VAT on Commercial Rents: When Tenants Pay 20%

Whether your tenant pays VAT on the rent depends on whether you have opted to tax. Getting this clear avoids disputes and cashflow surprises.

The default

Rent under a commercial lease is exempt from VAT by default, so no VAT is added. See VAT on commercial property.

When 20% applies

If the landlord has exercised the option to tax, the rent becomes standard-rated, so 20% VAT is charged on top. A VAT-registered tenant whose own business is taxable can usually recover that VAT, so it is broadly cost-neutral to them. A tenant who is exempt or not registered, such as some charities, banks or medical users, cannot recover it, so the option effectively raises their cost by a fifth.

Practical points

• Make the VAT position clear in the heads of terms and the lease, so the tenant knows whether rent is plus VAT.
• Issue valid VAT invoices for opted rent.
• Remember the option also affects a future sale and the TOGC position.

The lettability angle

Because opting to tax makes the space more expensive for VAT-exempt occupiers, it can affect who will take the property. Weigh the option to tax decision against the likely tenant profile, and take advice.

Does a tenant pay VAT on commercial rent?

Only if the landlord has opted to tax, in which case 20% applies. Otherwise rent is exempt.

Can a tenant recover VAT charged on rent?

A VAT-registered tenant with a taxable business usually can; an exempt tenant such as a charity or bank cannot.