As Costs Rise and Lending Falls, Alt-Fi Offer Solutions for Commercial Property VAT Surprises

The last few years have been some of the toughest for businesses. A global pandemic, supply chain woes, inflation, and all the subsequent economic challenges that came with them have created a myriad of issues for people and enterprises to navigate.

Hence, a record 98% of finance leaders anticipate operating costs to rise in the year ahead, according to Deloitte's UK CFO Survey Q1 2022, with almost half (46%) of chief financial officers (CFOs) expecting these rises to be significant.

Unfortunately, businesses in need of cash flow assistance will not be helped by commercial lenders - with bank loans to businesses, particularly smaller ones, at an all-time low according to Bank of England and the Federation of Small Businesses' data. These factors explain why the FSB calculates that 500,000 businesses are at risk of closing or downsizing in 2022. 

This is grave news for all, but these statistics will make for particularly worrying reading for businesses looking to purchase commercial property. Here, companies (rightly) worry about a surprise value-added tax (VAT) surcharge of 20% rearing its ugly head towards the end of a deal. Without payment, you cannot complete - and it is surprisingly difficult to know the exact VAT status of the building as it depends on many factors.

In the UK, HMRC can help – by either investigating whether VAT is expected to be paid or by refunding the VAT cost after payment. However, businesses often do not have time to open an investigation in such a fast-moving market. Waiting for HMRC to pay back that sizable 20% is not an option in such turbulent economic times when cash flow just to operate is needed. This issue is made worse by an HMRC plagued by understaffing and delays.

Alternative-Finance (Alt-Fi) Solutions

Tech-savvy businesses should view this VAT refund as an asset to leverage liquid cash flow against. A new generation of 'alternative-finance' (alt-fi) fintechs can ensure on-demand, consistent and calculatable capital without having to submit and wait for HMRC's refund.

"Purchasing a commercial property is usually one of the costliest investments a company must make – and one of the most complicated,” says Freddie Digby, CCO of Adsum, a fintech tax credit specialist providing advance funding solutions for all UK business tax receivables. “The VAT status of a building, or a shop or office within a building, is seldom clear cut – and to make matters worse, there is a significant knowledge gap on the issue.”

Sometimes, companies in a VAT refund position are happy to wait for HMRC to send them that money back. However, as wages, inflation, and other costs eat into margins and a recession looms on the horizon, growing businesses have even more reason to need consistent, resilient cash flow. This is made even more pressing when talking about a significant investment like purchasing a new commercial.

"Put both factors together – and it is clear why property VAT is such a tricky issue. When a deal is on the line, and a business finds out they must find an extra 20% to complete, alarm bells rightly go off," Freddie says. "It just shouldn't be that complicated – after all, HRMC guarantees your refund, but the issue isn't just having to find an extra 20% and surviving without it for months.”

Furthermore, business owners often face compliance questions, taking time to register and then submit claims, chasing, recovery, and lawyer or consultant fees, which can take several business days and no small sum of money. 

"Here, a new generation of fintechs can help,” says Freddie. “By leveraging the inevitable VAT refund as an asset, businesses can use it as collateral to secure on-demand finance. This is a vital tool for scale-up CFOs keen to buy new premises. Calculable, hassle-free capital enables purchases to be completed quickly in times when businesses need to keep their heads above water even after a VAT paid post-purchase."