UK: VAT and Golden Brick Arrangements

Last Updated: 12 October 2010
Article by Michelle Rowe

Commercial property (including land for development) is exempt from VAT unless an owner has elected to opt to charge VAT. Sellers often make such an election to enable them to charge VAT, usually at the standard rate, (currently 17.5% although rising to 20% in January 2011). This is so that they can recover VAT on their costs incurred on the land and related professional fees etc. However, Registered Social Landlords (RSLs) are generally unable to recover VAT they incur in connection with rented properties and are limited in what they can recover in relation to shared ownership schemes. This means that RSLs may have to pay any VAT on top of a purchase price, which would represent an additional cost to them. The conflicting VAT interests of a Seller and RSL can be the cause of a breakdown when negotiating the purchase of a development site.

The 'golden brick' scheme is one solution. If a Seller starts building an RSL's development prior to transferring the property title to the RSL, then the sale can be 'zero-rated' for VAT purposes as it is a 'partially completed building'. If VAT is payable at zero-rate as opposed to standard-rate, there will be no VAT due on the purchase price payable to the Seller. However, because the VAT is 'zero-rated' as opposed to 'exempt' and therefore still payable by the RSL (although at the zero rate), the Seller can recover all its VAT. This is provided the development has reached 'golden brick' stage.

In this situation, the Seller must be willing to commence the construction before transferring title. The Seller and the RSL will need to work closely together to agree plans and specifications etc and to ensure that the arrangement is properly documented.

What is 'Golden Brick'?

The term 'golden brick' is not defined by legislation. However guidance from HM Revenue and Customs (HMRC) states that it is achieved 'when walls begin to be constructed upon the foundations. These walls do not have to be above ground level'. The building therefore only has to be under construction and the development only progressed beyond the foundation stage.

The Treatment of Deposits

Deposits are usually payable under contracts for the purchase of land, and usually at the rate of 10% of the purchase price. A Seller will want to ensure receipt of a deposit, particularly in a 'golden brick' arrangement to protect its interest in the site. The Seller will also need funds to allow it to start the development to reach 'golden-brick' stage.

Deposits are not unusual under 'golden brick' arrangements. Traditionally they have been payable to the Seller's solicitors and held by them as stakeholder. This means the deposit is only released to the Seller on completion of the sale, i.e. after 'golden brick' stage is reached. If the deposit is held as stakeholder the 'tax point' (the point at which VAT becomes chargeable) does not arise until completion - when the VAT would be 'zero-rated' as 'golden brick' would have been achieved. If the 'tax-point' is earlier than this, VAT would be due at the standard rate. Parties should be aware that delivering an invoice or allowing the RSL onto the property before completion could cause the 'tax point' to arise.

When a deposit is held by the Seller's solicitors as stakeholder, it is not available to the Seller to be used as part of the construction monies to reach 'golden brick'. In the current economic climate this has caused difficulties for sellers and developers and as a result last summer HMRC issued guidance as to the VAT treatment of deposits.

Under the new guidance, provided that it is clear from the contract between the parties that what will be supplied to the RSL at completion will be party-completed dwellings (beyond 'golden brick' stage) then the deposit can be considered as part payment for the site, meaning that it too can be zero rated for VAT purposes. This is welcome news for Sellers as it means that deposits can be released to them immediately, without the need for the deposit to be held as stakeholder, and without the risk that the 'zero-rating' of the transaction could be reversed.

Contracts need to be carefully drafted to ensure that parties can benefit from the recent VAT guidance on deposits.

Further Purchases

If an RSL obtains funding at a later stage and therefore wishes to purchase additional parts or units on a site, they should carefully consider the stage of construction of the parts/units that they wish to purchase as this will determine whether VAT is payable. If the site or units to be purchased have already been completed they may be considered 'exempt' from VAT rather than 'zero rated'. This would mean that VAT on the sale of the units would not be recoverable by the RSL. Instead, if the units were 'zero rated', VAT is technically payable, although at 0%, so the RSL would be able to recover.

VAT is a tricky area for RSLs. As they are unable to recover VAT in most situations, they need to ensure that they are incurring a limited amount. The 2.5 per cent rise in VAT, to take effect from January 2011, will potentially mean further irrecoverable costs RSLs will need to absorb. However, some comfort should be taken from the fact that a rise in VAT should also bring about a rise in RPI, translating to higher rent increases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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