Saffery is calling for reform of VAT rules to address longstanding issues restricting the supply of affordable housing.
The proposed changes, which would not incur any cost to the Treasury in reduced tax revenue, come as the government pursues an overhaul of the planning system to deliver 1.5 million new homes by the end of the parliament, as addressed in the King’s Speech.
The VAT rules on the sale of land for affordable housing currently require developers and acquirers to wait until the land is at a stage of development where it can be classified as a dwelling – the so-called ‘golden brick’ point – before the sale qualifies for the zero rate of VAT. If the zero-rating is not available a VAT cost is created.
The golden-brick approach ensures that VAT is not a cost to the acquirer of the land – registered providers of affordable or social housing – and this cost is not passed on to the end users.
However, leading advisors to the industry have raised concerns that the provisions are no longer fit for purpose and are currently delaying or restricting the delivery of affordable housing.
Sean McGinness, Head of VAT and Partner in the Real Estate Group at Saffery LLP, says: “The biggest problems relate to access to funding as well as the overall cost and delays that transacting on a golden brick basis can bring for housebuilders”, he said.
Where a registered provider is securing funding from Homes England under the Continuous Market Engagement (CME) model there is a requirement for the registered provider to obtain title to the land on which the new affordable homes will be built before accessing funding.
“This means that unless the registered provider has significant funds in its own right, it cannot make advanced payments without it having an interest in the land on which the dwellings will be built. The simplest way of transacting is for the legal interest to be transferred as early as possible in the development to enable access to funding for the registered provider so they can accelerate their affordable and/or social housing requirements”, McGinness said.
For housebuilders, transacting on a golden brick basis is costly and time consuming and can prevent sites being developed.
“Until a land conveyance has taken place a registered provider will usually only supply a deposit for the dwellings. Land has to be acquired, and significant build costs incurred, before significant funds are received. If the development does not meet key metrics the development may not be pursued.
McGinness added: “For developments that do go ahead, continual monitoring is required to ensure that each dwelling is “above foundation level” before it can be transferred. In a multi-stage development, “bundles” of properties may be transferred to the registered providers who can then obtain part funding and release that to the developer. This piecemeal approach results in increased costs for the developer and therefore increased costs for the registered provider. It also means VAT dictates the development phasing which is not always the most efficient way of delivering much needed affordable housing.”
The government has committed to a range of measures to encourage housebuilding including reform to the National Planning Policy Framework (NPPF) and restoration of mandatory housing targets, and reform to planning laws.
McGinness proposes a change to the VAT Act specifying that the sale of land to a registered provider of affordable or social housing, where there is outline planning permission for the construction of affordable housing, is zero-rated.
The requirement would be that the registered provider certifies that it will construct, or appoint a contractor to construct, affordable homes on the land acquired.
“If that intention did not crystalise within x years, or there was a change to the use of the site within x years from the date of certification/acquisition of the land, then there would be a self-supply VAT charge on the registered provider. This would limit the use of the new provision to very specific circumstances with an in-built mechanism of claw-back where the registered provider did not use the land for the construction of new affordable homes”.
“It is not a tax cut” he added, “but will remove a barrier to effective delivery of affordable housing.”
“The changes would end the need to delay the transferring of land to the registered provider until the houses or flats are partially completed.”
“From our experience working with large housebuilders, registered providers, and industry bodies, it is clear this would be an effective solution to the issues raised which would greatly stimulate the affordable housing supply without any VAT cost to the Exchequer.”
