An option to tax never applies to a building that is designed or adapted and intended for use as a dwelling or solely for a relevant residential purpose, so those supplies stay exempt whatever the seller has opted. Where a commercial building is to be converted to residential use, the buyer can switch off the seller’s option by giving the seller a certificate on form VAT1614D before the price is legally fixed, which makes the purchase exempt instead of standard rated.
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Which residential supplies does an option never reach?
Paragraph 5 of Schedule 10 to the VAT Act 1994 says an option to tax has no effect on any grant of a building, or part of one, that is designed or adapted, and intended, for use as a dwelling or number of dwellings, or solely for a relevant residential purpose. No certificate is needed for existing houses and flats, although Notice 742A, paragraph 3.2, recommends keeping evidence of the intended use.
A relevant residential purpose building is one where some facilities, such as dining rooms and bathrooms, are shared. Notice 742A, paragraph 3.3, gives examples such as homes for children, the elderly or disabled people and student halls, and excludes hospitals, prisons, hotels and similar establishments. For these the buyer or tenant must tell the seller of the intended use before the supply; there is no formal certificate, but the seller should get it in writing. For how an option works more generally, see opting to tax property for VAT.
What does the VAT1614D certificate do?
Paragraph 6 deals with buildings that are not yet residential: an office, shop, pub or barn that the buyer intends to turn into homes. If the buyer certifies that the building, or part of it, is intended for use as a dwelling or dwellings or solely for a relevant residential purpose, the seller’s option has no effect on that grant. Notice 742A, paragraph 3.4.2, which has force of law, says the certificate must be on form VAT1614D and contain the information the form asks for.
The seller does not choose whether to honour a valid certificate received in time. Paragraph 3.4.3 says that if the certificate arrives by the deadline, the seller must exempt the supply of the building or the part covered. The effect is that the buyer pays no VAT on the price, which at the 20% standard rate can be a large sum.
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Who is allowed to give the certificate?
Under paragraph 6(3), only a buyer who:
- intends to use the building or part as a dwelling or solely for a relevant residential purpose;
- intends to convert it with a view to that use; or
- is a relevant intermediary (see below).
Paragraph 6(8) stops a certificate where there is to be a period of other use before residential use, although incidental or minor use is ignored. Notice 742A, paragraph 3.4.1, gives short term storage of goods as an example of minor use. A buyer who plans to keep letting the building as offices for a few years and convert later cannot certify.
When must the certificate be given?
Section B of Notice 742A, which has force of law, says the certificate must be given before the price for the grant is legally fixed, for example by exchange of contracts, letters or missives, or the signing of heads of agreement. HMRC warns in paragraph 3.4.4 that heads of agreement do not always fix the price, so the safest course is to hand over the certificate before anything is signed.
A late certificate is not void, but the seller can refuse it. If the seller agrees to accept it, it applies only to supplies made after it is received. On a freehold sale the supply is usually made on completion, so a certificate received between exchange and completion can still work if the seller accepts it. On a lease with periodic rent, only rent falling due after the certificate is exempt.
How does a chain of buyers work?
Property is often bought by a dealer who sells it on to the person who will do the conversion. A buyer is a relevant intermediary if it intends to dispose of the whole of the interest it is buying and holds a certificate from its own buyer saying that buyer will convert or is itself a relevant intermediary. Paragraph 6(4) to (6) lets that chain run through any number of links.
Notice 742A, paragraph 3.4.5, explains that the intermediary’s certificate from its buyer does two jobs: it entitles the intermediary to give a VAT1614D to its own seller, so its purchase is exempt, and it disapplies the intermediary’s own option when it sells on. Each link needs its own certificate in place before its own price is fixed.
What if only part of the building will be residential?
The certificate must say so and describe the qualifying part. The option still applies to the rest, and the seller apportions the price fairly between exempt and taxable elements (paragraph 3.4.6). For a mixed building such as a shop with a flat above, paragraph 3.10 explains that no certificate is needed for a part that is already a flat, but a part that is still office space awaiting conversion needs a VAT1614D. Where the seller grants a lease, the disapplication covers all later supplies under that grant for the certified parts (paragraph 3.4.7).
What happens after the purchase?
The certificate settles only the seller’s VAT. The converter then has its own position under Notice 708. Building work on a qualifying conversion can carry the reduced rate of 5% (section 7), and the first sale or long lease of a converted non residential building can be zero rated where the conditions in section 5 are met, which lets the developer recover VAT on its costs. A converter that keeps the flats to let makes exempt supplies, because an option cannot apply to dwellings, and generally cannot recover VAT on the costs. That is often the strongest reason to use the certificate: VAT on the purchase price would otherwise be an irrecoverable cost. See VAT on renovating empty homes and zero rating for new homes for related reliefs.
For the seller, the disapplied option means the sale is exempt. Notice 742A, paragraph 3.1, warns that this can affect how much input tax the seller can claim and may require repayment of VAT already recovered, including through the capital goods scheme.
What does it look like in practice?
Illustration only. A landlord has opted to tax a vacant 1990s office building and agrees to sell it for £1,000,000 to a developer who will convert it into flats. Before contracts are exchanged the developer gives a completed VAT1614D. The sale is exempt, so the developer pays £1,000,000 rather than £1,200,000. Had the developer signed heads of agreement that fixed the price and only then produced the certificate, the landlord could have refused it and charged £200,000 VAT.
Illustration only. A dealer buys a former pub intending to sell it within weeks to a converter. The converter gives the dealer a certificate, the dealer gives its seller a certificate, and both sales are exempt despite both sellers having opted.
What mistakes come up most often?
- Producing the certificate after the price is fixed and assuming the seller must accept it.
- Certifying when there will be an interim commercial use before conversion.
- Missing a certificate at one link in a chain, which breaks the exemption for that link.
- Not describing the qualifying part where only some floors will be residential.
- Sellers overlooking the input tax consequences of an exempt sale.
Both parties should keep a copy of the certificate with the completion documents. For background on the wider rules, see VAT on commercial property.
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Related Accountapedia entries
- Residential conversions: the reduced VAT rate
- Charitable and residential purpose buildings: zero rating
- TOGC rules for selling a let commercial property
- VAT on letting agents’ fees
- VAT on service charges
Sources
- legislation.gov.uk: Act 1994 c. 23, schedule 10
- GOV.UK: Opting to tax land and buildings notice 742a
- legislation.gov.uk: Act 1994 c. 23, schedule 10
- GOV.UK: Vat certificate to disapply the option to tax buildings for conversion
- GOV.UK: Vat rates
- GOV.UK: Buildings and construction vat notice 708
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.