VAT on SIPP Commercial Property Purchases: Option to Tax Explained Simply

VAT stalls more SIPP property purchases than any other subject. A buyer gets comfortable with the price, the borrowing and the lease — then sees "plus VAT" on the heads of terms, pictures writing HMRC a cheque for 20% extra, and the deal drifts. In almost every case that fear is misplaced: the VAT is either recoverable or, structured correctly, never payable at all. Here is how it actually works.

Why VAT appears on commercial property at all

The starting position in the VAT rules is that sales of commercial property are exempt — no VAT. Two things change that:

1. The seller has "opted to tax". An owner can elect to charge VAT on a property, usually because doing so let them recover VAT on their own costs (construction, refurbishment, professional fees). Once made, the option means VAT at 20% is added to the sale price and to rent.
2. The building is new. Sales of a commercial building within three years of completion are standard-rated automatically — no election needed. This is why "plus VAT" is normal on new developments and is not a red flag; it is simply how the rules treat new commercial stock.

So a new-build industrial unit will almost always be sold plus VAT. What matters is not whether VAT is charged, but which of the two routes below applies.

Route one: the SIPP registers and recovers

A SIPP that buys an opted (or new) property can itself register for VAT and opt to tax the property. The sequence:

1. The SIPP registers for VAT and notifies HMRC of its own option to tax — done before completion.
2. At completion, the SIPP pays the price plus 20% VAT.
3. On its next VAT return, the SIPP reclaims that VAT in full.
4. From then on, the SIPP charges VAT on the rent and files returns — routine administration that property SIPP providers handle for a fee.

The VAT is not a cost on this route; it is a timing difference. The money goes out at completion and comes back when HMRC processes the return — typically a gap of weeks to a few months.

Route two: TOGC — no VAT changes hands

Where the unit is sold with a tenant in place and the SIPP continues that letting business, the sale can qualify as a Transfer of a Going Concern. A TOGC is outside the scope of VAT entirely: nothing is charged, nothing needs recovering. The conditions are strict but mechanical:

1. The property is a letting business at the point of sale — a tenant (or an agreed lease) in place.
2. The buying SIPP is VAT-registered and has opted to tax the property, with HMRC notified before completion (or before any deposit is released to the seller).
3. The letting business continues without a break.

Miss a condition — most commonly the notification deadline — and VAT is due after all. This is why the option-to-tax paperwork is dealt with before exchange, not after.

The two costs people actually miss

1. Cashflow. On the recovery route, the SIPP must fund the VAT between completion and the refund. That can be met from cash in the scheme or from borrowing — but borrowed VAT counts within the SIPP's 50% borrowing limit, so it needs to be in the funding plan from the start.

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2. SDLT on the VAT. Stamp Duty Land Tax is calculated on the VAT-inclusive price. On a purchase where VAT is charged and later recovered, the extra SDLT on that VAT is a real, permanent cost — modest, but it belongs in the numbers. A TOGC avoids it, which is one reason tenanted deals are often structured that way.

What it means for the tenant

Once the SIPP has opted to tax, rent carries VAT. For a VAT-registered business tenant — including your own company, if it occupies the unit — this is neutral: the tenant reclaims it. For a non-registered tenant (some small businesses, charities, financial services), VAT on rent is a genuine extra cost, which is worth knowing before agreeing terms.

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Worked example Illustrative example

A new-build unit at Engine Works Park, Margate, priced at £359,999 plus VAT:

1. VAT at completion: £72,000. SDLT (calculated on the VAT-inclusive figure of £431,999): £11,100.
2. The SIPP registers, opts to tax, pays £431,999 including VAT, and reclaims £72,000 on its next return.
3. Net effect: the lasting VAT-related cost is the additional SDLT of £3,600; everything else is timing.
4. Bought instead with a tenant in place as a TOGC: no VAT paid, no VAT financed, SDLT charged on £359,999 only.

Engine Works Park's VAT position is documented, and the paperwork is available to buyers and their advisers before exchange.

Where deals actually go wrong

1. Leaving the SIPP's VAT registration and option to tax until after exchange — the TOGC window closes and cashflow planning starts too late.
2. Assuming VAT is a 20% cost and walking away from an otherwise workable purchase.
3. Forgetting the SDLT-on-VAT interaction when comparing a TOGC deal with a vacant one.
4. Not telling the lender the facility needs to cover VAT at completion.

Your SIPP provider and solicitor deal with all of this routinely — the key is that VAT is planned before exchange, not discovered at completion.

FAQ

Do I pay VAT when a SIPP buys a commercial unit?

Only if the property is opted to tax or is a new building — which is normal on new developments. The SIPP can usually register and opt to tax to recover the VAT in full, or the purchase may qualify as a TOGC with no VAT payable at all.

Can a SIPP register for VAT?

Yes. A SIPP that owns opted commercial property can register for VAT, recover VAT on the purchase and on costs, and charge VAT on rent. Property SIPP providers administer the returns as part of their service.

What is a TOGC?

A Transfer of a Going Concern — the sale of a property letting business, tenant included, rather than just a building. If the buying SIPP is VAT-registered and has opted to tax before completion, the sale is outside the scope of VAT and none changes hands.

Is VAT a real cost or just timing?

On the recovery route it is timing: paid at completion, reclaimed on the next VAT return. The lasting cost is the extra SDLT, because SDLT is calculated on the VAT-inclusive price. A TOGC avoids both.

Does VAT on rent affect my business as tenant?

If the tenant is VAT-registered, it reclaims the VAT and the position is neutral. A tenant that cannot register bears the VAT as a real cost.