Is there VAT on commercial property?
It depends. Most commercial property in the UK is VAT-exempt by default, meaning no VAT is charged on the sale or the rent. However, an owner can choose to opt to tax the property, which switches it to standard-rated and adds 20% VAT to the price and to any rent. So the first question on any commercial purchase is simple but crucial: has the seller opted to tax? If they have, you may face a 20% VAT charge on top of the purchase price.
On a 500,000 pound building, that is a 100,000 pound VAT charge. Even where it is ultimately recoverable, that is a large sum to fund upfront, which is why VAT is one of the most important early checks in any commercial deal.
Exempt versus option to tax: what is the difference?
By default, the sale and letting of commercial property are exempt from VAT. Exempt sounds helpful for a buyer, but it has a downside for owners: if a supply is exempt, the owner generally cannot recover the VAT they incur on related costs, such as refurbishment, professional fees or agent's commission.
To get around this, an owner can make an option to tax (sometimes called electing to waive exemption). This makes the property standard-rated, so:
- The owner charges 20% VAT on the sale price and on the rent.
- In return, the owner can recover the VAT on their related costs.
The option is made with HMRC and, once made, generally applies to that property for the long term, so it is a decision with lasting consequences. It is common on refurbished or newly developed commercial property, and on investment property where the owner has incurred recoverable VAT.
Why does the option to tax matter to a buyer?
If you buy a property the seller has opted to tax, you are charged 20% VAT on the purchase price. Whether that VAT is a real cost or merely a cashflow event depends on your own VAT position:
- If you are VAT-registered and use the property for taxable purposes, you can usually recover the VAT you pay. It is a cashflow cost, not a permanent one, but you still have to fund it until HMRC repays it.
- If you are not VAT-registered, or the property is used for exempt activities, the VAT can become a genuine, unrecoverable extra cost, adding 20% to your effective purchase price.
There is also a knock-on effect on Stamp Duty Land Tax: SDLT is generally charged on the VAT-inclusive price, so an opted property can carry more SDLT as well. VAT decisions therefore ripple through the whole cost of the deal.
How does a transfer of a going concern (TOGC) help?
A very important relief is the transfer of a going concern, or TOGC. Where a let commercial property is sold as an ongoing rental business rather than as a bare building, and certain conditions are met, the sale can be treated as outside the scope of VAT. That means no 20% VAT is charged at all, which removes the need to fund a large VAT payment upfront.
For a TOGC to apply to an opted, tenanted commercial property, the typical conditions include:
- The property is sold with the benefit of the existing lettings, as a going concern.
- The buyer is VAT-registered (or becomes so) by the relevant date.
- The buyer makes their own option to tax on the property and notifies HMRC by the relevant time, usually by completion.
- There is no break in the rental business.
Get the TOGC conditions right and a buyer avoids fronting 20% VAT and the extra SDLT on it. Get them wrong and VAT can suddenly become chargeable, which is why proper advice is essential. TOGC is especially relevant to investment purchases, covered in our guide to commercial investment property finance.
How VAT affects cashflow and funding
The cashflow challenge is straightforward: if VAT is chargeable, you have to pay it at completion, and if it is recoverable, you only get it back from HMRC later, often weeks or months afterwards. That timing gap has to be funded from somewhere, because a commercial mortgage is advanced against the property value, not the VAT.
This is where short-term finance sometimes comes in. Buyers who face a recoverable VAT bill they cannot fund from cash occasionally use a short-term facility to cover the VAT until HMRC repays it, then clear it once the refund arrives. Our guide to commercial bridging loans explains how short-term finance works, though whether it is appropriate depends entirely on your position and advice. The cleanest outcome, where available, is structuring the deal as a TOGC so no VAT arises at all.
What buyers should check before completion
- Has the seller opted to tax? If so, 20% VAT is in play.
- Can the deal qualify as a TOGC? For tenanted investment property, this can remove the VAT charge entirely.
- What is your own VAT position? Recoverable or not changes whether VAT is a cashflow issue or a real cost.
- Have you factored VAT into SDLT? Duty is usually charged on the VAT-inclusive price.
- Can you fund any VAT until it is recovered? The mortgage will not cover it.
VAT on property is a specialist area, and this article is general information rather than tax advice. Always take advice from a qualified accountant or VAT specialist before completing.
Funding the deal with Assesr
VAT and TOGC affect how much cash you need at completion, so getting your core funding lined up early gives you room to plan around them. Assesr builds a lender-ready credit paper in around 60 seconds and matches your commercial mortgage to specialist lenders whose criteria fit your deal, at a quarter of the typical broker fee. It is free to submit, and you pay the 0.5% Assesr Fee on drawdown, with nothing until your deal completes.
Frequently asked questions
Is there VAT on commercial property?
Most commercial property is VAT-exempt by default, so no VAT is charged. However, an owner can make an option to tax, which makes the sale or rent standard-rated at 20% VAT. Whether VAT applies depends on whether the seller has opted to tax.
What is an option to tax on commercial property?
An option to tax is an election a property owner makes with HMRC to charge VAT on the sale and rent of a commercial property that would otherwise be exempt. It lets the owner recover VAT on related costs, but means buyers and tenants are charged 20% VAT.
What is a transfer of a going concern (TOGC)?
A TOGC is a sale of a let commercial property as a business, rather than as a bare asset. If the conditions are met, the sale falls outside the scope of VAT, so no 20% VAT is charged, which avoids a large upfront VAT cash outlay.