VAT on commercial rent

My company is VAT-registered. We previously rented a commercial property for our business, but we no longer use it, though we still pay £4500 per month. We are now considering renting out the premises for £5000 per month. My question is: Do we need to charge our client 20% VAT on the £5000 rent, or is it VAT-exempt, or should VAT be charged only on the difference between £5000 and £4500?

What you pay for the rent is your expense (£4,500), what you charge the tenant is your income (£5,000) so in simple accounting terms you are making £500 profit each month on this deal. If you are charged VAT by the landlord (ie £4,500 + VAT) and you reclaim this currently, then that is fine as you were using the property for your own, taxable business activities....if you are now sub-letting that property to a tenant and if you do not charge VAT (rent is exempt) then you cannot reclaim the VAT you incur from the landlord, if you want to, you can charge VAT on the rent but to do this you must first notify HMRC, it called "opting to tax", once you opt to tax then you charge VAT on the rent (£5,000 + VAT) and you can also continue to reclaim the VAT charged to you by the landlord. If the property you are renting has no VAT charged to you by the landlord (ie, £4,500 no VAT), then as you are not incurring any VAT yourself on this property then you can sub-let without opting to tax and your rent to tenant would exempt (£5,000 no VAT) but that then also means your business becomes partially exempt (as you are now making taxable supplies and now also this exempt rent), you will need a partial exemption calculation and you may not be able to reclaim any input tax in relation to that property, whether that is an issue depends on whether you or the tenant are responsible for maintaining the property. Whether opting to tax is the right thing to do depends on the type of tenant you are seeking to occupy the property (new start-ups are not usually VAT registered and VAT will be an extra cost to them for example), you should perhaps have a conversation with your Accountant or else the links in this post should give you some clarity as to what works best for you. Link to partial exemption here https://www.gov.uk/guidance/partial-exemption-vat-notice-706 Link re. opting to tax https://www.gov.uk/guidance/opting-to-tax-land-and-buildings-notice-742a

Hi Anna,
If you rent out a commercial property then it would be exempt from VAT.
If you place an Option to tax on a commercial property, however you will then be required to charge VAT on the rent.
If you put an option to tax in place you can look at recovering VAT on the expenses incurred in relation to the property.
Please see the guidance below:
9.1 Rules on reclaiming input tax
2. The scope of an option to tax
Thank you.