New Government Consultation - on VAT treatment of land intended for the construction of new social housing

This consultation sets out a specific series of questions about the scope and administration of a new proposed VAT relief - to zero rate land for social housing.

The government is seeking responses to these questions directly, but has added that respondents should not feel limited to only the questions posed and that they will also consider written submissions on other aspects relevant to the policy design and impacts.

Housing associations, developers and other groups critical to the delivery of social housing have suggested the government could go further to ensure the VAT treatment of land better supports the way social housing is delivered.  In particular, the government has heard that targeted changes to the existing zero rate of VAT for new homes have the potential to increase the speed at which new social homes are built.

The government is therefore consulting on the introduction of a new zero rate of VAT for the sale of land intended for the construction of social housing.  Any relief will need to be targeted, effective and fiscally responsible.  That means designing rules that will genuinely support social housing delivery whilst protecting vital tax revenues and minimising the scope for abuse.

Through this consultation the government is seeking evidence on how the current VAT rules affect the feasibility and timing of social housing developments, and how the introduction of a new zero rate on the sale of bare land intended for social housing development might influence behaviour across the sector.  The government is also seeking comments on the design of the proposed relief to inform the final design of the policy.

The current VAT treatment of land, construction for new dwellings and the ‘golden brick’ rules.

'Golden brick’ is where the developer will construct to above foundation level (the golden brick stage) before transferring title to the social housing provider to benefit from the construction zero rate.

The VAT rules that are concerned with the construction of social housing are those relating to:

• land transactions

• property transactions

• construction of, and the first sale of a major interest in, new homes

These rules play an important role in shaping the housing market and incentivising the delivery of social housing.

A typical development involves three parties:

• the landowner,

• a developer/builder of social housing, and

• the social housing provider/operator.

The developer sources the land for building new homes and approaches a registered social housing provider to enter into a partnership or joint venture.  Once an agreement is reached, development can begin.  The developer will construct to above foundation level (golden brick stage) before transferring title to the social housing provider to benefit from the construction zero rate.  

All parties would benefit from a zero-rated transaction.  The landowner would be able to recover VAT on their costs.  The developer would not incur any additional costs building to golden brick.  The social housing providers will not incur VAT that they would otherwise be unable to recover, because onward supplies will be exempt.

Reaching the golden brick stage incurs significant costs, up to 60% of the whole costs of the project.  Thus creating cashflow impacts that can delay construction and delivery.

The government is of the view that introducing a zero rate for the sale of bare land planned for social housing would remove a barrier that is restricting the delivery of social housing and therefore support the government’s commitment to deliver 1.5 million new homes over this Parliament. 

The key principles guiding the development of the new relief are as follows:

• Ensuring VAT rules do not create barriers that slow or adversely impact social housing delivery

• Delivering value for money for taxpayers

• Minimising administrative burdens for businesses and HMRC

• Reducing opportunities for misuse

VAT is the UK’s third largest tax and helps to fund public services, including the NHS, education, and defence.  Therefore, any relief must be tightly focused to ensure that it achieves its objectives whilst minimising opportunities for abuse.

The government proposes that a zero rate of VAT will be applied to bare land that will be used for the construction of social housing. The new relief will enable a relevant registered housing provider to purchase and take title of land that will be used for construction of social housing.

This would remove the need for social housing developers to build to the ‘golden brick’ stage, to qualify for the existing construction VAT relief, whilst still getting full recovery of VAT.

Our concern is that many social housing sites are not necessarily bare land, but more likely to be brownfield sites in urgent need of regeneration, so the current proposals might have a limited impact.

If you have any particular views or concerns about the VAT proposals and the likely impact for social housing and/or wider housing delivery please do get in touch with one of our team.

Equally, if would like to discuss any property tax matters then please do contact the team on 0345 230 6450 or [email protected]. We look forward to speaking with you soon.