment has strict conditions. In opted property cases, the buyer may need to be VAT registered and may need to opt to tax the property before completion. This may not help a buyer who is unable or unwilling to be VAT registered, or a buyer who wants to occupy the property rather than continue a rental business.

So TOGC is worth checking, but it is not a universal fix.

Watch for input tax and capital goods scheme issues

Removing VAT from the sale is not always cost-free for the seller.

If you opted to tax when you bought the property, you may have recovered VAT on:

• the purchase price

• professional fees

• refurbishment

• repairs

• capital improvements

  
  

If the VAT status of the property changes, or if the sale is exempt rather than taxable, there may be input tax consequences. For larger capital expenditure, the capital goods scheme can require adjustments over a period of years.

This does not mean revocation or disapplication is a bad idea. It means the seller should calculate the full effect before agreeing terms.

A VAT saving for the buyer may still leave the seller worse off if it triggers an input tax adjustment that has not been priced into the deal. By contrast, if the adjustment is small or no adjustment arises, removing VAT may be highly beneficial.

The commercial negotiation should reflect the full tax result, not just the VAT line on the completion statement.

What the contract should cover

If the parties agree that VAT will not be charged, the contract should say why.

Vague wording creates risk. The contract should match the VAT analysis and deal with what happens if HMRC later disagrees.

Depending on the route used, the contract may need to cover:

• whether the option to tax has been revoked

• whether the buyer has provided a valid certificate

• whether TOGC treatment is intended

• what happens if VAT becomes payable later

• who bears penalties or interest caused by incorrect information

• whether the price is VAT-inclusive or VAT-exclusive

• how the price is apportioned for mixed-use property

  
  

The words “plus VAT if applicable” are common, but they are not always enough. If VAT is a live issue, the drafting should be specific.

A buyer will want protection from an unexpected VAT bill. A seller will want protection if the buyer’s certificate or intended use turns out to be wrong.

A practical route through the problem

When a buyer asks for a VAT-related discount, pause the price discussion and work through the tax position.

A sensible process looks like this:

1. Confirm the option to tax

   
   

   Find the original option, HMRC acknowledgement if available, and the effective date. Check exactly what land or building it covers.

   
   

2. Split the property if needed

   
   

   Identify any residential, charitable, or other element that may not follow the commercial VAT treatment.

   
   

3. Check revocation

   
   

   Look at whether the option can be revoked, especially if it is within an early cooling-off period or more than 20 years old.

   
   

4. Check disapplication

   
   

   Ask what the buyer will do with the property. If the intended use qualifies, make sure the right certificate and evidence are in place.

   
   

5. Check TOGC treatment

   
   

   If the property is let, consider whether a property rental business is being transferred and whether the buyer can meet the conditions.

   
   

6. Model the seller’s tax cost

   
   

   Include input tax adjustments, professional fees, and any capital goods scheme effect.

   
   

7. Agree the commercial split

   
   

   If removing VAT saves the buyer a major cost but creates some tax cost for the seller, the parties may be able to share the benefit rather than cut the price by the full VAT amount.

   
   

The best answer usually comes from modelling VAT, SDLT and cash flow together.

The answer is often better than a discount

So, can you remove VAT from an opted to tax property sale? Sometimes, yes.

The best route depends on the facts. If the option is old enough, revocation may be possible. If the buyer’s intended use qualifies, disapplication may solve the issue. If the sale is really the transfer of a letting business, TOGC treatment may remove VAT from the transaction.

If none of those routes applies, VAT may have to be charged. The parties can then negotiate the price with a clear understanding of the real cost.

The important point is not to assume that a 20% discount is the only answer. Before conceding on price, check whether VAT can be removed lawfully, what that does to SDLT, and whether any input tax claw back changes the numbers.

A properly planned VAT solution can leave both parties better off.

Speak to a Professional Before Taking Action

If you are considering selling a property that is subject to an option to tax, we strongly recommend taking specialist advice before agreeing a sale price or exchanging contracts. Your accountant and solicitor should work together to review:

• Whether your option to tax can be revoked within the six-month cooling off period.

• Whether the 20-year revocation rule applies to your property.

• Whether the buyer's intended use of the property allows the option to be disapplied, such as conversion to residential use, or use by a housing association or charity.

• The VAT liability and claw back risk on costs you have previously reclaimed.

• The SDLT impact on your buyer, and how this affects negotiations over price.

• Whether the property involves a mixed residential and commercial element that could override the option automatically.

• Acting early, before you agree a reduced price or exchange contracts, is nearly always more effective than trying to unwind the position later.

  
  

If you would like to discuss a property sale involving an option to tax, please get in touch with our team.

We can help you understand whether the option can be revoked or disapplied, and work with you to structure the sale in a way that benefits both you and your buyer.