"The reason that VAT presents an additional hurdle is that when newbuild housing is sold, it is VAT zero-rated meaning that the costs of any VAT incurred on the development can be recovered from HMRC"
- Stephen Patey - haysmacintyre
The new Labour government made no secret of its ambition to get Britain building again ahead of the General Election, and that policy ambition has remained front and centre since 4th July. That includes a restatement of the commitment to building 1.5mn homes over the course of the current Parliament. That equates to 300,000 homes a year – the UK has not built that many in a year since 1977.
A key part of that target is to build more affordable housing, with the Deputy Prime Minister announcing that 40% of homes on planned new developments will be affordable housing. In theory then, by 2029, the UK will have built as many as 600,000 new affordable homes.
However, it is one thing to set that target and quite another to actually achieve it, particularly in light of recent figures that revealed that housing associations, which remain the UK’s biggest developers of social housing, broke ground on just 32,705 homes in 2023-24, which is a marked decline compared with even the previous financial year.
The reality behind the falling number of new houses is that the margins for housebuilders across the entire sector are increasingly tight. But housebuilders who are looking to either enter into or expand their operations in the affordable housing market face an additional hurdle: VAT.
The reason that VAT presents an additional hurdle is that when newbuild housing is sold, it is VAT zero-rated meaning that the costs of any VAT incurred on the development can be recovered from HMRC. However, this only applies to newbuild housing that is sold, not housing that is rented.
This creates a problem when housing is built for affordable housing associations as the end supply to home occupiers becomes VAT-exempt rather than VAT-zero-rated. The situation has arisen because where a sale of land for development is made, or the sale of commercial property which a housing association plans to convert is made, and an Option to Tax has been made over either the land or property, VAT legislation allows affordable housing associations to require developers to exempt their sale to them, providing the associations with a means of mitigating their VAT costs. Whilst the difference between a sale being VAT exempt and VAT zero-rated may seem academic, the reality is quite different.
The VAT exemption means there can be no recovery of VAT on the costs that the housebuilder has incurred in relation to the land or the commercial properties, including potentially the initial purchase of the land. This could result in costs rising by as much as 20% for housebuilders in the worst-case scenario, which unsurprisingly creates a significant disincentive for the landowner to release the site for development.
The rise in costs is not likely to be that extreme in the majority of cases, and there are solutions that can mitigate the VAT cost arising, such as the ‘Golden Brick’ solution or to delay any sale to the housing association until the houses have been fully completed.
However, these solutions typically require housebuilders to plan far in advance, and in any case are not always available. As a result, when confronted with both uncertainty and the likelihood of higher costs, it is hardly surprising that for many housebuilders, VAT is an unwelcome barrier to entering the affordable housing market.
Fortunately, it is also a barrier that could be knocked down by the government using a straightforward solution. Legislative provisions are already in place to ensure that developers who build charitable buildings or other residential buildings can recover VAT.
This utilises a process whereby the developer can zero-rate the sale of the property to a charity, for example, if the charity certifies that the use of the building meets the relevant charitable use tests. Extending this zero-rating option to affordable housing would be both a sensible and simple step to encourage more developers to enter the market.
