C ORONAVIRUS - LOANS
C an you reclaim VAT on costs linked to a new bank loan?
The ongoing coronavirus crisis has led to your business applying for a new bank loan. The bank requires you to pay certain costs, including a survey fee, as a condition of the loan. Is there any issue with reclaiming the VAT on these costs?
Input tax conditions
The basic rule with claiming input tax is that the expense must be incurred for the purpose of your business, and also linked to your taxable supplies, i.e. no issues with partial exemption or exempt activities. You must also retain evidence to support the claim, usually a VAT invoice. But there is a further important condition, namely that the supplier must be providing goods or services to your business and not to any third party.
Tip. HMRC has the discretion to allow you to claim input tax without a tax invoice, as long as you hold alternative evidence that confirms that you have paid VAT to a UK supplier on an expense that is for the purpose of your business.
Example. ABC Flooring Ltd is raising £200,000 to provide working capital for its business. The loan will be secured against a freehold property that it owns. The bank has insisted that the company pays the cost of a full survey on the property, which will be £2,000 plus VAT.
In this situation the surveyor will almost certainly be working for the bank, providing a report to the bank on whether the property is suitable collateral for the loan. Even though ABC Flooring will pay for the expense, it cannot claim input tax of £400.
Trap.It makes no difference if the surveyor raises their sales invoice to ABC Flooring because the surveyor is acting under the instructions of the bank. The commercial reality is that the bank has increased its loan arrangement fee to ABC in order to cover the cost of the surveyor.
In some cases a bank might impose a borrowing condition that your business operations must be reviewed by an external consultant, perhaps to identify cost savings or ways to improve profit margins. These reviews can often be expensive and are usually paid for by the borrower rather than the bank.
Tip 1. You need to ask the same question as with the surveyor costs: is the consultant engaged by your business or the bank? If it is the bank, then you cannot claim input tax on their fees.
Tip 2. A letter of engagement often gives a good indication of who a professional person is working for, although this is not always conclusive. You need to consider the commercial reality of the arrangement, i.e. is the professional acting under the orders and instruction of your business or those of the bank?
The lender will usually charge you a loan arrangement fee in addition to the other costs. This charge is exempt from VAT, so there is no input tax to claim on the fee.
Tip.This means that you can claim input tax, i.e. as an overhead of your business.
You can’t reclaim VAT on costs where a supplier is working for the bank rather than your business. It makes no difference if the supplier invoices your business if the reality is that they work under the instructions of the lender. However, if you pay an advisor, e.g. to provide the lender with forecasts, you can recover VAT on their fee.