With higher costs and therefore restricted margins, confusion around VAT status could be putting off property investors from capitalising on a less optimistic market – but ‘alt-fi’ can remove worries about that potential extra 20%, says Freddie Digby, CCO of Adsum.

Commercial property has always been a wise, if turbulent, asset to invest in, with consistent historical market growth – fuelled in large part by the rise of e-commerce and dwindling supply. Yet, according to Carter Jonas, this may start to slow as businesses reduce their spending and in turn, profits for property investors shrink.

In May, falling Amazon profit forecasts caused a tumble in commercial property stocks due to reduced demand for warehouses, and now rising interest rates may start to punish investors who jumped in at the top of the market.

For office space, Greater London is still the epicentre – but changes hint at limited cash flow. The city’s edges in the southeast are seeing the most extensive growth at 2.1% to May 2022 compared to the centre’s increase of 0.7%, which could highlight that businesses looking for a new office market may not have the cash to expand into that central, expensive London postcode. This, in turn, could impact investors’ margins.

With so much market turbulence, VAT becomes an obstacle to market confidence. The extra 20% paid on completion of new builds can be a significant additional cost and if the property is over three years old, the confusion around its status is still a concern. Without payment, sales can’t complete, and with additional costs raised by a fifth, deals may fall through.

The challenge is finding out the exact VAT status of the building as this depends on a multitude of factors, including its deal history and the status of any commercial renters currently letting the property.

Technically, HMRC can help in two ways. Firstly, by opening an investigation into its VAT status – but investors often do not have time for this in such a rapidly moving market. Alternatively, HMRC can refund the 20% after completion; however, many will not be able to continue operating with such a dent in cashflow.

However, tech-savvy property investors should not worry about this potential extra cost. Instead, they can leverage it as an asset to secure immediate capital should they have to pay VAT. A vibrant, new generation of the so called ‘alternative-finance’ (alt-fi) fintechs can put up HMRC’s refund upfront – ensuring on-demand, consistent and calculatable cashflow without waiting for HMRC.

Freddie Digby comments: “Investing in commercial property has traditionally been a promising asset class if one of the more complicated. The VAT status of a building, or a shop or office within a building, is seldom clear cut. To make matters worse, there is a significant knowledge gap on the issue.

“Sometimes, businesses or investors 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 with a recession looming on the horizon, weary investors have even more reason to need consistent, resilient cashflow and reduce costs.”

“Put both factors together – and it is clear why property VAT is such a tricky issue. When a deal is on the line, and an investor finds out they must find an extra 20% to complete, alarm bells rightly go off.”

Freddie continued: “It just shouldn’t be complicated. HMRC guarantees your refund, but the issue isn’t just having to find an extra 20% and surviving without it for months. Investors will often face compliance questions, taking time to register, submit claims, chasing, recovery, and lawyer or consultant fees, which take time and money.

“By leveraging the inevitable VAT refund as an asset, investors and businesses can use it as collateral to secure on-demand finance. This gives calculable, hassle-free capital when investors are facing a slowing market and shrinking margins.”

Leave a Reply