Selling or letting commercial property is exempt from VAT by default, so no VAT is charged but the owner usually cannot recover VAT on its own costs. Two things change that: the freehold sale of a commercial building less than three years old is always standard rated, and an owner can opt to tax a property so that its sales and lettings become standard rated and the related VAT on costs becomes recoverable.

What is the starting point?

Section 31 of the VAT Act 1994 makes the supplies in Schedule 9 exempt, and Group 1 of Schedule 9 covers property. Notice 742 says the grant, assignment or surrender of an interest in, right over or licence to occupy property is normally exempt. A grant includes selling a freehold and creating a lease; an assignment is the transfer of a lease to a new tenant; a surrender is giving a lease back to the landlord. For VAT, property includes buildings, civil engineering works and anything else attached to the site.

Exemption is not the same as zero rating. Notice 742A explains that with an exempt supply no VAT is payable, but the supplier cannot normally recover VAT on its own expenses. For a landlord who has just paid VAT on buying or refurbishing an office, that can be a large cost. See zero rated vs exempt supplies.

Some supplies are carved out of the exemption and standard rated whatever the owner does, including hotel and holiday accommodation, many parking supplies, the letting of sports facilities, the right to fell and remove timber, and viewing boxes at sports grounds and theatres (Notice 742, paragraph 3.1).

When is a sale of a commercial building standard rated without an option?

Paragraph 3.2 of Notice 742 says the freehold sale of a new or partly completed commercial building is standard rated, unless it is part of a transfer of a going concern. A commercial building is any building not designed as a dwelling and not intended solely for relevant residential or relevant charitable use: shops, factories, warehouses and offices are the examples given.

A building is new for three years from completion. Completion is the date the certificate of practical completion is issued or the date the building is fully occupied, whichever is earlier. Every freehold sale within that three years is standard rated. A leasehold sale of the same building is exempt unless the seller has opted to tax. New civil engineering works such as roads follow a similar three year rule (paragraph 3.3).

New homes are different: the first sale or long lease of a new dwelling by the person constructing it is generally zero rated. Converted buildings have their own rules; see residential conversions.

What does opting to tax change?

Once a person opts to tax, their supplies of their interest in that property are normally standard rated, and they can normally recover VAT incurred in making those supplies (Notice 742A, paragraph 1.2). The law is in Schedule 10 to the VAT Act 1994. Key features:

  • The option is made for a building or an area, and it continues to cover the site if the building is demolished and any new building put up, unless a new building is excluded (paragraph 2.1).
  • Linked buildings, and units around an enclosed concourse such as a shopping mall, count as one building (paragraph 2.2).
  • It must normally be notified to HMRC within 30 days of the decision, and takes effect from the decision date or a later date specified, never earlier (paragraphs 4.2.1 and 4.3).
  • HMRC’s written permission is needed first if exempt supplies of the property have been made, or are intended, in the 10 years before the option is to take effect, unless an automatic permission condition is met (paragraph 5.1).
  • It can be revoked within six months under strict conditions, and otherwise normally not until at least 20 years have passed (paragraphs 6.2 and 8.1).
  • It binds only the person who opted. A buyer or a subtenant makes their own choice (paragraph 4.4).

The mechanics and permission conditions are covered in more depth in the option to tax.

Which supplies does an option not reach?

Section 3 of Notice 742A lists supplies that stay exempt even if the property is opted:

  • buildings designed or adapted and intended for use as dwellings;
  • buildings intended for relevant residential or relevant charitable use;
  • buildings to be converted into dwellings, where the buyer or tenant gives a certificate on form VAT1614D;
  • sales to relevant housing associations, with a certificate on form VAT1614G;
  • sales of a plot to an individual who will build a home on it for their own use, not for business;
  • supplies caught by the anti avoidance rules.

The VAT1614D route is why an opted office block can be sold to a residential converter without VAT.

How does a sale of a let building work?

Selling a let commercial building can be a transfer of a going concern, which is outside the scope of VAT. Where the sale would otherwise be standard rated, because the seller has opted or the building is a new freehold, Notice 700/9 requires the buyer to opt to tax and notify HMRC no later than the relevant date, which is normally the time of the supply, and to tell the seller that the option will not be disapplied under paragraph 12 of Schedule 10. The seller should see evidence of both. See transfer of a going concern.

What about service charges and fixtures?

Service charges a landlord is obliged to provide under the lease follow the liability of the rent: exempt, unless the landlord has opted (Notice 742, paragraph 11.2). Fixtures and fittings sold with a building take the same liability as the building (paragraph 7.9).

How do partial exemption and the capital goods scheme fit in?

VAT on costs used for exempt property supplies is not recoverable, subject to the partial exemption rules; see partial exemption. Under the current version of Notice 706/2, updated in July 2026, the capital goods scheme applies to property expenditure of £600,000 or more excluding VAT, with adjustments over 10 intervals. If the use of the building switches between taxable and exempt during that period, the VAT recovered is adjusted. See the capital goods scheme.

A business that deregisters while holding opted property on which it recovered VAT may have to account for VAT on it if the total would be over £1,000 (Notice 742, paragraph 7.8).

What does it look like in practice?

Illustration only. An investor buys a 20 year old office from a seller who has not opted, so the purchase is exempt. The investor plans a refurbishment costing £400,000 plus £80,000 VAT. Without an option, rents are exempt and the £80,000 is a cost. If the investor opts and notifies HMRC within 30 days, the £80,000 becomes recoverable but every rent invoice carries 20% VAT. A tenant that is a fully taxable business can reclaim that; a tenant making exempt supplies, such as an insurer, cannot, which may affect the rent it will pay.

Illustration only. A developer completes a warehouse and sells the freehold 18 months later. The sale is standard rated without any option. If it had granted a long lease instead and had not opted, the premium would be exempt.

What mistakes come up most often?

  • Opting to tax without notifying HMRC within 30 days.
  • Missing that permission was needed because of exempt lettings in the previous 10 years.
  • Treating a freehold sale of a two year old building as exempt.
  • Assuming the seller’s option passes to the buyer on a going concern sale.
  • Charging VAT on a sale to a residential converter who has supplied a valid VAT1614D.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.