Affordable Housing - VAT Shelters
Housing Associations can save millions of pounds by reviewing VAT costs
VAT is a significant cost for Housing Associations but careful tax planning can reduce Housing Association's VAT costs:
Scenario 1: VAT and homes for rent
Housing Associations renting out properties originally built for sale can mitigate VAT being reclaimed by HM Revenue & Customs.
What is the issue?
VAT incurred by Housing Associations for renting homes is an exempt supply and is largely, if not wholly, irrecoverable. By changing the use of the property from sale to rent, any VAT previously recovered on the cost of construction may need to be paid back to HM Revenue & Customs.
How can this cost be reduced?
It is possible to avoid or mitigate a claw back of previously reclaimed VAT if there is a change of use of newly constructed housing stock provided action is taken in good time. A good example of this is in the recent case of Community Housing Association Ltd v Revenue and Customs Commissioners in which the High Court held that an assignment of the benefit of construction contracts, to a property developer, was a taxable supply. This was sufficient to 'frank' the recovery of VAT incurred on professional fees at the time of the assignment and prevent VAT becoming a cost to the Housing Association.
Scenario 2: VAT and Large Scale Voluntary Transfers
VAT potentially runs into millions of pounds for LSVTs due to the cost of refurbishing housing stock post transfer. With careful planning Housing Associations can mitigate this cost by adopting a "VAT Shelter" tax structure.
What is a VAT Shelter?
The VAT shelter arrangement permits Housing Associations to recover VAT incurred on renovating housing stock. Under the VAT Shelter the VAT incurred in the renovation works is attributed to a taxable works agreement with the local authority. The local authority contracts for works required by the Housing Association prior to transfer. The cost of the works is subject to the local authority's VAT position which permits full recovery of VAT incurred.
What are the benefits of the VAT shelter?
Without the use of the VAT Shelter the VAT incurred by the Housing Association would relate to the VAT exempt supply of renting affordable housing and would be largely, if not wholly, irrecoverable.
What are the typical savings?
Typically the amount of VAT on LSVTs runs into millions of pounds.
Examples of McGrigors' services:
McGrigors' tax team has dealt extensively with VAT issues that affect Housing Associations including:
- the recovery of over £4 million in VAT for a Housing Association from HM Revenue & Customs;
- conducting the lead case in ongoing litigation in which HM Revenue & Customs have sought to impose a corporation tax charge following use of the VAT Shelters.
Our teams experience of dealing with VAT issues for clients in the Affordable Housing sector enables us to provide practical, solution driven advice. We are happy to work with existing advisers on projects to ensure that you receive the very best advice and service possible.
We would be pleased to set up a meeting to review your current and future tax and VAT position and to discuss how we may be able to assist you.
About the McGrigors Affordable Housing Team:
McGrigors' Affordable Housing Team has been providing solutions focussed development, tax, construction, procurement, charities and funding advice to the sector for a number of years, and the team's breadth and depth of experience in delivering bespoke outcomes for Housing Associations is significant.
About the McGrigors Tax Team:
McGrigors market-leading tax team specialises in disputes and investigations work and works closely with all of McGrigors major practice areas.
The tax team is the largest dedicated team in the UK, and is rated in the top band of the leading client's guide to the UK legal profession, Chambers UK, which describes it as a "[team of] highly specialised and shrewd .... tax litigators .... at the pinnacle of taxpayer-led contentious work with expertise in both direct and indirect tax matters ....unrivalled for depth .... [and has] proved itself at strategy and implementation."
McGrigors team has specialists within it covering a number of taxes and industry sectors. David Anderson, partner, specializes in Housing Associations and is VAT specialist who has previously worked in legal teams both within HM Customs and Excise (as it then was) and a "Big Four" accountancy firm.
David Anderson
Partner
Tel +44 (0)207 054 2725 (London) or
+44 (0)161 662 8014 (Manchester)
Email david.anderson@mcgrigors.com
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