Getting this wrong is expensive twice over: 20% of the price is a large sum, and because SDLT is charged on the VAT-inclusive price, a wrong VAT charge quietly inflates the buyer's stamp duty too.
On a commercial property deal, the VAT question is rarely "how much", it is "which of four treatments applies", and the four are worth tens of thousands of pounds apart on a typical price. This is the map: exempt, compulsorily standard-rated, opted to tax, or outside the scope as a going concern.
Common mistakes & confusionsWhere VAT on a commercial property sale trips buyers and sellers up
- Assuming a commercial sale is always exempt. It is only the default. A new building, an option to tax, or the wrong going-concern treatment can each turn it into a 20% charge or take it outside VAT, so the exemption is the starting point, not the answer.
- Missing that a new building is compulsorily standard-rated. A freehold sale of a commercial building completed within the last three years carries VAT at 20% whether you like it or not. There is no exemption and no choice for the first three years.
- Forgetting to check the option-to-tax history. An option to tax lasts 20 years and is personal to whoever made it, so a seller can have opted long ago and lost track. Check the property's option history before you assume a sale is exempt, because a live option turns a "no VAT" deal into a 20% one.
- Getting the going-concern conditions slightly wrong. A going-concern sale is outside VAT only if every condition is met, including the buyer opting to tax and notifying HMRC by the relevant date. Miss one and the sale is standard-rated after all, with VAT due that no one budgeted for.
- Ignoring the SDLT knock-on. SDLT is charged on the VAT-inclusive price. Charge VAT that was not due and the buyer pays stamp duty on top of it, a cost that does not come back even if the VAT is later corrected.
- Assuming the buyer can always recover the VAT. A VAT-registered buyer using the property for taxable purposes usually can, but if they are partly exempt, or converting it to residential, the VAT sticks as a real cost and changes the deal.
Start from exempt, then look for what flips it
The starting point is friendlier than most people expect: the sale of a commercial property is exempt from VAT. The land exemption in Group 1 of Schedule 9 to the VAT Act 1994 treats a sale of buildings and land as exempt, so the default answer to "do I charge VAT?" is no. The difficulty is that the default is only ever a starting point, and three separate things can move a particular sale off it.
A new building is dragged into compulsory VAT. An option to tax converts an exempt sale into a taxable one. And a sale bundled up with a business can drop out of VAT altogether as a going concern. On a commercial price, the gap between these treatments runs to tens of thousands of pounds, so the whole exercise is really working out which of the four your deal actually is. Here they are in turn.
The new building rule: three years of compulsory VAT
The first thing that overrides the exemption is age. The freehold sale of a commercial building completed within the last three years is standard-rated at 20%, and there is nothing optional about it: for those first three years the exemption simply does not apply to a freehold sale, and VAT is due whether the seller wants it or not. After three years the building is no longer new for these purposes, and the sale falls back to the default exempt treatment, unless something else moves it. The two details that decide whether 20% is in play at all are the three-year clock and whether what you are selling is the freehold or the grant of a lease, which follows different rules again.
The option to tax: 20% by choice, and it lingers
The second override is one the seller chooses. A commercial property can be opted to tax under Schedule 10, which turns otherwise-exempt sales and rents into standard-rated ones, so that whoever opted can recover the VAT on their own costs on the property. If the seller has opted, the sale is standard-rated at 20%, and the option is not a light thing: once notified to HMRC it runs for 20 years and is, in practice, very hard to get out of.
What catches people is that the option belongs to the person who made it, not to the building, so there is no such thing as an opted property. A buyer does not inherit the seller's option, and a seller can have opted years ago and forgotten. Before anyone assumes a sale is exempt, the property's option history is worth checking on both sides, because a forgotten option is the single most common reason a "no VAT" deal turns into a 20% one.
A VAT Expert Call fixes the treatment, exempt, standard-rated or going concern, before you exchange, while it is still cheap to get right.
Transfer of a going concern: outside VAT, if you thread the needle
The third override takes the sale out of VAT entirely. If what you are selling is not just bricks but a business, most often a let investment property, which is a property rental business, it can be sold as a transfer of a going concern, and a going concern is outside the scope of VAT: no VAT is charged at all. That is usually the outcome everyone wants, because it keeps 20% out of the price and the stamp duty down with it.
But the going-concern rules, set out in Notice 700/9, are strict and all-or-nothing. Among other conditions, the buyer has to be VAT-registered, has to carry on the same kind of business, and, where the seller had opted to tax, the buyer has to make their own option to tax and notify HMRC by the relevant date, with no disapplication of that option. Miss a single condition, or miss the notification deadline, and the sale is not a going concern after all: it snaps back to standard-rated, and the 20% that no one priced in becomes due. This is the part of a property deal where the largest sums ride on the smallest details.
The two costs of getting it wrong: the 20% and the SDLT on top
Two things make errors here more expensive than they first look. The first is stamp duty. SDLT is calculated on the VAT-inclusive price, so if VAT is charged when it should not have been, the buyer pays SDLT on the VAT as well, and that extra stamp duty does not come back even if the VAT charge is later unwound. A wrong VAT call is therefore not a wash that corrects itself; it leaves a permanent stamp duty cost behind.
The second is recovery. Where VAT is correctly charged, a VAT-registered buyer who will use the property for taxable purposes can usually recover it, so the 20% is a cash-flow cost rather than a real one. But if the buyer is partly exempt, or is buying to convert the property to residential or another exempt use, some or all of that VAT sticks and becomes a genuine cost that changes the economics of the deal. Whether the VAT is recoverable is as much part of the price as the VAT itself.
When you might need expert VAT advisory
On a commercial property deal the VAT is rarely the headline, but it is often where the largest avoidable cost hides. In practice, the situations below are where a senior specialist's read meaningfully improves the outcome:
- You are selling or buying a commercial property and need the VAT treatment confirmed before exchange, not discovered afterwards
- You are relying on transfer-of-a-going-concern treatment and want every condition, including the buyer's option to tax and its timing, locked down
- You are not sure whether the property carries an option to tax, or whether an option made earlier in its history still applies
- You are buying a new commercial building and need to plan for the 20%, and the SDLT on top, in your numbers
- You are buying to convert to residential or for an exempt use, where the VAT charged may not be recoverable
- You are an accountant or solicitor on a deal and want the VAT position sense-checked against the contract before completion
Whether you're an investor weighing up a deal or an accountant or solicitor checking the VAT before completion, we focus on the VAT questions where extra expertise pays off, and we work in plain English.