VAT and the Landlord’s Option to Tax: A Cautionary Tale Every Property Owner Should Read

Jul 1, 2025
4 min read

How one overlooked detail can lead to a potential VAT nightmare and how you can avoid the same fate.

Navigating the complexities of VAT legislation can be a minefield so let’s start with a real-life example to illustrate just how costly a misstep can be.

Picture this.

You are a landlord. It is 2014. You have just secured a solid commercial tenant. The lease is signed. It includes a clause saying the tenant will pay “any Value Added Tax which may arise.” You dutifully charge VAT on rent, collect it, include it in your VAT returns without a second thought.

Fast forward to 2025. You are ready to sell the property. It is time to tie up loose ends. You sit down with your tax advisor, do the usual compliance checks and review of the properties VAT history, and then it happens, the red flag.

There was no VAT clause in the lease agreement or any separate document which confirmed that the rent was to be exclusive of VAT and that VAT shall be payable on top of the rent.

What now?

Why this matters, a lot

Under Irish VAT law, commercial property lettings are exempt from VAT, unless the landlord opts to tax the letting.

That’s right: unless you expressly choose to charge VAT (and do so in writing), your lease is treated as VAT-exempt. And here's the kicker, if you haven't done it properly, Revenue may say the VAT you have charged all those years was never valid.

The potential consequences include:

VAT wrongly charged and paid to Revenue can only be reclaimed within 4 years of the relevant tax period. After that, it's gone for good.
A clawback of any VAT reclaimed on acquiring, building or refurbishing the property under the Capital Goods Scheme.
VAT incorrectly collected is treated as additional rental income triggering extra tax liabilities.
Tenants who have paid VAT on the rent may seek reimbursement from the landlord, as the VAT was incorrectly charged.
Landlord may lose the ability to reclaim VAT on expenses related to the property (e.g. repairs or development costs), as the property would not be considered a taxable supply without a valid option to tax.
The landlord may face administrative challenges in rectifying the situation, including amending VAT returns and dealing with disputes with tenants or Revenue.

In short: a serious financial headache.

How to get it right

Where a landlord opts to tax a lease, it is important to ensure the following:

the option to tax is explicitly stated in the lease agreement or in a separate document, and
that an effective VAT clause is included in the lease or separate document that allows the landlord to collect VAT on the lease from the tenant.

While the inclusion of a VAT clause is an indication that the landlord will charge VAT on the rent, it is not sufficiently explicit to constitute an option to tax. An option to tax should include a provision in the letting agreement that expressly states that the landlord will charge VAT on the rent (not merely that they can charge VAT).

That’s it. Strictly speaking, without the above two steps, the option to tax is possibly not valid, and the letting remains VAT-exempt. Importantly, the option to tax cannot be applied retrospectively. This means that if you fail to include the option to tax and a sufficient VAT clause at the outset, you cannot later claim that the letting was taxable from the start.

But what if I have been issuing VAT invoices?

Good question. Some argue that issuing VAT invoices could count as the required “separate document” notifying the tenant, essentially a de facto option to tax.

It is not a bad argument, but it is not a guaranteed win.

Real Risk, Real Money

Going back to our landlord, the risk is that Revenue could rule that there was never any VAT due in the first place, since the option to tax the lease was not properly exercised. Meaning all those years of VAT collected were in fact rental income.

That’s a serious blow, especially if:

You have reclaimed VAT on building, acquiring or refurbishing the property, as there could be a clawback under the Capital Goods Scheme as you’ll be deemed to have put the property to an exempt use during its VAT life,
You cannot claw back the VAT incorrectly paid over to Revenue which is outside the 4-year timeframe for repayments of tax, and
You now owe more tax on the “VAT” you charged the tenants which has been reclassified as rental income

Moral of the story: don’t wing it with VAT

If you are letting commercial property and want to charge VAT, document it properly.

✔ Include an option to tax in the lease agreement or a separate document, and ✔ Include an effective VAT clause in the lease agreement or separate document that allows the landlord to collect VAT on the rental income from the tenant.

Ensure the above two steps have been complied with, before you start issuing VAT invoices. That’s it. Those simple steps that seem like a formality today could save you a major tax headache tomorrow.

We always recommend that you engage with a tax advisor to ensure the option to tax is correctly executed.

At Taxkey, we untangle the knot of VAT on property, so you don’t end up in a tax twist.

Whether you are leasing, selling, or just trying to make sense of the rules, our team turns tax talk into plain English (with as little jargon as humanly possible).

The rules might be complex but getting help doesn’t have to be. Our team is here to make the process smoother, smarter, and a lot less stressful.

DISCLAIMER This article does not constitute professional accounting, tax, legal or any other professional advice. No liability is accepted by Taxkey for any action taken or not taken in reliance on the information set out in this presentation. Professional accounting, tax, legal and / or any other relevant professional advice should be obtained before taking or refraining from any action as a result of the contents of this article.