Unlocking ‘golden brick’ – how proposed VAT reform could boost development

The UK continues to face a deepening housing supply challenge, with a growing gap between policy ambition and delivery. The government has committed to delivering 1.5 million new homes during this parliament – equating to 300,000 new homes per year, with social and affordable housing being a key part of this target. However, February’s ONS data for the last four available quarters shows that fewer than 170,000 new homes were completed, across both private and social housing. Recent research from RSM captured sentiment and viability challenges being felt in the industry.

The government’s Autumn Budget announcement of a forthcoming consultation to fast track the point at which zero-rating can be accessed marks a welcome development for the sector. This proposal would extend zero-rating reliefs for new dwellings to the sale of land for social housing.

Under the current VAT legislation, land only qualifies for zero-rating once construction reaches the ’golden brick’ stage. This is usually when the first bricks above the foundations have been laid.

Where land is sold prior to ‘golden brick’, the sale of the land is usually either exempt from VAT, leading to irrevocable VAT costs for the landowner which are often passed on to the housing association, or standard rated, which also often leads to an increased cost for the housing association.

In practice, this means the sale of the land to the housing association is delayed until the zero rate can be accessed under the ‘golden brick’ rules. This often leads to delays in the delivery of new social housing, which can cause a knock-on impact to private housing supply and, in some cases, render schemes unviable.

The consultation announced in the Autumn Budget, proposing to extend the current zero-rating provisions, has been widely called for and is a positive step towards unlocking more social housing development. HMRC has indicated this is a priority and the formal consultation process is expected to launch this spring.

The consultation will seek to consider HMRC’s concerns relating to how the zero-rating would work in relation to mixed use developments, and how only land specifically intended and ultimately used for social housing will benefit from the zero-rating. For example, changes to intended use of land may lead to zero-rating relief being clawed back, as is the current case for zero-rating reliefs for the first grant of a major interest in or construction of new buildings for a relevant charitable or residential purpose.

A change in the legislation to bring forward the point at which the zero rate applies to housing provided to registered providers will:

• simplify the delivery model, avoiding the need for complex legal arrangements or negotiations around golden brick;
• remove uncertainty on applying golden brick rules (e.g. with modern methods of construction);
• accelerate funding access for registered providers; and
• improve cash-flow by allowing developers to unlock capital in land sooner.

The expectation is that these changes will support quicker, more cost-efficient delivery of social and affordable housing.

Further changes to HMRC processes, policy and the VAT legislation would help to boost the supply of new housing and bring existing housing up to standard:

• Residential developers are often frustrated by delays in HMRC approving VAT registration applications and processing repayment VAT returns. This can lead to cash flow pressures and unnecessary administration. Such pressures could be eased by HMRC ensuring that the departments dealing with VAT registration applications and reviewing repayment returns are adequately resourced.
• Private housing delivery is critical for the government to meet its targets, and, therefore, the golden brick concept will continue to be used by the sector. As housebuilders continue to incorporate modern methods of construction, alongside traditional construction methods, we urge HMRC to further consider the application of the golden brick rules across different build types, and issue definitive guidance to support businesses.
• To encourage housing associations and private rental providers to upgrade their housing stock and install energy saving materials, we would also urge the government to extend the zero-rating reliefs for the installation of energy saving materials beyond 2027 (when the relief is due to revert to the reduced rate) and introduce an apportionment to ensure relief can be benefited from where installations form part of a wider refurbishment project

If you would like to explore the implications of the consultation or discuss residential VAT issues, please contact:

• Louise Cowell, Indirect Tax Director, Real Estate and Construction, RSM
• Audrey Fearing, Indirect Tax Partner, Public Sector, RSM 

For further insights, access RSM’s latest Real Estate 360 report to delve into trends shaping the industry.