VAT on Commercial Property: The Basics

VAT on commercial property is one of the areas landlords most often get wrong. The default is that property is exempt, but there are important exceptions.

Exempt by default

The grant of an interest in land, including a lease or a freehold sale, is VAT-exempt by default. Exempt means no VAT is charged on the rent or sale, but it also means the landlord generally cannot recover VAT on related costs.

New buildings are different

The sale of a new commercial building, broadly one completed within the last three years, is automatically standard-rated at 20%, regardless of any election. This catches buyers of new-build commercial property.

The option to tax

A landlord can choose to make an otherwise exempt property standard-rated by exercising the option to tax. This lets you recover input VAT but means charging 20% on rent and sale. It is a significant decision with a 20-year commitment: see option to tax.

Why it matters

VAT interacts with SDLT (which is charged on the VAT-inclusive price), with the ability to recover VAT on a refurbishment, and with whether an exempt tenant such as a charity or bank will take the space. It also affects whether your tenant pays VAT on the rent, and how much input VAT you recover under partial exemption and the Capital Goods Scheme. Get VAT advice early on any commercial purchase or letting. See also Transfer of a Going Concern.

Is commercial rent subject to VAT?

Exempt by default, so no VAT is added, unless the landlord has opted to tax, in which case 20% applies.

Are new commercial buildings standard-rated?

Yes. The sale of a new commercial building, broadly one completed within the last three years, is automatically standard-rated at 20%.