The complexities of VAT regarding commercial property rent are such that it is always best to seek expert advice on this facet of managing and leasing a commercial premises.

However, it’s worth noting that commercial property in the UK is typically exempt from VAT. This covers all manner of commercial space, such as warehouses, light industrial units, retail shops, corporate offices and restaurants. Rent paid for these types of premises have VAT exemptions, applicable to the exchange of interests and a business’ rights to occupy a commercial building.

What this also means for VAT-registered tenants is that it’s impossible to recover any VAT on costs, which may be significant in nature.

A commercial landlord’s right to ‘opt to tax’

Although most commercial properties are VAT-exempt, landlords can charge standard rate VAT for rental income. If they charge VAT on rent, they must also charge VAT for all other costs linked to a commercial lease, such as periodic maintenance fees. This can benefit landlords by allowing them to reclaim any VAT charged to them relating to the premises. For example, a commercial landlord could reclaim VAT charged on the associated costs to tenants for a property’s refurbishment.

Commercial landlords that take the decision to tax their tenants have to abide by specific stipulations. First and foremost, HM Revenue and Customs (HMRC) should be formally made aware within 30 days of a landlord’s decision to opt to tax in writing. This process must be adhered to each time the property in question is let or sold. That’s because the decision to charge VAT on a commercial premises doesn’t follow the property and requires clarification for every new tenant or owner.

What is a transfer of going concern?

It’s also possible for a commercial premises to be transferred to a new owner with existing tenants remaining in place. In this instance, the property vendor would be required to charge standard rate VAT. This would not be necessary however, providing the new owner plans on continuing to let out the property instead of occupying it. These commercial property transactions are known as a ‘transfer of going concern’ (TOGC) and are exempt from VAT charges.

What should prospective tenants do about VAT?

At the earliest possible stage of negotiations for a commercial property lease, prospective tenants should ask the landlord whether they intend to opt to tax the property’s rental income. If so, it may be possible to negotiate a reduced rental figure, particularly if the tenant is not VAT registered and unable to reclaim the costs back.

Furthermore, some tenants will also drive a hard bargain with their landlords by asking for a clause to be included in their tenancy agreement stating that the landlord cannot opt to charge VAT during the lifespan of the lease. This is an option that can provide clarity and peace of mind for all parties.

At Pall Mall Estates, we’re owner-managers of 4,000,000+ sq. ft of commercial space across 125 locations nationwide. No matter what industry they are in, we’re committed to offering low-cost, high-value business space to tenants big and small. 

Our property professionals operate with the utmost transparency, putting you firmly in the picture of all associated costs before signing on the dotted line. For us, it’s a mission to enable our commercial tenants to go forward with their businesses, not backwards.

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Pall Mall Estates have a wide range of low cost commercial properties across the UK.

Take a look at our available spaces here or get in touch with our experienced team here.

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