Value Added Tax (VAT) is a consumption tax that is added to the price of goods and services in the UK and many other countries. It is a tax on the value added to a product or service at each stage of its production or distribution.
When businesses sell goods or services, they charge VAT on the sale. The VAT charged is known as output tax. When businesses buy goods or services, they pay VAT on the purchase. The VAT paid is known as input tax.
Businesses are able to reclaim the VAT paid on their own business expenses (input tax) by reducing it from the VAT charged on their sales (output tax). The difference between the input tax and the output tax is the net VAT that the business must pay to the government or reclaim from the government.
The VAT rate in the United Kingdom currently is 20% and there are also reduced rates that apply to certain goods and services.
When you buy a commercial property the purchase price normally has VAT at 20% added to it, dramatically increasing the amount of cash needed. While a commercial mortgage will provide some funding towards the acquisition costs, this will not include the VAT element.
A VAT bridging loan is a solution designed to cover this additional amount of tax. The lender covers the VAT part by way of a short term loan, and you pay it back when you get a refund on your next VAT return.
