VAT reclaim and HMRC

Partial Exemption and Property

PropertyVAT Team · Updated 21 October 2026 · 3 min read

Partial exemption is where VAT on property stops being a question about the building and becomes a question about your business.

Two buyers can purchase identical opted buildings and recover completely different amounts, because recovery follows what each of them does.

The principle

Input VAT is recoverable to the extent it relates to taxable supplies. A business making only taxable supplies recovers in full. A business making only exempt supplies recovers nothing.

A business doing both is partly exempt, and its recovery is apportioned.

Who this catches

More businesses than expect it:

The first row is the most relevant to property investors and the one most often overlooked. A portfolio with a mix of opted and unopted buildings is, by definition, making both taxable and exempt supplies.

How the apportionment works

Input tax is first allocated where it can be:

• Directly attributable to taxable supplies — recoverable in full
• Directly attributable to exempt supplies — not recoverable
• Residual — relating to both, and apportioned

A property purchase can fall into any of the three. A building bought and opted, let entirely to a taxable tenant, is directly attributable to taxable supplies. A building serving the business as a whole is residual.

The residual element is apportioned using a partial exemption method.

Standard method or special method

The standard method apportions residual input tax by reference to turnover — the proportion of taxable supplies to total supplies.

This is simple and frequently unfair on property businesses, because a single large property transaction can distort the turnover ratio in a year that bears no relation to how the building is used.

A special method can be agreed with HMRC, using a basis more appropriate to the business — floor area is a common alternative where property is the main asset.

On a property-heavy business, the choice of method can change recovery by a meaningful margin. It is worth getting advice on rather than defaulting to the standard method because it is the default.

De minimis

There are de minimis provisions under which a business whose exempt input tax is small can recover it in full.

The thresholds and tests are specific and change, so check the current position. The practical point is that being slightly partly exempt is not necessarily the same as losing recovery — it may be within de minimis.

The ten-year tail

On property expenditure of £250,000 or more excluding VAT, the Capital Goods Scheme revisits the recovery position across ten intervals.

So a partly exempt business does not settle its recovery at purchase. If the taxable and exempt mix shifts — a tenant leaves, a building is opted or un-opted, the business changes — recovery is adjusted up or down in later years.

This is the part that catches people out long after the deal team has moved on.

What to do before buying

1. Establish whether your business is partly exempt, including any small exempt income streams you may not think about.
2. Work out the expected recovery percentage before you commit — it determines whether the VAT is a timing cost or a partial permanent cost.
3. Consider the holding structure. A separate entity holding a single opted property may have a cleaner recovery position than adding it to a mixed portfolio.
4. Review your partial exemption method if property is becoming a larger part of the business.
5. Plan for the ten-year position, not just the first return.

The funding point

If your recovery is restricted, the amount you will actually get back is less than the VAT you pay at completion. Size any VAT facility against the recoverable amount, and fund the balance as a genuine cost.

A facility sized against full recovery on a partly exempt business is a facility with a shortfall built into it.

This guide is general information, not tax advice. Partial exemption is technical and the methods are negotiated with HMRC — take specialist advice.