How to reclaim the VAT paid on a commercial property purchase

Most older commercial property is exempt from VAT by default, so no VAT is charged. That changes when the seller has exercised the option to tax, or where the building is a new commercial property (broadly within three years of completion of construction), because in those cases the sale becomes standard rated and VAT of 20% is due on the purchase price.

When VAT is charged, the buyer pays it to the seller at completion, on top of the agreed price. It is the buyer who then reclaims that VAT from HMRC. You can normally recover it in full where you are VAT registered and the property will be used to make taxable supplies, for example trading from it or letting it having made your own option to tax. If the property will be used for exempt purposes, recovery can be restricted, so confirm your position with your accountant before you commit.

Recovery happens in three practical steps.

Get VAT registered. You can only reclaim VAT as input tax if you are registered for VAT, so a buyer who is not yet registered needs to sort this out before or around the purchase. If you are buying and letting an opted property, you will typically make your own option to tax and register so the rent, and the reclaim, work correctly.

Recover it on the VAT return. The VAT you paid on the net purchase price is claimed as input tax on your VAT return for the period in which the purchase falls. The reclaim reduces the VAT you owe, or produces a repayment if your input tax exceeds your output tax for the quarter.

Hold the evidence. HMRC expects a valid VAT invoice from the seller showing the VAT charged, plus the option to tax paperwork and completion documents. Without a proper VAT invoice the claim can be refused, so make sure your solicitor secures it at completion.

The reclaim is only made when you file the VAT return for the relevant period, so the wait depends on where completion sits in your VAT quarter and how quickly HMRC processes the repayment. In practice buyers commonly wait somewhere between one and three months from paying the VAT to receiving the money back, and repayment claims can be selected for a HMRC check, which adds time.

That gap matters because the VAT is real cash out of the door at completion. On a purchase of any size the 20% can tie up funds you would rather keep for the deposit, works or working capital. For the detail on processing times, see our guide to HMRC VAT refund timing.

A VAT bridging loan is short term finance designed to fund the VAT element of a property purchase and be repaid from the HMRC VAT refund. Rather than finding the 20% from your own reserves, the VAT bridge pays it at completion, and when HMRC refunds the VAT you use that VAT refund to clear the loan.

Because the exit is a defined event, this kind of VAT bridging finance is usually arranged for a short term, often up to around six months to allow for the return and any HMRC checks. Interest is typically handled by interest roll-up, so there are no monthly payments to service and the balance is settled in one repayment when the refund lands. Lenders charge an arrangement fee and interest, and security is usually taken over the property, commonly as a second charge behind your commercial mortgage or as a first charge where appropriate.

Yes, and the tight timescales are exactly where it earns its keep. An auction purchase of an opted commercial property means the VAT is payable alongside completion within the auction deadline, often 28 days, which is difficult if your cash is committed elsewhere. Pairing your auction finance or commercial mortgage with a VAT bridge keeps the VAT from derailing the timetable.

The same applies where a purchase feeds into a scheme funded by development finance: the VAT bridge covers the VAT at the point of acquisition so more of your own capital stays in the project. Whether you need a gross loan covering the full VAT or a smaller net loan alongside other funds, the structure flexes to the deal and the LTV is measured against the VAT sum rather than the whole property value.

Sometimes. Where a property is sold as a let investment with sitting tenants, the sale can qualify as a transfer of a going concern. A genuine TOGC means no VAT is charged on the sale at all, provided the conditions are met, which typically include the buyer being VAT registered and having their own option to tax in place by the relevant date, and the business continuing as the same kind of letting business.

A TOGC removes the cash flow problem because there is no VAT to fund or reclaim. But the conditions are strict and easy to fall foul of, so a deal that everyone assumed was a TOGC can end up standard rated. Always confirm the treatment with your solicitor and accountant, and line up a VAT bridge as a fallback if there is any doubt about whether VAT will be charged at completion.

It is worth remembering that VAT interacts with Stamp Duty Land Tax. Where VAT is charged on a commercial purchase, SDLT is calculated on the VAT inclusive consideration, so opting to tax can nudge up the SDLT bill as well as the cash you need at completion. That is another reason to confirm the VAT position early and budget for the full outlay.

A VAT bridge does not change your SDLT, but by covering the recoverable VAT it protects your cash flow so the tax side of the transaction does not force you to hold back capital you need elsewhere. Read more in our guides to VAT on commercial property and the option to tax.