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What is a VAT bridging loan?

A VAT bridging loan allows you to raise short term finance to cover the VAT element that may be due on the purchase of a commercial property.  The rules around VAT are complex so it’s not unusual for the issue of VAT to only come to light at a late stage.  A VAT bridging loan can provide the finance to meet this additional cost and ensure that the deal completes.

When is VAT chargeable on a commercial property?

Where the sale of a commercial property involves a property that is less than 3 years old, VAT may be payable at the standard rate of 20%.  This also applies to commercial property transactions where the landlord has elected to charge VAT to enable them to recover the VAT element of any refurbishment or renovation costs of the property. 

This is referred to as an “opted in” commercial property.

Can you reclaim the VAT on commercial property transactions from HMRC?

Whilst you may be able to reclaim the VAT from HMRC, you will still have to pay the VAT at the time of purchase.  At 20% of the purchase price this can add considerable additional costs on top of what you may have budgeted for.  Claims to HMRC can typically take between 45 to 120 days between the date of payment and recovery, which can have a serious detrimental effect on your cash flow.

A VAT bridging loan enables you to borrow the cost of the VAT and then repay the loan once the money has been reclaimed from HMRC.

How much can you borrow under a VAT bridging loan?

VAT bridging loans are available from a relatively small pool of lenders, although the market is growing.  Loans are usually available from a minimum level of around £50,000 (the equivalent of the VAT on a £250,000 purchase) up to £20 million plus.

Can you borrow 100% of the VAT charge?

It’s possible to borrow up to 100% of the VAT element of your commercial property purchase with a VAT bridging loan, which means that you can cover the full costs until you are able to reclaim this from HMRC.

What security will lenders require?

The loan is secured on recovery from HMRC rather than on available equity in the property.  However, some lenders may require a second charge on the property as security for the loan, whilst others may require the property to be held in a Special Purpose Vehicle until the debt is cleared.

How much will a VAT bridging loan cost?

Interest rates on VAT bridging loans will vary between lenders but rates of between 1.25% and 1.5% per month are typical.

Reclaiming the VAT from HMRC

To make the process as fast and straightforward as possible some lenders offer a fully managed option which means that they will oversee the recovery of the VAT direct from HMRC, freeing you to concentrate on running your business.  As lenders will be very experienced in dealing with the VAT recovery process, this can speed things up, helping to reduce interest payment costs by reducing the term of the loan.

The advantages of VAT Bridging

Quick to arrange - It’s not unusual for purchasers to be unaware that VAT will need to be paid on a commercial property transaction until late on in the sale process.  This can leave you needing to raise additional finance at short notice.  Luckily VAT bridging loans can be arranged quickly, sometimes in as little as 5 days, which means that completion of the deal shouldn’t be delayed.

Straight forward process – Whilst the issue of VAT on commercial property can be complex, lenders will aim to make the process for developers straight forward, keeping due diligence processes as streamlined and quick as possible.  This again will help to reduce delays in completing the deal.

Frees up working capital – A VAT bridging loan will enable you to avoid tying up funds that could otherwise be used to proceed with other projects. With HMRC taking up to 120 days to refund VAT payments, a VAT bridging loan can take pressure off your cash flow and allow you to move forward with your next development.

Support throughout the process – Lenders who offer a fully managed option will oversee the recovery process with HMRC for you.  This enables you to focus on running your business and not having to divert resources to dealing with HMRC bureaucracy.

Multiple applications – It’s possible to apply for multiple VAT bridging loans, which is helpful if you have a number of commercial property transactions underway at one time.

The disadvantages of VAT Bridging

It can be expensive – With average costs of around 1.25% to 1.5% per month, VAT bridging is not cheap.  However this needs to be considered against the opportunity cost of tying up large sums of money in the short term. If utilising a VAT bridging loan means that you don’t miss out on the next business opportunity then the costs may be worth it.

There can be penalties for late payment – if the loan is not repaid in the agreed timeframe the lender may take action to recover the outstanding debt.  This may include charging penalty interest which can soon mount up.