The costs associated with occupancy in London are high with rental rates, business rates and service charges. Overall costs can vary from between £54.00 per sq. ft to over £150.00 per sq. ft depending on building quality and, most of all, location. An diverse range of UK based education organisations have taken the decision to locate themselves to the east of London in developments such as the Republic, in East India Dock, where rental rates are in the mid £30.00s per sq. ft (overall costs being approx. £60.00 per sq. ft) in order to provide London based courses to their students at relatively low oost.
We acquired a floor for the University of the West of Scotland in the Republic Import building, paying approx. £34.50 per sq. ft exclusive and amounting to a total cost of approx. £65.00 per sq. ft before tax (albeit including business rates).
The location however is not to everyone’s taste and the overseas based universities with similar ambitions tend to want to be located more centrally and close to the many sights and features that visitors to London like to visit in order to enhance the visiting experience for their students.
This strategy brings the cost up significantly. And, together with the basic cost, goes Value Added Tax (VAT) added to the and rent in most, but not all, instances , as well as service charge costs.
VAT is currently at 20% and is added to the rent of buildings that are registered for VAT. Most US based, and other overseas teaching organisations, cannot recover their VAT costs in the UK as they choose to register as a charity in the UK or take all income from their home country and therefore take no revenue in the UK. As a result, this charge is essentially an added outgoing. The property rent is by far the largest outgoing and so any VAT charged on it (at 20%) is going to be a significant factor.
Not all buildings are VAT registered though. My greatest delight is in the identifying and acquisition of non VAT registered buildings that also have the benefit of a Class F1 Education building. Such situations , if successful, are considered resounding and unmitigated successes. Well, by me, at any rate.
I can cite many examples but a few stand out such as the occasion where we identified a 25,000 sq. ft building for an high profile north American university. The building in question had actually very recently been registered for VAT in order to allow the owner to recover significant VAT payments incurred in their refurbishment cost.
Once an election has been submitted it is, under certain circumstances, possible to revoke the registration. Revoking an option to tax is possible only within a six month ‘cooling off’ period. In this instance we had caught the situation early enough to negotiate a revoking of the VAT registration in exchange for a sum equating to the level payable by the landlord to HMRC. By doing so we were able to save the added cost of £200,000 per annum in VAT on a 25 year lease.
We are involved in a current situation where we are looking at taking on the assignment of a 12,000 sq. ft education building which is subject to a rent review every five years on behalf of a major US overseas student programme provider. In this instance the plan is slightly different and works to mutual benefit between landlord and tenant. Historically it has been the case that, at each fifth year, the landlord announces a desire to register the building for VAT. There is no particular reason for doing this other than for accounting continuity with the rest fo their Estate. The discussion then begins and has, in the past, resulted in a 10% uplift in the rent in exchange for that all important undertaking not to register for VAT for a further five years.
I am most certainly not a VAT specialist and cannot advise with any real confidence over this thorny and dense subject. I do however know when an opportunity exists to do something and I most certainly make it my purpose in life to know what buildings are not VAT registered. This is an arduous task as very few remain unregistered. And any building that has been refurbished will most definitely be registered as the landlord will want to recover their tax costs on the refurbishment.
There was a time in the City of London where the majority of buildings were purposely left unregistered despite significant costs to the owners. This was due to the financial service provider predominant occupier base’s inability to recover VAT. Over time, and with increasing boldness of the past 20 years of the city market and ability for financial service occupiers to cover VAT costs, this level has reduced significantly.
Whilst we cannot guarantee finding non VAT registered options for our non VAT registered clients, we will enjoy giving it our best shot!