VAT efficiency – opportunities for housing associations

Effective VAT recovery

VAT on costs that relates to taxable supplies is often miscoded and is treated as either exempt input tax or residual and subject to partial exemption recovery when it should have been recovered in full.

Furthermore, the recovery of residual VAT is not always aligned with the scale of VAT-able activities – the key points here being:

• Could a partial exemption special method (PESM) produce a more appropriate rate of VAT recovery?
• Can it be backdated? Whilst HMRC recently withdrew the backdating of PESMs for housing associations, there are other technical positions that enable this.

Identifying taxable outputs

Outright sales and the first tranche sale of shared ownership homes will often be a zero-rated supply.

Failure to identify zero-rated income results in inefficient VAT recovery in several areas: the costs directly related to the sales, the residual costs incurred on mixed tenure schemes, and the general overheads of the organisation.

The zero rate might not always be available, particularly if the housing association does not hold person constructing status. VAT groups and joint venture arrangements should always be considered in detail regarding this point to establish which entities have this status.

VAT reliefs on mixed refurbishment and new build development sites

Many sites will contain a mix of works with various VAT rates, for example: 

• Standard rate (20%) – refurbishment of existing rented units.
• Reduced rate (5%) – renovation of void ‘empty’ units.
• Zero-rate (0%) – construction of new homes.

Most costs incurred on the refurbishment of existing units should be standard-rated – this usually creates an irrecoverable VAT cost. However, there are many reliefs available, for example, where properties:

• Have been empty for two or more years – potentially 5%.
• Have been empty for ten or more years – potentially zero-rated.
• Are being converted, for example a house into two flats, or hostel accommodation into single units – potentially 5%.
• Are converted from commercial to residential –zero-rated.

Some works are likely to benefit the entire site, e.g. access roads.  Apportioning such costs across different VAT rates is a common missed opportunity.

Site investigation or demolition work that is carried out before planning permission has been granted should be standard-rated. It is commonplace for VAT incurred on ‘qualifying’ demolition (and indeed other costs) to have unnecessary VAT charged on it.

Design and Build (D&B) companies – additional challenges by HMRC

HMRC is showing specific interest in ensuring D&B companies operate on ‘sound business principles’, particularly since the tribunal decision in Faskally Care Home.

HMRC decided that Faskally did not make taxable supplies of D&B services and raised an assessment for the VAT recovered on professional fees. This was on the basis that:

• The statutory accounts for the period showed no turnover or cost of sales.
• There were no invoices issued or evidence of income received.
• There was no evidence of the necessary loans.

The tribunal agreed and the VAT efficiency of this arrangement was therefore removed.

Housing associations should review the arrangements of subsidiary D&B companies to ensure there is the required commercial substance and that the savings made will not be challenged in the future by HMRC.

If a housing association does not have a D&B company, and they incur significant third-party professional fees in relation to new housing developments, then consideration should be given to the implementation of a D&B company into the supply chain.