Golden brick VAT reform: could new rules help accelerate affordable housing delivery?

Could changes to ‘golden brick’ help support the delivery of 1.5 million new homes?

The government is considering reforms to the VAT treatment of land intended for affordable and social housing, following longstanding concerns that the current rules can create unnecessary complexity and delay housing delivery. Saffery has submitted a response to the government’s consultation, drawing on extensive experience advising housebuilders on transactions and development agreements.

The potential changes come at a time when the government has set a target of delivering 1.5 million new homes during this Parliament.

Sean McGinness, National Tax Partner and a Partner in Saffery’s Real Estate Group, has worked with clients, HM Revenue & Customs and HM Treasury on this issue for over five years.

How VAT rules currently apply to development land and affordable housing

Under existing VAT rules, the sale of land is generally subject to VAT if the seller has opted to tax the land. To prevent VAT becoming an irrecoverable cost for registered providers of affordable or social housing, land is often transferred only once construction has progressed beyond foundation level and the development reaches the ‘golden brick’ stage. This allows the sale to be zero-rated, ensuring VAT is not a cost to the registered provider, or the developer, and ultimately does not increase the cost of delivering affordable housing.

While this approach prevents a VAT cost arising, it can mean transactions are structured around VAT requirements rather than commercial considerations.

Why are the current VAT rules causing problems for housebuilders and affordable housing providers?

The current rules can affect both funding arrangements and the practical delivery of developments.

For larger or multi-phase developments, each building being sold generally needs to reach the required stage of construction before it can be transferred on a zero-rated basis. This can lead to multiple land transfers, additional conveyancing and ongoing monitoring of construction progress.

The timing of transfers can also delay access to funding in some circumstances. For example, registered providers of affordable housing may need to hold an interest in the land before certain funding can be released but acquiring that interest too early can create VAT issues under the current rules.

Sean McGinness said:

“The current rules create a timing issue to meet a policy objective – relieving housing from VAT cost. Land intended for affordable housing is often transferred only once each building has reached golden brick, even though its intended use has not changed. The result is that transactions are structured around VAT requirements rather than commercial or operational considerations.”

Proposed VAT reform for development land: what could change?

The government is considering extending the VAT zero rate to land intended for the construction of ‘social housing’. This would allow qualifying land to be transferred earlier in the development process, removing the need to wait until construction has reached a particular stage before a zero-rated transfer can take place.

The aim is to reduce administrative burdens, simplify transaction structures and support the delivery of affordable and social housing. The proposals also consider eligibility criteria and certification requirements designed to ensure the relief is appropriately targeted.

Saffery’s recommendations on the ‘social housing’ VAT consultation

In our consultation response we support the policy objective of removing VAT-driven barriers to the delivery of affordable housing. However, we have suggested some refinements.

In particular, the firm believes eligibility should be linked primarily to the status of the purchaser rather than the specific housing tenure ultimately delivered. Affordable housing schemes commonly include a mix of social rent, affordable rent, shared ownership and other affordable housing products, and those mixes can evolve as developments progress.

Saffery has also suggested that consideration should be given to extending relief to certain acquisitions of existing non-residential buildings intended for conversion into affordable housing. In addition, developments containing limited commercial or ancillary space should not automatically be excluded where the primary purpose of the site remains the delivery of affordable housing.

McGinness added:

“This is not about introducing a tax break. It is about removing a barrier that can affect how affordable housing developments are structured and funded. Reform would allow projects to proceed in a way that reflects commercial and operational needs, rather than the point at which a particular VAT milestone has been reached.”

Read Saffery’s consultation response

If you would like to discuss the proposals or their potential impact, please get in touch with Sean McGinness.