By Alan Smith ACA BSc, Managing Director, Bridging Vat
VAT on the purchase of a commercial property can create a short-term funding gap, in the worst case, one that can stop deals completing. Alan Smith, Managing Director of Bridging Vat, discusses the background to the problem and shows how Bridging Vat can provide a deal enabling solution.
VAT, Commercial Property and the “Option to Tax”
VAT is charged on the sale of; or granting a long leasehold in; a commercial property up to three years old. The sale of; or granting a long leasehold in; a commercial property over three years old is treated as an exempt supply, i.e. no VAT is charged.
However, this presents a problem to buyers of older commercial property. If the property is exempt, the buyer cannot claim back VAT on any costs they incur associated with the management, maintenance or repair of the property.
To address this anomaly the “Option to Tax” was created. Under the “Option to Tax” a property owner notifies HMRC that they want to treat the property as taxable rather than exempt. As the property is now taxable, they can claim back VAT on any costs they incur, but when they sell the property, they must charge VAT on the sale proceeds.
After completion of the purchase, a VAT registered new buyer will include the VAT they have been charged on the purchase in their VAT return, giving rise to a VAT recovery.
The Funding Gap
With the majority of commercial property subject to an “Option to Tax”, most purchasers will need to consider how to fund the VAT for a period of 30 -150 days from completion to receipt of the VAT recovery.
If the purchaser is financing the purchase with debt funding, it is worth bearing in mind that most commercial mortgage lenders adopt a maximum ‘loan to value’ criteria of 70-80% of the purchase price, excluding any VAT payable. This leaves many borrowers experiencing difficulty in securing the short-term funding required to settle the VAT.
Bridging the gap
The Bridging Vat lending product provides a solution to this problem: short-term secured loans that recognise the security of the VAT recovery from HMRC, rather than focussing purely on the underlying property. Unlike most lenders, we are not restricted by fixed loan to value criteria and this explains why we are happy to operate as second or even third charge holders, behind senior debt and mezzanine funders.
More than funding
Bridging Vat’s solution is more than just a funding product. We become a borrower’s authorised VAT agent. In the period between offer and advancing a loan, we work closely with the borrower, using in-house tax expertise, to ensure the borrower is “Recovery Ready”. After completion of the loan, we manage the VAT reporting process and communicate directly with HMRC on the borrower’s behalf. The work we do before and after advancing the loan ensures the VAT loan is outstanding for the shortest possible time, reducing our risk and the borrower’s cost.
Bridging Vat’s loans provide: