VAT on commercial property is one of the most complex areas of UK tax law. Unlike many other business transactions where the VAT position is immediately clear, commercial property deals can be exempt from VAT, subject to VAT at the standard rate, or fall entirely outside the scope of VAT, sometimes all within the same transaction. Getting this wrong can lead to unexpected costs, irrecoverable VAT, and inflated Stamp Duty Land Tax (SDLT) bills. This guide explains everything you need to know.
The Default Position: VAT Exemption
As a general rule, the sale or lease of commercial property in the UK is exempt from VAT. This means that where the exemption applies, neither the buyer nor the tenant is required to pay VAT on the purchase price or rent. The exemption extends to the grant of any interest in, right over, or licence to occupy commercial land and buildings.
While VAT exemption reduces the immediate cost for buyers and tenants, it carries a significant drawback for sellers and landlords. Where a supply is exempt, the seller or landlord cannot recover any VAT they have incurred on related costs such as legal fees, refurbishment work, or professional services. For properties that have required substantial investment, this can result in a considerable irrecoverable VAT burden.
When VAT Is Compulsory: New Commercial Buildings
There is one situation in which VAT at the standard rate of 20% is automatically charged, regardless of the seller’s or landlord’s preference. This applies to the sale or lease of a new commercial property, defined as one that is less than three years old at the time of the transaction.
Where a buyer purchases a new commercial property and intends to let it out, they will almost certainly want to opt to tax immediately in order to recover the VAT charged on that purchase. If they do not, they will be unable to reclaim any VAT on acquisition costs and will face ongoing irrecoverable VAT on future expenditure related to the property.
The Option to Tax Explained
For commercial properties that are more than three years old, owners have a choice. They may elect to opt to tax the property, charging VAT at the standard rate of 20% on sales and rents. The decision to opt to tax is entirely voluntary, but once made, it carries important and long-lasting consequences.
The primary reason a landlord or vendor opts to tax is to enable them to recover VAT on costs associated with the property. This is particularly common where a property has recently been refurbished or renovated and the owner wishes to reclaim the VAT paid on that construction or improvement work.
How to Make an Option to Tax
There are two distinct steps to making a valid option to tax:
- Making the decision: The business must formally decide to opt to tax the property
- Notifying HMRC: The decision must be notified to HMRC in writing within 30 days of the decision being made, using form VAT1614A or by email to the HMRC Option to Tax National Unit
From 1 February 2023, HMRC no longer sends a confirmation letter on receipt. Instead, where notification is made by email to the designated HMRC address, an automated email response is generated. This automated reply must be retained as the primary evidence that the option to tax was properly notified, as HMRC may request it on any future sale, lease, or enquiry.
When submitting an option to tax by email, include the property address including postcode and the effective date of the option to tax in the subject line.
Duration and Irrevocability
Once notified to HMRC, the option to tax remains in place for 20 years and is largely regarded as irrevocable. There are limited windows for revocation:
- Within the first 6 months, subject to repayment of any input tax already recovered as a result of the option
- After 20 years from the date the option was made
- Where no interest has been held in the property for 6 years from the date of the option
It is important to note that the option to tax does not follow the property. Each successive owner or tenant makes their own decision about whether to opt, independently of the previous owner.
Who Should Not Opt to Tax
Opting to tax is not always the right decision. If a significant proportion of likely buyers or tenants are businesses that cannot themselves recover VAT such as banks, insurance companies, charities, and healthcare providers, adding 20% VAT to the price can make the property considerably less attractive and may impede a sale or letting.
Transfer of a Going Concern (TOGC)
One of the most valuable VAT reliefs available in commercial property is the Transfer of Going Concern (TOGC). A TOGC is a transaction that falls entirely outside the scope of VAT, meaning no VAT is charged at all even where the seller has opted to tax the property.
A commercial property transaction qualifies as a TOGC where:
- The property is being sold as part of an income-generating business, typically with tenants in place or with the benefit of an existing lease
- The buyer intends to continue the same type of business activity after the transfer
- The buyer is VAT registered, or will become VAT registered immediately as a result of the transfer
- The buyer has opted to tax the property, and HMRC has received notification of that option before the date of completion
- There is no significant break in normal trading before or immediately after the transfer
- The transaction does not form part of a series of immediately consecutive transfers
Where a lease has been surrendered before completion, the property rental business has effectively ceased and TOGC status will no longer apply. In those circumstances, VAT at the standard rate will be charged on the sale.
Practical example: A commercial property is currently leased to a business tenant. A purchaser intends to acquire the landlord’s freehold interest and continue the rental arrangement. Provided the purchaser is VAT registered and has opted to tax the property before completion, no VAT will be charged on the transaction.
VAT and Stamp Duty Land Tax: A Hidden Cost
One of the most frequently overlooked consequences of VAT on commercial property is its interaction with Stamp Duty Land Tax (SDLT). Where VAT is chargeable on a commercial property transaction, SDLT is calculated on the total consideration including VAT, not just the net purchase price.
For a commercial property purchased for £500,000 subject to VAT at 20%, the total consideration for SDLT purposes becomes £600,000. The SDLT is then calculated on that higher figure, which can significantly increase the tax bill. SDLT on commercial property purchases is charged at 0% on the first £150,000, 2% on the portion from £150,001 to £250,000, and 5% on the remainder.
This is effectively a form of double taxation and is a compelling reason to explore TOGC status or other VAT planning opportunities before proceeding with a commercial property transaction.
Practical Considerations Before Transacting
Before proceeding with any commercial property purchase or lease, the following questions must always be addressed:
- Has the seller or landlord opted to tax the property? Always ask for written confirmation from HMRC as evidence
- Is the property less than three years old, making VAT compulsory at 20%?
- Does the transaction qualify for TOGC treatment, and if so, has the buyer opted to tax and notified HMRC in time?
- Will VAT be recoverable by the buyer or tenant, or will it represent an irrecoverable cost?
- Does the tenant’s future use of the property affect the landlord’s ability to opt to tax?
If the lease is silent on VAT at the time of signing, it is also worth noting that most commercial leases contain a clause permitting the landlord to charge VAT on the rent if they opt to tax the property at any point during the lease term. Tenants should be prepared for this possibility and budget accordingly.
How Property Tax Accountant Can Help
VAT on commercial property requires careful planning at every stage from initial purchase through to eventual disposal. Failing to consider VAT early enough, missing the 30-day notification window, or overlooking TOGC conditions can result in substantial unexpected costs that could have been avoided entirely.
UK Property Tax Accountant provides specialist commercial property VAT advice to buyers, sellers, landlords, and investors across the UK. Our expert team can:
- Advise whether opting to tax is in your best financial interests, based on the specific property and your VAT recovery position
- Prepare and submit your Option to Tax notification to HMRC accurately and within the required deadline
- Assess whether a transaction qualifies as a TOGC and coordinate with all parties to ensure the conditions are met before completion
- Review the VAT and SDLT interaction for each transaction to calculate your true all-in acquisition cost
- Provide ongoing VAT compliance support for commercial landlords, including VAT return preparation and advice on recoverable input tax
Whether you are completing your first commercial property acquisition or managing a large and complex portfolio, our team brings the technical expertise to navigate the VAT rules with confidence. Contact UK Property Tax Accountant today for specialist advice tailored to your situation.
Frequently Asked Questions
Is VAT always charged on commercial property in the UK?
No. The default position is that the sale and lease of commercial property is exempt from VAT. VAT at 20% only applies automatically to new commercial buildings that are less than three years old. For older properties, VAT is only charged if the seller or landlord has opted to tax.
What is an option to tax and why would a landlord make one?
An option to tax is a voluntary election by a landlord or vendor to charge VAT at 20% on supplies of a commercial property. The main reason to opt is to enable recovery of VAT incurred on related costs such as refurbishment, repairs, and professional fees. Without an option to tax, those costs carry irrecoverable VAT.
How do I notify HMRC of an option to tax?
You must notify HMRC in writing within 30 days of making the decision, using form VAT1614A or by emailing the HMRC Option to Tax National Unit. Where notification is sent by email, you will receive an automated acknowledgement, which should be kept permanently as evidence of your notification.
What is a Transfer of Going Concern and how does it help?
A TOGC is a commercial property transaction that falls outside the scope of VAT entirely, meaning no VAT is charged. For a transaction to qualify, the property must be sold with tenants in place or with an existing lease, the buyer must be VAT registered and must have opted to tax the property before the date of completion.
Does VAT on commercial property affect the amount of SDLT I pay?
Yes. Where VAT is charged on a commercial property purchase, SDLT is calculated on the total sum payable including VAT. This can significantly increase the SDLT bill, which is one of the strongest reasons to explore TOGC status where it is available.
Can I revoke an option to tax once it has been made?
An option to tax is largely irrevocable once made and lasts for 20 years. The only limited windows for revocation are within the first 6 months (subject to repaying recovered input tax), after 20 years, or where no interest has been held in the property for 6 years since the option was made.
Does the option to tax pass to the next buyer of the property?
No. The option to tax is personal to the business that makes it and does not follow the property on sale. Each successive owner must make their own independent decision about whether to opt to tax.
