Why follow the "Golden Brick" Road?
Competing tax mitigation interests lie at the heart of a "golden brick" scheme. The situation arises where a developer has opted to tax land so that VAT on its development costs can be recovered. A sale of land in that circumstance would ordinarily attract a VAT charge at the standard rate of 20%.
A RSL, as a result of its charitable status, will not ordinarily be able to recover that VAT and it would therefore rest as a cost to the RSL…making affordable housing less, well, affordable…
Ensuring adequate affordable housing provision is also a problem for the developer. Many residential developments have an affordable housing obligation contained in the planning permission and Section 75 provisions. Non delivery of that housing might prevent occupation of the private units, stalling the overall development.
How does the "Golden Brick" scheme help?
Transfer of land with the units under construction is treated as the sale of newly built residential accommodation, which is zero rated for the purposes of VAT. This means that the developer can still recover the tax on its costs (because it is making a taxable supply - albeit at the zero rate) but the RSL does not need to pay any VAT on the sale price.
The Scheme does have recognition within HMRC guidance which states that buildings under construction can be zero-rated and that foundation and one level of brickwork above would clearly count as "under-construction" for VAT purposes.
Of course, this effect could equally be achieved by buying completed units, but an early transfer of land might assist staged payments being made (which can largely be met through grant drawdowns) and ultimately lead to a saving in development costs and a reduction in the overall price paid by the RSL.
Follow, Follow, follow, Follow, I hear you sing….
What pot-holes might there be?
The scheme is not, however, risk free from the RSL's point of view.
Construction Obligations - Buying partially completed units (as opposed to completed ones) comes with additional risk for the RSL and requires a number of construction obligations to be brought into the purchase contract.
There needs to be an obligation to build to the agreed standard and specification (with a means of inspection and determination). This would be coupled with the imposition of timescales for delivery, with the potential for liquidated damages to be paid if the programme is not met and an ultimate longstop date allowing for termination if the works are not completed by then.
The RSL may also want collateral warranties from the contractor and design team as opposed to relying on NHBC cover available on completion.
The usual contractor's insurances need to be in place and appropriate provisions built in should damage or destruction occur during the construction.
Insolvency Risk - There is always the risk that the developer could become insolvent during the construction. Payments should be structured so that they are only being made against valuations on-site. The RSL may also want to consider step-in rights against the contractor and design team.
Procurement Risk - RSLs should be wary about becoming involved in the design of the units. They will need to avoid the contract being construed as a "contract for works" under the Procurement Regulations which would, ordinarily, require an open tendering procedure to be carried out.
LBTT - Whilst an RSL will usually be exempt from LBTT as a result of its charitable status, if buying through a subsidiary (say for mid-market rent or shared equity sales) then LBTT will still be payable on the entire construction costs (though this is no different to buying on completion). If the RSL bought land and built out itself, no LBTT would be payable other than on the land value. There is therefore a tax balancing exercise to do.
VAT Risk - There should also be provision made as to who is responsible for VAT if the scheme fails (the technical requirements were not met) or VAT legislation or guidance changes and VAT becomes payable. It would be prudent to record for audit purposes the stage of construction on the date of transfer of the land.
A heart, a brain and courage?
So whilst the "golden brick" road is not without its pot-holes, if you have the heart to undertake affordable housing developments, these can be overcome with a brain to navigate around them and the courage of your convictions.