VAT on commercial property

Is VAT Payable on Commercial Property? The Four Possible Positions

PropertyVAT Team · Updated 20 October 2026 · 3 min read

The question sounds simple and the answer is frequently assumed. That assumption is why buyers turn up to completion needing an extra 20% they had not budgeted for.

The default position is that commercial property is exempt from VAT. But there are four possible positions, and only one of them is the default.

The four possible VAT positions

The practical consequence is that two apparently identical office buildings on the same street can have completely different VAT positions, decided entirely by what their respective owners did years ago.

Why the option to tax exists

Exemption sounds like a benefit, but it is not for the owner. If a property is exempt, the owner cannot recover VAT on costs relating to it — refurbishment, professional fees, agent commission.

Opting to tax flips that. The owner charges VAT on rent and on sale, and in exchange can recover VAT on their costs. For anyone who has spent money on a building, opting to tax is usually the rational choice.

That is why opted property is far more common at the institutional end of the market, and why the probability of facing VAT rises with the quality and recency of the asset.

Crucially, the option belongs to the seller, not to you. You cannot decline it, negotiate it away after exchange, or choose to treat the purchase as exempt.

The three-year rule on new buildings

Where a commercial building is new, VAT is standard-rated automatically. The seller has no discretion. Broadly, a building counts as new for roughly three years from completion of construction.

This catches buyers of newly developed industrial units and offices who have assumed that because no option to tax was notified, no VAT is due. The rules here are more technical than they first appear, so confirm the position with a VAT adviser rather than counting back from a date on a planning portal.

When no VAT is payable at all: TOGC

If the property is let and the sale transfers a continuing rental business, the transaction can qualify as a transfer of a going concern and fall outside the scope of VAT entirely.

The appeal is obvious. No VAT means no funding gap, no reclaim, and — because stamp duty is calculated on the VAT-inclusive price — a lower SDLT bill as well.

The conditions are strict and fact-specific. Both parties generally need to be VAT registered, the buyer usually needs to have opted to tax and notified HMRC before the relevant date, and the buyer must intend to continue the same business. Deals that look like a TOGC at heads of terms sometimes fail the test by completion, which is precisely when a 20% liability is hardest to fund.

How to establish your position

1. Ask before you offer. The VAT position should be one of your first questions, not a completion-week discovery.
2. Read the contract, or the legal pack at auction. The special conditions are where the VAT position is stated.
3. Get it in writing from your solicitor. Agent particulars and brochures are marketing, not a legal position.
4. Ask whether a TOGC is intended, and what happens if the conditions fail.
5. Confirm your own VAT registration status. You cannot reclaim VAT you were not registered for at the time of purchase.

What it costs if VAT applies

On a £1m purchase where the seller has opted to tax, you need £200,000 of additional funds on completion day. You will recover that through your VAT return, typically within one to three months.

There is also a cost you cannot recover. Stamp duty is calculated on the VAT-inclusive consideration, so you pay SDLT on the £1.2m rather than the £1m — and that extra stamp duty is not reclaimable.

The VAT itself is a timing problem rather than a permanent cost. But timing problems still have to be funded, which is where a VAT bridge comes in.

This guide is general information, not tax advice. The VAT position on property is highly fact-specific — confirm yours with a VAT adviser before exchange.