Paying VAT on the purchase of a commercial property

If my company acquire a commercial property (assume not qualify for TOGC) at a cost of £100,000+20% VAT and then lease to a VAT registered tenant at £1,000+20% VAT per month. Keep it simple by assuming a lump sum expenditure for the frist quarter of operation £2,000+20% VAT Property Rental Income - Output VAT £600 Property Purchase -- Input VAT £20,000 Expenditure - Input VAT £400 Can we recover the Input VAT balance of £19,800 after the first quarter of operation from HMRC by submitting a normal VAT return ?

You need to read this HMRC Notice https://www.gov.uk/guidance/opting-to-tax-land-and-buildings-notice-742a You cannot charge VAT on rent relating to a commercial property unless you have first notified HMRC in writing (via email). This process is called "opting to tax", this is because commercial rent is not a VATable supply, it is an exempt supply, but you as the property owner have the choice to "opt" to tax the property, whereby you notify your intention to charge VAT on rent and your rent is then standard rated. The right to reclaim VAT is always on the basis the costs you incur (property purchase) are connected to the making of a taxable /VATable supply (the rent is your supply, it is not taxable unless you opt, so without opting, no right to reclaim VAT), so to answer your query, you cannot reclaim any input tax (the £20,000) unless you first opt to tax/notify HMRC. You should read all of the Notice and then speak to your accountant if you have one. Once you have notified your option to tax, it is irrevocable for 20 years, this means all future rents or any future sale will be subject to VAT, even if you try to deregister for VAT within next 20 years, there may likely be an output tax liability due on the market value of the property which you'll have to pay before deregistering (unless you ell the property plus VAT or it meets the sale conditions to be a ToGC), so opting to tax is not something to take lightly or without advice or at least thinking through the numbers first.. If you try and reclaim the £20,000 VAT on your next VAT return, this will likely attract HMRC's attention (HMRC often monitor land registry transactions plus the £20k might be a higher figure than normal for your business and such a spike will trigger HMRC to query the return) and when HMRC enquire as to why the refund is so high, you will tell them you bought a property to rent out, HMRC will then ask for your option to tax notification, you will not have that and HMRC will deny you the refund and potentially issue penalties for trying to reclaim VAT without an option to tax in place. In summary, you can reclaim the VAT if you opt to tax, but ensure you understand all the implications of opting to tax. If you don't opt to tax, you cannot reclaim the input tax on the property purchase.

I understand opt to tax is essential before we can reclaim any VAT. Thank you Jason for your helpful explanation and citation.

Hi,
If you incur VAT on a property from which you use to make taxable supplies then you have an entitement to revover the VAT as your input tax.
The amount claimed in a period will be the the VAT incurred minus the out put tax charged in the period:
Please see the guidance below:
Introduction to input tax
https://www.gov.uk/guidance/how-to-fill-in-and-submit-your-vat-return-vat-notice-70012
Thank you.

Thank you very much HMRC Admin 8

Now, about the topic at hand—VAT and its complexities. It's like trying to solve a Rubik's cube blindfolded, am I right? But hey, we're all in this together, trying to make sense of those HMRC letters that might as well be in Morse code sometimes!