option to tax ottThis blog seeks to answer a few of the more common questions asked about the OTT. It does not cover the exclusions from the OTT or the anti-avoidance rules. Since 2008 the VAT Act has not referred to the “election to waive exemption”.

What is the option to tax?

The OTT was introduced in 1989 following the imposition of VAT on new commercial construction work, and everything within this blog relates solely to commercial property. When a building is sold or let there is a VAT exempt supply, unless the sale is of the freehold in a “new” commercial building (“new” meaning unfinished, or within three years of the issue of the architect’s certificate of practical completion). The OTT turns these exempt supplies into supplies taxable at the standard rate. That generally enables the “opter” to recover more input tax.

Who can opt to tax?

In theory, anyone can opt to tax any building. But it has no practical effect unless you have an interest in the building you are opting to tax. Where the beneficial and legal interest in a building is split, it is the beneficial owner who may opt to tax.

When is opting to tax a good idea?

The usual reason for opting to tax is to recover input tax. For example:

  • A developer who builds new warehouses and grants long leases could recover the VAT on his construction costs only by opting to tax.
  • A landlord who refurbishes an office block may decide to opt to tax to recover the VAT on his refurbishment costs.

The opter must consider the impact on his prospective tenants or purchasers. If financial sector tenants are a real possibility, opting to tax might drive down the net rents that could be obtained. This is because such a tenant may not be able to recover all (or any) of the VAT on the rents.

What can