How bridging loans can solve commercial property VAT problems

Buyers set to seal a deal on the purchase of a commercial property have been told they needn't panic when it comes to securing the short-term funding required to settle the VAT.

Laurence Rutter, who is the CEO of principal lender VATBRIDGE, says help is at hand for borrowers who face a headache as they try to secure a loan for what they might consider "a potentially unfundable problem".

The VAT in question arises when an opted-in commercial property is sold. VAT is charged on the sale of the property and at completion the buyer is liable to pay VAT on the purchase price. This leaves many borrowers having trouble in securing the short-term funding required to settle the VAT. Every commercial property buyer must plan for a 45- to 120-day delay between payment and recovery of the VAT.

Yet Rutter explains that paying VAT on commercial property need not be a burden. He says:

"If you are financing your purchase with debt, it is worth bearing in mind that most commercial mortgage lenders adopt a maximum loan-to-value criteria of 70 per cent-80 per cent leaving the VAT as a potentially unfundable problem.

"More than a year ago, we designed the VATBRIDGE product to provide the solution; short-term secured loans that recognise the inherent security of the VAT recovery from HMRC, rather than being limited by the available equity in the property being acquired.

"A VATBRIDGE loan advanced the VAT less interest and charges. For some this was enough, but we soon realised there were many borrowers that needed more help, a loan that advanced the full amount of the VAT due."

In response the business developed VATBRIDGE+, a top-up loan used in conjunction with a VATBRIDGE loan to ensure the borrower receives the full amount of VAT due. However, as this loan is not repaid by the VAT recovery, it is only available to borrowers where it can be seen that there is a viable repayment plan that coincides with the recovery of the VAT.

The development has led to huge interest from potential clients, says Rutter, adding:

"By the end of the summer, with VATBRIDGE and VATBRIDGE+ products and processes in place, our focus shifted to promoting the business to a wider audience.

"We have seen a significant increase in the number of enquiries and with it the development of an interesting new trend - the borrower with the funds available to pay the VAT but choosing a VATBRIDGE loan."

Another aspect of the approach is for the business to talk to borrowers to understand their reasons for choosing to borrow, and these fall into various categories, says Rutter. He adds:

"One is to maintain a war chest. Developers with an eye on their next project have cited the need to maintain free cash to take advantage of opportunities arising in the short-term. We lent £120,000 to an expanding developer on the south coast. With cash in the bank, they didn’t need to borrow but were planning to buy another property at auction before the VAT would be recovered and didn’t want to tie up the funds.

"Another is that borrowing is cheaper than the cost of exiting investments. Borrowers with significant invested assets have cited high costs of exiting investments as the reason for taking a loan.

"We previously offered a £2.2million loan to an experienced property developer, where the total cost of the loan was less than 4.5 per cent -- they accepted as the cost was lower than they would have faced in liquidating other investments to pay the VAT."

Also, says Rutter, developers look to increase returns by reducing their dependency on profit share partners. He continued:

"Developers are recognising a short term VATBRIDGE loan can be cheaper than taking short term funds from a profit share partner.

"We previously lent £800,000 to an experienced developer, who approached us very close to completion of their latest purchase. The developer had arranged to source the funds for VAT from their profit share partner at a cost of an additional four per cent of the development profits -- the VAT loan was less than a quarter of this figure."