October 2018
By Ben Lloyd, Managing Director at Pure Commercial Finance
One of the main differences between purchasing commercial property compared to residential, beyond the physical space, is VAT. Some properties require you to pay VAT on the purchase, meaning a standard finance deal may not cover the full cost required.
Furthermore, a lack of awareness, or less experienced borrowers simply forgetting about the additional capital requirement for the VAT, leaves many in need of a quick solution.
That’s where a VAT bridging loan comes in.
When do you need to pay VAT on a property purchase?
Typically, you do not have to pay VAT on a residential property purchase. However, you do when buying many commercial buildings. This therefore increases the property price by 20%.
This is typically required for new (less than three years old), freehold commercial property which sometimes makes it more difficult for buyers to get the deal done and for sellers to offload the property. VAT is owed on new commercial property because of its ‘negative impact’ on the UK residential housing market. This can take up to six months to be claimed back and refunded.
In many cases, an owner may opt to charge VAT as this will allow them to charge VAT on all supplies and recover VAT charged to them on property costs. To do this, they must write to and notify HMRC within 30 days of the decision to inform them of their intentions – before any exempt supplies are made.
Once notified, this decision will last 20 years and, in most cases, cannot be revoked. However, please note that this option does not follow the property if sold in future. If you will be purchasing a property as a Transfer of Going Concern (TOGC), VAT is not payable.
How can VAT bridging loans help?
A bridging loan is ideal to use in this situation as it will provide a top-up loan to cover the additional costs to help make a purchase go through. Some principle funders may cover the requirement, but we have found that in general specialist VAT funders are far better suited to funding the requirement. Specialist VAT bridging finance can be sourced and completed incredibly quickly to meet the demand of the typically last-minute requirement and using a specialist for this will usually mean they handle the VAT recovery process as well – which could help speed up the process and thus save unnecessary interest.