What is a VAT bridging loan?
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 facility 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.
Where there is a senior debt provider supplying the commercial mortgage, a Deed of Postponement and or an intercreditor deed will need to be put in place.
Not all lenders require a legal charge but they will request a debenture and personal guarantees from the directors and shareholders.
Our Guide to Bridging Loans provides an overview of bridging loans and offers some tips on how to get the best deal.
How is it different to a normal bridge?
A standard commercial bridging loan will have a term of 3 – 24 months, with full repayment needed at the end.
The lender takes a first, or second, legal charge over the property as security, to protect them in the event of a default. It’s also possible to have a cross-collateral charge, where the lender takes charges over multiple properties.
With all normal bridging finance arrangements the underwriter will focus on two main aspects:
- The property – They need to establish the value and sale-ability of the asset to be used as security
- The exit strategy – It’s important to the lender that you have a robust and viable way of paying them back
A VAT bridging finance agreement will have a very specific and fixed purpose – To provide funding for a known amount of VAT for a short period of time, usually up to 90 days.
Repayment of the loan will occur when HMRC reimburse the tax paid for purchasing the property.
Some lenders may look to place a legal charge against a property, just to give them some extra protection, but others rely on PG’s and the validity of the VAT reclaim.
Bridging Loans Guide
In this guide, we will provide an overview of bridging loans and offer some tips on how to get the best deal when looking for short term finance.
Bridging Loans
Bridging loans are a popular way to raise finance quickly and easily for a variety of purposes, including buying a new property before selling your old one, carrying out refurbishments, or even raising working capital for a business.
How does it help?
Commercial loans and mortgages are used to fund the purchase of a commercial property. Typically the maximum available would be somewhere around 60-70% of the purchase price, excluding VAT.
As the loan used to purchase the property doesn’t include any of the VAT element, there is a large funding gap that needs to be covered.
The bridging lender will set up a short-term loan that can pay the VAT costs, fixing the funding gap and reducing the cash-flow burden on the business.
How much can you borrow?
You may be surprised to learn that the lender will be able to fund all of the VAT element, so 20% of the purchase price.
The minimum loan is around £50,000 and there is no maximum.
For a property purchase that costs £500,000 the VAT payable will be another £100,000 on top. Paying this would take 100K of cash-flow out of the business for 1-3 months.
When is VAT charged on a commercial property?
Value Added Tax (VAT) is typically charged on the purchase of a commercial property when the property is to be used for standard-rated activities. This includes activities such as retail, office space, or other business activities that are subject to VAT at the standard rate of 20%.
However, there are also situations when VAT is not charged on a commercial property purchase, such as:
- If the property is already registered for VAT and the buyer intends to continue using it for the same or similar business activities, it is possible to purchase the property without paying VAT on the purchase price, under what’s known as a “transfer of a going concern” (TOGC)
- If the property is going to be used for VAT-exempt activities, such as residential or charitable, then there will be no VAT to pay on the purchase price.
When a property transaction is “opted-in” for VAT purposes, it means that the seller has chosen to charge VAT on the sale of the property and the buyer must pay the VAT in addition to the purchase price. This is in contrast to a property transaction that is “opted-out” of VAT, where the seller does not charge VAT on the sale.
There are a few reasons why a seller may choose to opt-in a property transaction for VAT. One reason is that the seller is registered for VAT and is required to charge VAT on the sale of the property as part of their normal VAT obligations. Another reason is that the seller has chosen to opt-in because it can be more beneficial for them financially, such as if they are able to recover the VAT paid on the property’s construction or renovation through their VAT returns.
When a property is opted-in, the buyer must pay VAT on the purchase price in addition to the price of the property, but they may be able to recover the VAT paid through their own VAT returns if they are registered for VAT.
It’s important to consult with a professional accountant or tax advisor for specific advice on VAT and property transactions, as the VAT position on a property transaction can be complex and depends on individual circumstances.
GET PREPARED
It’s very common for the VAT component of a purchase only coming to light towards the end of the process. And hey presto, the price has just gone up by 20%!
Don’t get caught out, make these enquiries as early in the process as you can. VAT funding can be arranged very quickly but it’s much less stressful when you have a bit more time!
Reclaiming the VAT
When you buy a commercial property in the UK and the property is standard-rated or reduced-rated, you can claim back the VAT you have paid on it as input tax. To do this, you need to include the VAT paid on the property purchase in your VAT return, under Box 4 (Acquisitions) and Box 1 (Output Tax). The difference between these two boxes is the net VAT you need to pay or reclaim.
It’s important to note that you must be VAT-registered at the time of the property purchase and must continue to be registered for VAT in order to claim back the VAT paid.
Also, you must be able to provide proof of the VAT paid, such as a VAT invoice or receipt, and must use the property for the purposes of your business in order to claim back the VAT.
You will include the amount of VAT paid in your normal VAT return. HMRC will then refund it or use the refund to offset any VAT that is due to them.
This is not always a quick and easy process. VAT claims will usually take between 45-120 days between the date of payment and the recovery.
To make things easier some of the lenders offer a fully managed VAT option. This means that they will liaise and chase HMRC directly, leaving you to concentrate on your business.
How does a fully managed VAT option work?
A fully managed VAT option is a service offered by some VAT bridging lenders to help businesses claim back VAT paid on commercial property purchases.
Under this option, the lender takes on the responsibility of managing the entire VAT reclaim process on behalf of the business. This includes preparing and submitting the VAT return, as well as dealing with any queries or issues that may arise with HM Revenue & Customs (HMRC). The lender may charge a fee for this service.
The main advantage of using a fully managed VAT option is that it can save businesses time and hassle by taking care of all the administrative work involved in claiming back VAT. Businesses can also be sure that the process is being handled by experienced professionals who are familiar with the intricacies of VAT reclaims.
In order to use this option, you must provide the lender with the necessary documentation, such as VAT invoices and receipts, and authorise the lender to act on your behalf in dealing with HMRC.
It is important to note that this service is not offered by all VAT bridging lenders.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Repaying the loan
All other bridging loans will ask you to provide an exit plan, this is how you will repay the debt. Here, the route and method for repayment is clearly understood.
The loan enables you to borrow the cost of the VAT then repay it once the VAT claim has been paid to you. How much can you borrow with a VAT bridging loan?
With the fully managed service above, the lender will normally open a bank account for the refund to be paid into. Upon receipt they can immediately use the proceeds to settle the loan account.
The loan will be set up for a maximum of 90 days, with full repayment due at the end.
Advantages
It is not always apparent that VAT is payable until late in the process. So loans can be arranged quickly and efficiently.
Cash-flow is maintained, allowing the business to operate as normal.
With the managed option you will not have to spend time dealing with HMRC, the lender will do this for you.
Disadvantages
The main disadvantage is the cost.
Bridging finance is not cheap but it does offer a convenient, flexible service.
The loan application may require security but will need a personal guarantee (PG). In the event of default then you become personally liable. However, this situation should not arise where the loan is covering a VAT refund.
