Converting surplus offices and shops – what are the tax implications for HAs?

In a similar way to design-and-build for new build, further VAT savings can be achieved by procuring services through a ‘design-and-convert’ contract.

Converted units are treated similarly to new build units. So the first tranche sale of a shared ownership unit created out of an office would be zero rated, enabling increased VAT recovery by the association.

Some examples

1. An RP takes the lease of an empty ground-floor shop, which it believes will make some good units for tenants with mobility issues. If the owner has opted to tax, the RP can certify that it intends to convert this to flats and no VAT will be chargeable on any premium. The RP has a design-and-build subsidiary. The lead contractor will charge five per cent VAT to the subsidiary, with professionals charging VAT at 20 per cent. All of this VAT should be recoverable by the subsidiary, which should charge no VAT to the RP on its design-and-convert service.
2. An RP owns a first-floor office on a high street for which it now struggles to find tenants. It decides it would make a good shared ownership unit. No VAT should be incurred on the conversion, other than on white goods and carpets. The first tranche proceeds are zero rated, in the same way as if it were a new build project.
3. An RP acquires a shopping centre, which it will demolish and then build new homes for rent. The owner will almost certainly have opted to tax, but the RP may be able to agree to serve a certificate so that no VAT needs to be charged on the land sale.

What about our own offices?

Many organisations are talking about reconfiguring their offices to deal with the new ways of working. There are likely to be more hot desks and meeting areas, and much less paper filing and individual offices. The costs of these works will be subject to VAT, and for most organisations only a tiny percentage of this VAT can be recovered.

Some associations may conclude that they simply do not need all of the office space they have. What you do with surplus space is likely to have VAT implications.

If it has been less than 10 years since you moved in or undertook a major refurbishment, VAT you recovered in the past may need adjusting.

If you are going to let out surplus office space to a third party, there is the potential to opt to tax and charge VAT to your new tenant. This should enable additional VAT to be recovered, potentially going back 10 years, but you will need to consider carefully whether VAT will be a cost to potential tenants.

If you are thinking of turning the surplus area into some sort of community facility, HMRC may consider this a ‘non-business’ activity if you charge nothing for this. Existing VAT recovery calculations and agreements may need to be revisited.

Organisations with several offices may now decide to rationalise these. A payment to surrender a lease early, or to vary the lease in order to hand back some floors, will be subject to VAT if your landlord has opted to tax.

Some are considering setting up new local hubs where individuals can work closer to home, but still enjoy the access to technology and social benefits of office working. The more that facilities, rather than physical space, predominate, the more likely charges are automatically subject to VAT.

Housing associations are frequently pioneers in changing the ways new homes are created. Fortunately this is one area where VAT should not get in the way of these ambitions.

Adam Cutler, VAT director and head of social housing tax, Crowe