With development costs continuing to rise and budgets under increasing pressure, housing associations are constantly looking for ways to maximise the value of every project.
One area that can have a significant impact on development viability, but is often not considered until later in the process, is VAT. Whether you’re acquiring land, delivering new-build homes, developing care or supported living facilities, or converting existing buildings, understanding the VAT position from the outset is essential.
While the rules can be complex, a range of valuable VAT reliefs and planning opportunities are available. This article explores some of the key areas housing associations should be aware of, including zero-rating for new developments, “golden brick” arrangements, the Option to Tax, and reliefs for conversion and regeneration projects. With the right approach, early VAT planning can help minimise irrecoverable VAT, avoid unexpected costs and make valuable development funding go further.
One of the most valuable VAT reliefs available to housing associations is the zero rating of certain new-build projects.
Where the relevant conditions are met, qualifying construction services can be supplied at 0% VAT, helping to reduce development costs and minimise irrecoverable VAT.
After all, the rent of social housing is an exempt activity and leads to a restriction of VAT incurred in relation to that activity.
While the rules around zero-rating new build residential properties may seem straightforward, applying them in practice is often far more complicated. Housing developments typically involve a range of parties, including landowners, developers, contractors, funders, and housing associations. With multiple transactions taking place throughout a project, different elements can attract different VAT treatments, creating risks if the position is not carefully reviewed and managed.
Importantly, zero rating is available across a range of different construction projects. In addition to the construction of new dwellings, relief can also apply to the construction of qualifying Relevant Residential Purpose (RRP) buildings, such as care homes, hospices, and children’s homes. Certain Relevant Charitable Purpose (RCP) buildings may also qualify, provided they are intended solely for a non-business charitable use.
If you are involved in acquiring affordable housing land from a landowner, you may come across the term “golden brick”.
The principle arises because the VAT treatment of a land sale can change and be more favourable once construction has commenced and sufficient works have been completed.
Where a housing association acquires a site before construction has begun, the VAT treatment of the purchase of the land may differ from the position where part of a residential building has been constructed before purchase. A sale of bare land before construction of dwellings has taken place will be treated as exempt from VAT ordinarily but may also be subject to VAT at 20%. Neither treatment is ideal. An exempt sale may restrict the landowner’s ability to recover VAT incurred on costs, such as on its purchase of the land, while a standard-rated sale by the landowner could result in the housing association incurring VAT that it may not be able to recover in full. Housing associations also have a special ability in law to which can remove a VAT charge on the land by the landowner (more on this later).
For these reasons, landowners and housing associations will often seek to structure transactions so that ownership transfers after construction of the dwellings have commenced and works have progressed beyond the foundations, reaching what is commonly known as the “golden brick” stage. At this point, the sale should qualify for zero-rating as the sale of a partly completed dwelling, rather than being treated as a sale of land.
The main advantage of a “golden brick” structure is that it can reduce VAT costs for both parties. It is a well-established arrangement that is recognised by HMRC. By structuring the transaction in this way, the landowner is generally able to recover VAT incurred on land and development costs, while the housing association avoids irrecoverable VAT becoming embedded within the purchase price.
However, successful implementation requires careful planning. The timing of the transfer and the extent of the construction works completed before the sale are critical, as the desired VAT treatment will depend on the specific facts of the transaction.
Whilst golden brick arrangements remain an important feature of many social housing developments, proposed changes to the VAT treatment of land for social housing could make these arrangements less necessary in the future, as discussed below.
The Government has recently issued a consultation on proposals to introduce a new VAT relief for land acquired for qualifying social housing developments.
If introduced, the changes could make the VAT position much more straightforward by allowing certain land purchases intended for social housing to be zero-rated from the outset. This would reduce the need for more complex structures and arrangements, such as “golden brick”, that are often used to achieve a favourable VAT outcome under the current rules.
For now, nothing has changed and the existing VAT rules still apply; it is therefore an area worth watching if you are planning future land acquisitions or development projects.
Another area that often catches housing associations by surprise is the Option to Tax (OTT).
Property transactions are often exempt from VAT but this not always the case; for example, a property owner may choose to opt to tax a (commercial) building or piece of land, meaning VAT must be charged on supplies that would otherwise be exempt.
For organisations with limited VAT recovery, including many housing associations, this can add a significant and often irrecoverable cost to a transaction. The good news is that there can be ways around this.
Special rules can apply where land or buildings are being acquired for qualifying residential or social housing use. In certain circumstances, an Option to Tax can be ‘disapplied’, meaning VAT does not need to be charged even though the seller has opted the property. This can produce significant savings when acquiring development land or buildings that will be converted into homes.
However, the position is not always straightforward, and it is also important to remember that a relief is not automatic. While disapplying the Option to Tax can be beneficial for the purchaser, it may be less attractive for the seller. This is because the seller’s ability to recover VAT on property-related costs may be restricted where the sale is treated as exempt rather than taxable. As a result, VAT can become an important point in commercial negotiations.
Many housing associations are exploring regeneration, conversion, and redevelopment projects as part of their wider plans to create new homes and make better use of existing buildings.
These types of projects can often present valuable opportunities for VAT savings. However, the reliefs available will depend on the classification of the property before works start, the nature of the works being carried out and the specific conditions that apply.
Below are some of the key VAT reliefs that may be available.
A specific VAT relief is available where construction services are supplied directly to a relevant housing association in connection with the conversion of a non-residential building, or a non-residential part of a building, into:
a building (or part of a building) designed as a dwelling or number of dwellings; or
a building (or part of a building) intended solely for use for a Relevant Residential Purpose (RRP).
Where the relevant conditions are met, qualifying construction services can be zero-rated (0%) for VAT purposes. This relief should be considered first, as it is more beneficial than the reduced-rate reliefs discussed below.
If the conditions for zero-rating are not satisfied, it may still be possible for the works to qualify for one of the 5% reduced-rate VAT reliefs outlined below. These reliefs are generally not limited to relevant housing associations and can also be available to other qualifying persons or organisations, subject to the relevant conditions being met.
A special residential conversion generally involves converting a residential building(s) into a facility that meets the definition of a Relevant Residential Purpose (RRP) building. Examples can include:
Where the relevant conditions are met, qualifying conversion services can benefit from the reduced rate of VAT (5%).
VAT reliefs can also be available where works result in a change to the number of residential units within a building. Examples include:
Where the conditions are met, qualifying construction services can also benefit from the reduced rate of VAT (5%).
VAT relief may also be available where a building is converted into an HMO.
Broadly, this can apply where a building that does not currently contain any HMO accommodation is converted so that it contains one or more HMOs after the works have been completed.
Where the relevant conditions are met, qualifying conversion services can benefit from the reduced rate of VAT (5%).
Housing associations are increasingly involved in projects that seek to regenerate areas and return vacant properties to occupation.
Where a residential property has been empty for a qualifying period, the reduced rate of VAT (5%) may be available on works to the property.
Whether you are acquiring land, delivering new homes, purchasing a property that has been opted to tax, considering a golden brick arrangement or undertaking a regeneration project, our VAT specialists can help identify opportunities for VAT savings and avoid costly surprises.
Speak to the Kreston Reeves VAT team before your project gets underway. Early advice can make a significant difference to the overall VAT cost of a development and help ensure valuable reliefs are not missed.
Do housing associations have to pay VAT on land purchases? Not necessarily. The VAT treatment of land depends on a number of factors, including the nature of the land, how it will be used and whether the seller has exercised an Option to Tax. Some land transactions are exempt from VAT, while others may be standard rated.
What is an Option to Tax?An Option to Tax is an election made by a property owner that generally results in VAT being charged on supplies of land or buildings that could otherwise be exempt.
Can an Option to Tax be disapplied for housing associations? In certain circumstances, yes. Where land or buildings are being acquired for qualifying residential or social housing use, it may be possible to disapply the seller’s Option to Tax. This can result in substantial VAT savings, but specific conditions and administrative requirements must be met.
What is a "golden brick" transaction? A golden brick transaction involves a developer selling a site after construction of a residential building has reached a certain stage. This can allow the sale to qualify for zero rating, helping to reduce VAT costs within the development structure and often delivering significant savings for both the developer and housing association.
Are golden brick arrangements still necessary? Under the current rules, golden brick arrangements remain an important feature of many social housing developments. However, the Government is consulting on proposals that could allow certain land purchases for social housing to be zero-rated from the outset, potentially reducing the need for these structures in the future.
Can housing associations benefit from VAT reliefs on new-build developments? Yes. Where the relevant conditions are met, qualifying construction services relating to new dwellings, Relevant Residential Purpose (RRP) buildings and certain Relevant Charitable Purpose (RCP) buildings can be zero-rated for VAT purposes.
Can the conversion of a non-residential building qualify for VAT relief? Yes. Several VAT reliefs may apply where a non-residential building is converted into dwellings or qualifying residential accommodation, depending on the nature of the project and the parties involved.
Is there a special VAT relief for housing associations converting non-residential buildings? Yes. Where construction services are supplied directly to a relevant housing association and the statutory conditions are met, the conversion of a non-residential building into dwellings or an RRP building can qualify for zero-rating (0% VAT).
When should a housing association seek VAT advice? Ideally, VAT should be considered before acquiring land, agreeing heads of terms, entering into development agreements or appointing contractors. Early advice often provides the greatest opportunity to maximise VAT reliefs and avoid costly mistakes.
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