Generally speaking, housing associations are not generally able to recover VAT on rented properties, and have limited recovery prospects for shared ownership schemes.

For this reason, they will look to purchase development land that will not be subject to this tax.

If the owner of the land being purchased has “elected to tax” and is unwilling to receive a notice from the housing association that will dis-apply VAT, an alternative solution must be found.

The Golden Brick allows this apparent conflict between the interests of the developer and housing association to be resolved by making the property ‘zero rated’ for VAT purposes. Even where a developer has elected to tax, this means:

• A housing association will not make any VAT payment in addition to the purchase price agreed
• The developer can recover any development costs expended on VAT
• For assistance in deciphering the Golden Brick concept, speak to the team at The VAT People

Property conversions are another complicated aspect of development. However, the reduced rate of VAT (5%) is available for a wide range of residential conversion and renovation projects. Many people do not know this exists.

For housing associations, the supply of building services of conversion of a non-residential building, or part of a building, into one or more self-contained dwellings is zero-rated, but certification must be provided initially.

This includes materials supplied in the course of the development, which are normally incorporated into the property. There are exceptions to this, however, including items such as white goods, carpets and fitted furniture.

Professional fees are subject to VAT at the standard rate, although it may be possible to mitigate these through a design and build contract. Works to any non-residential parts are subject to the standard rate of VAT.

Previously, stock transfer housing associations receiving transfers of local authority housing stock have been unable to recover VAT that was chargeable by the contractors appointed to carry out major repairs to the transferring properties. This would usually happen for two reasons:

• The primary source of income for a housing association is rents, which are treated as an ‘exempt’ supply in terms of VAT
• VAT carried by the housing association in relation to an ‘exempt’ supply cannot be reclaimed from HMRC

VAT rules for local authorities are different, and, in practice, councils can reclaim virtually all of the VAT it incurs on major works contracts from HMRC. However, a scheme has since been introduced to allow the stock transfer housing associations to benefit from the transferring local authority’s advantageous VAT position.

Named the VAT Shelter scheme, it works as follows:

• An analysis is prepared to identify all major works and improvements that are proposed and can reasonably be classified as ‘enhancements’ to the housing stock
• These ‘enhancement’ works have typically covered most of the major repair and improvement works that are proposed by the new landlord in the first five or 10 years after the transfer
• The local authority has an obligation to carry out these enhancement works.
• As the housing association does not have to bear the cost of ‘enhancements’, the purchase price payable for the acquisition of the housing stock is increased commensurately
• The local authority then asks the housing association to carry out the work, ‘paying’ them in advance. There are no cash transactions between the housing association and the local authority, as the increase in the purchase price of the stock is offset exactly by the payment to the housing association for carrying out the works
• The invoice from the housing association for carrying out the enhancement works includes VAT, which must then be paid to HMRC. The local authority must bear the cost of the VAT, but is able to reclaim it immediately
• Then, the housing association will appoint specialist contractors to carry out the major repairs and improvements programme, who will charge the cost of the works carried out plus VAT

The housing association is permitted to reclaim the VAT it bears up to the amount of VAT it has charged the council.