When you’re ready to start developing again, make sure your tax policy is ready too

1.   1. Take options over potential development sites

Associations may have identified sites that would be possibilities for development, but there is currently no certainty over whether they would achieve suitable planning consent. 

To share the risks, the association may wish to pay for a call option so that it can acquire the site for an agreed price if satisfactory planning is achieved. The seller may also wish to include an overage agreement so that it gets paid further amounts if certain conditions are met.

Ensuring VAT is charged on as few costs of acquiring a site as possible is normally vital to the viability of a development. 

HMRC’s policy on both call options and overage payments has been under review for several years, which causes uncertainty. However, case law and recent discussions point towards these payments having the same VAT treatment as a land sale taking place at the same time.

Land sales should be exempt unless the vendor has exercised the option to tax. Ascertaining whether they have done so is not always straightforward, especially where a property has been owned for decades.

Organisations should seek to agree that the land will not be opted (or if it has been, agree how to deal with this), from the start. Sellers may seek to add VAT once they appreciate how not opting will impact the VAT recovery on their costs.

1.   2. Create additional homes from existing land

Many associations are looking at their existing stock and questioning whether there is a ‘hidden homes’ opportunity. 

Additional homes might be added on top, to the side, or in the garden of existing dwellings. Unlettable shops and garages could be repurposed as flats and houses. Long-term voids might be brought back into use, remodelled to something more suitable, or demolished and rebuilt in a better way.

These strategies come with a multitude of VAT treatments. A small tweak in the plans can make a difference between works being subject to VAT at zero per cent, five per cent or 20 per cent. Some VAT reliefs are only available to registered housing providers, and contractors may not be aware of these.

3. Getting the right subsidiaries in place

Developing new homes directly within a charitable housing association tends not to be the most tax-efficient approach. 

Irrecoverable VAT will be incurred on fees of architects and other professionals helping to build new homes for rent. A charity is likely to be liable for corporation tax if it develops for open market sale or becomes a joint venture partner with a house builder. 

Larger organisations may well already have one or more subsidiary set up to deal with these issues, but many have allowed these companies to become underused or even dormant as they scaled back their development aspirations. 

Now is the time to start refreshing these to ensure they are ready to be used when development programmes start ramping up again.

For other housing associations, this will be the first time they will be developing at scale. They may have concluded in the past that the costs of operating a subsidiary were not merited by the potential savings, but this should be reappraised in the light of new plans.

The taxation of property and construction in the UK is one of the most complex and onerous regimes in the developed world. While there will be many measures brought in by the government to encourage building new homes, there seems little prospect of tax ceasing to be an obstacle to this. 

It is vital that housing groups take advantage of the available reliefs and ensure they are properly set up to ensure that tax does not render their development plans unviable.

Adam Cutler, VAT director and social housing tax lead, Crowe