Golden brick: could a tweak to the law offer a pragmatic solution to development delays?

Issues in practice

The developer must delay receiving payment for the land, fund demolition and lay the foundations and the early construction works until it reaches golden brick.

While HMRC allows interim payments made to the developer before golden brick to be zero-rated, I am finding that housing association boards are increasingly reluctant to countenance this.

The association may not be able to access funds to pay the land price before it owns it. Many grants cannot be drawn down until the association owns the land. Lenders may not allow loans to be used to make a payment that does not come with the security of land ownership.

If the developer is building houses, they may need to transfer plots at various times to enable each house to be sold when it is beyond foundations but not yet completed. This adds substantially to administrative time and professional fees.

Delaying owning the land may also lead to a loss of control over the site at arguably the stage when quality control is most important.

The most challenging development project I have been involved with in the past decade was where the foundations were not built properly, leading to four blocks of flats having to be demolished. 

A partial solution

As discussed in my February 2023 article, Golden brick – is it time for a rethink?, perhaps the concept of when ‘golden brick’ takes place needs a reassessment. 

However, even if HMRC were to agree that golden brick takes place when any construction works start, that would still entail months of delay before the land could be sold for some projects.

A new approach

Representative bodies have suggested that a change in the law, rather than just HMRC practice, could be a way through. 

The proposal is simply that: where land is sold to a registered housing association, there is approved planning permission for the construction of residential buildings on the land, and the association certifies that it will contract for the construction of these residential buildings, then this should also be zero-rated.

It is likely that this legislation would need to come with a requirement for the construction to have commenced within a certain period, otherwise the association would have to account to HMRC for 20 per cent VAT on the land price.

How likely is this change to take place?

This small change to the law would enable development land to be sold at a very early stage, potentially even before any demolition has started, without any VAT cost to either party.

As the UK has now left the EU, there is much greater flexibility to change the scope of items that qualify for the zero rate. 

The Treasury is lobbied each year by various sectors arguing why particular goods and services should enjoy a lower rate of VAT. If it accepted all these proposals, the cost to the Exchequer would run into the tens of billions. 

However, this proposal should not actually change the amount of any tax payable by either the housing association or the developer, at least compared with the alternative of waiting until the construction has reached golden brick before selling the land.

Admittedly, some associations currently concede defeat and incur a VAT or stamp duty land tax cost by acquiring the land in a different way, but I would hope that this is not factored in to any assessment.

The recent party conferences signalled that building new homes will be a key part of the manifestos of all the main political parties.

With little room to manoeuvre on tax rates, this proposed change in the law does seem a viable way of unblocking some stalled development schemes. 

If a tax relief cannot be accessed in practice, it is not fit for purpose and needs revising. 

If not included in this Autumn Statement, I hope this change will form part of Budget announcements next year. 

Adam Cutler, director of VAT and customs duty services, Crowe