VAT reclaim and HMRC

Input Tax Recovery Rules for Property

PropertyVAT Team · Updated 21 October 2026 · 3 min read

Recovery questions usually get asked as "can I reclaim the VAT?" The rules do not work like that. Input tax is attributed to the supplies it relates to, and the answer follows from that attribution.

The attribution hierarchy

Work through costs in this order.

Directly attributable to taxable supplies. Recoverable in full.

Examples: refurbishing a building you have opted to tax and let to a taxable tenant; agent fees on an opted letting.

Directly attributable to exempt supplies. Generally not recoverable.

Examples: costs relating to an unopted commercial building let on an exempt basis; costs relating to residential letting.

Residual. Relating to both, or to the business generally. Apportioned under a partial exemption method.

Examples: head office costs; group professional fees; advice spanning a mixed portfolio.

Where property costs usually fall

That last row matters and is often mishandled. Where a deal falls through, the costs are generally attributed by reference to what you intended — which is why a contemporaneous note of intended use is worth keeping.

Intention matters

Attribution is forward-looking. At the point you incur a cost, you attribute it to the supplies you intend to make.

Two consequences:

You can recover before making any supplies. A developer incurring costs on a scheme intended for zero-rated sales can recover, even though no sale has happened.

If intention changes, so does the position. A scheme switched from sale to letting has moved from an intended taxable supply to an intended exempt one, and the recovery position changes with it.

Document your intention at the time. Reconstructing it later, in response to an enquiry, is considerably harder than writing it down when the decision is made.

Why the same cost differs between businesses

Two investors buy identical buildings and incur identical legal fees.

• Investor A opts to tax and lets to a taxable tenant. Fees are directly attributable to taxable supplies, recoverable in full.
• Investor B does not opt and lets on an exempt basis. The same fees are attributable to exempt supplies, generally not recoverable.

Nothing about the property or the invoice differs. The attribution follows what each investor does.

The ten-year tail

On property expenditure of £250,000 or more excluding VAT, the Capital Goods Scheme revisits recovery across ten intervals.

So attribution at the outset is not final. If use shifts between taxable and exempt over the following decade, adjustments follow.

This is why the first-interval position should be documented carefully — it is the benchmark everything else is measured against, and the people who recorded it will often have moved on.

Practical steps

1. Attribute costs as you incur them, rather than reconstructing at year end.
2. Record the intended use for each property and each significant cost.
3. Keep abortive-cost records, including what was intended.
4. Review the residual pool — if it is large, consider whether a special partial exemption method would be fairer.
5. Track Capital Goods Scheme items for the full adjustment period.
6. Revisit attribution when use changes, not at the next audit.

This guide is general information, not tax advice. Attribution and partial exemption are technical — take advice from your accountant.