Property transactions are one of the categories GOV.UK names as exempt from VAT, and that exemption is the default for commercial property. It can be turned off. An owner can opt to tax a building, at which point sales and rents from it become standard-rated, and the reason they do it is not to charge tenants more but to recover the VAT on what the building cost them.
Why an owner opts to tax
Making exempt supplies restricts the input tax you can reclaim. An owner who buys, refurbishes or builds commercial property incurs substantial VAT on the works, and if the rents are exempt none of it is recoverable. Opting to tax makes the rents standard-rated and the input tax recoverable, which for a development of any size dwarfs any friction the option causes. It is an election made to HMRC, it attaches to the property rather than the owner, and it is difficult to reverse.
What it means if you are buying or renting
If the property has been opted, VAT is charged on the price or the rent. A VAT-registered tenant making taxable supplies reclaims it and is broadly indifferent. A tenant making exempt supplies cannot reclaim it and has just had a fifth added to their occupancy cost, which is why the option status is a commercial term rather than a technicality. Ask whether the property is opted before agreeing the rent, not after, and get the answer in writing.
The transfer of a going concern point
Buying a tenanted commercial building can qualify as a transfer of a going concern, in which case no VAT is charged on the price at all, which is a large cash-flow difference on a property purchase. The conditions are specific and include the buyer being registered and, where the seller has opted, the buyer opting too and notifying HMRC by the relevant date. Missing a condition turns a nil-VAT purchase into a standard-rated one, so this is a point to settle with advisers before exchange rather than after.
Questions people ask about vat on commercial property
Is VAT charged on commercial property?
Not by default. Property transactions are exempt, so no VAT arises unless the owner has opted to tax the building, in which case sales and rents become standard-rated.
Why would an owner opt to tax?
To recover the VAT on buying, building or refurbishing the property. Exempt rents block that recovery; taxable rents allow it.
Can I reclaim the VAT on rent for my premises?
If the landlord has opted to tax and you are VAT registered making taxable supplies, yes. If your own supplies are exempt, the VAT on the rent is a real cost to you.