Charities might be motivated to share their property assets for various reasons. Some may simply require an additional income stream in order to support their charitable purposes, whilst others’ charitable activities may actually include the provision of space to beneficiaries. Like-minded charities might choose to share a property in order to pursue shared aims and objectives.

The main types of property-sharing arrangement that charities are likely to enter into include leases and licenses to occupy. Which is more appropriate will depend upon many factors, one being the VAT treatment of the arrangement.

Exempt supply

A ‘supply of property’ is usually exempt from VAT. This means that the party making the supply (i.e. the landlord/licensor) does not charge VAT on rents or service charge, and cannot claim back the VAT they are charged by suppliers on the costs they incur in owning and running the property.

A ‘supply of property’ includes the grant of a lease/sublease. It also includes the grant of a licence to occupy a defined area for an agreed duration. It does not, however, include a licence over undefined space, or for an undefined period/‘ad hoc’ use, such as a desk space agreement. VAT at the standard rate is likely to be chargeable on such arrangements. Furthermore, where a licence to occupy is granted together with the supply of other goods/services, the nature of the supply for VAT purposes will be assessed with reference to the overall arrangement.

‘Opting to tax’

A landlord or licensor of commercial property may vary the default position by ‘opting to tax’ a commercial property (also known as ‘electing to waive the VAT exemption’). This means that they must charge VAT on rents or service charge, and can claim back any VAT they incur in connection with the property.

There are various reasons why a charity might opt to tax their commercial property, and specialist tax advice should be sought before doing so. For instance, if the charity proposes to redevelop or refurbish the property, it might opt to tax in order to claim back the VAT it incurs on the building costs and professional fees associated with that development.

On the other hand, if you are looking to let your property to an organisation that is not registered for VAT, by opting to tax you will effectively increase the cost of the lease by (currently) 20%. This may be off-putting to any small charity potential tenants.


Where a charity is itself occupying the property in question under a lease, and is looking to sublet, the position is likely to be influenced by whether the charity’s landlord has opted to tax the property. Where VAT is payable upon the charity’s own rent, it will presumably wish to charge VAT on the rent under any sublease, and it can only do this if it exercises its own option to tax in relation to the property.

Using the property for relevant charitable purposes

Various VAT reliefs are available to charities that use their properties for ‘relevant charitable purposes’. The nature of the reliefs, and the meaning of ‘relevant charitable purposes’, is explained in our previous article Charity property and VAT: sport and recreational facilities. When sharing your property, it is important to ensure that the arrangements do not jeopardise any VAT relief you may have benefitted from. For example:

  • if a charity’s landlord has exercised an option to tax, that charity may ‘disapply’ the option if it is to use the property for a ‘relevant charitable purpose’. This means that, despite the option to tax, the charity (as tenant) will not pay VAT on the rent. If, however, that charity then sublets that property to an organisation not using it for a ‘relevant charitable purpose’, HMRC may be entitled to ‘claw back’ some or all of the unpaid VAT.
  • if a charity landlord has opted to tax a property, but leases it to another charity which is entitled to (and does) ‘disapply’ that option for the reasons explained above, this will affect the landlord charity’s VAT recovery
  • where a charity has constructed a new property for use for a ‘relevant charitable purpose’, it may be entitled to VAT zero-rating on the construction costs. However, HMRC has the power to ‘claw back’ the VAT if, within the ten years following the construction, the property ceases to be used for such purposes. This would include use of the property by any tenant/licensee of that charity.

For more information on real estate for charities, contact our charity and social business team.