VAT on commercial property purchases

As a general rule, the sale of an established commercial property is exempt from VAT. If nothing else has happened, the buyer pays the agreed price and no VAT is added on top. That is the default many people have in mind, and for a good number of purchases it holds true.

There are exceptions built into the rules. Newer commercial buildings, broadly those less than three years old, are standard-rated rather than exempt, so VAT applies automatically. But the situation that trips up most buyers is not the new-build rule. It is the one where an otherwise exempt property has been made taxable by the seller, which is where the option to tax comes in.

A seller can choose to opt to tax a commercial property. Once they have, the sale that would have been exempt becomes standard-rated, and VAT at the current rate of 20 percent is added to the price. Sellers do this because opting to tax lets them recover the VAT they have incurred on the building, for example on a refurbishment, so it is common on properties that have been improved or actively managed.

The practical effect on you as the buyer is immediate and cash-heavy. A property advertised at a given figure suddenly costs 20 percent more to complete on, even if you can recover that VAT later. This is why the very first questions on any purchase should include whether the seller has opted to tax. Your solicitor and accountant will confirm the position, and it needs to be nailed down before you commit, not discovered at completion.

• Ask early: has the seller opted to tax the property?
• Confirm the amount: 20 percent of a large purchase price is a significant, separate sum to fund.
• Check the timing: you pay the VAT at completion, and any reclaim comes back later.

If the seller has opted to tax and VAT is charged, the good news is that a VAT-registered buyer using the property for its taxable business can usually reclaim that VAT from HMRC. In principle it is recoverable, so the VAT is often a timing cost rather than a permanent one.

The catch is exactly that timing. You fund the VAT up front, at completion, out of your own resources. You then reclaim it on your next VAT return, and you wait for HMRC to process and repay it. Depending on where you sit in your VAT quarter, that wait can run to several months. For that whole period the money is out of your business, which is precisely the pinch point owners underestimate.

Two conditions matter for the reclaim to work cleanly. You need to be VAT-registered, and the property needs to be used for your taxable business activities. If your business makes exempt supplies, the picture is more complicated and the reclaim may be restricted. This is squarely a question for your accountant or VAT adviser, because the detail varies from business to business.

There is one route where the VAT may not need to be charged at all, even on an opted property. If the purchase qualifies as a transfer of a going concern, often shortened to TOGC, the sale can fall outside the scope of VAT. That means no 20 percent to find at completion and no reclaim to wait for.

A TOGC typically applies where a property is sold together with the business or tenancy operating from it, so that what changes hands is a continuing concern rather than bare bricks and mortar. Several conditions have to be met, and where the property has been opted to tax the buyer usually has to opt to tax as well and notify HMRC in the right way and at the right time.

TOGC treatment can save a great deal of cash flow when it applies, but the conditions are specific and getting them wrong is costly. Whether a particular deal qualifies is a technical judgement for your accountant or VAT adviser and your solicitor to make together, well before completion.

Even when the VAT is fully recoverable, the up-front gap is real. You have to pay it at completion and then wait, and a mainstream business mortgage is generally sized against the property value rather than the value plus VAT. That can leave a genuine hole between what you can borrow on the premises and what you actually need to hand over on the day.

One common answer is short-term VAT bridging: a specialist short-term facility taken out specifically to cover the VAT element, then repaid once HMRC refunds the reclaim. It is arranged to run for only a few months, matched to the reclaim timeline, so you complete the purchase without draining your working capital and clear the facility when the refund lands. As indicative figures, bridging of this kind tends to sit at around 0.75 to 1.1 percent per month, subject to status and valuation.

Whether that is the right tool depends on the size of the VAT, how quickly you expect the reclaim, and how comfortable your cash position is. We can talk through the options and, where a short-term VAT facility fits, arrange it alongside the main business mortgage so the two pieces work together.

The theme running through all of this is that VAT on commercial property is a cash-flow issue as much as a tax one, and it is best handled early. The buyers who get caught out are almost always the ones who assumed exemption and only asked the question near completion. The ones who sail through are the ones who pinned it down at the offer stage.

A sensible order of play looks like this:

• Ask up front whether the property has been opted to tax, before you finalise your offer.
• Get your accountant or VAT adviser involved early to confirm the treatment and whether a reclaim or TOGC applies to your situation.
• Budget for the gap between what the mortgage covers and what you pay at completion, including any VAT.
• Line up the funding for that gap, whether from your own reserves or a short-term VAT facility, so completion is never held up.

None of this is tax advice, and the right answer genuinely depends on your business and the specific property. Our role is to arrange the finance around whatever VAT position your advisers confirm, so the purchase completes cleanly.