UK: VAT Advice For Housing Associations

Last Updated: 19 November 2009
Article by Jonathan Pryor

New initiative from HMRC

HM Revenue & Customs (HMRC) is again trying to understand what housing associations are all about and how they operate. It is intended that a new notice will be issued before the year end, which it seems is as much intended to educate the average VAT officer as it is for the sector.

There are a number of HMRC roadshows taking place which will promote a special partial exemption 'framework' for housing associations.

What this means, in a nutshell, is that HMRC is trying to identify special methods for partial exemption calculations which are appropriate to the sector, and which it feels comfortable with, and consequently can more readily and easily agree without entering into protracted negotiations.

It will be interesting to see how this develops, and although the intention is good, perhaps, in practice, time might be better spent working with associations that are content to stay on the standard partial exemption method, but need help operating and understanding the basic approach.

Whether this will mean that we are likely to see an increased level of interest from HMRC, which will involve looking more closely at housing association activity, only time will tell, but with a tight restraint on resources, we suspect this is unlikely.

HMRC to return to old ways?

For much of the 1990s, and up until relatively recently, HMRC was focused on attacking the unacceptable face of VAT avoidance, and it must be said that the level of aggressive VAT planning has significantly declined. However, with considerable pressure on the Treasury to raise funds in the current difficult economic times, there appears now to be a mood shift back to assessing for compliance and administrative irregularities. This, together with a new penalty regime, means we could be heading back to the draconian approach from HMRC, last seen in the early 1990s, when we had the last major property recession.

Housing associations should ensure their VAT compliance and administration is up to scratch, as it is expected that HMRC may be looking for easy wins on the assessing front.

Change of VAT rate

With effect from 1 January 2010, the standard VAT rate will return to 17.5% from 15%, and it is widely expected that this rate may climb as high as 20% in the not too distant future. Housing associations that issue invoices with VAT to persons/bodies unable to make full VAT recovery should be thinking now about whether to advance the issue of those invoices to a date before 31 December, so that recipients may benefit from the lower VAT rate.

However, before rushing off to raise lots of invoices, there are a number of issues to consider. Commercially, you need to consider whether you will be paid promptly if this is outside the normal invoicing cycle, and from a VAT perspective, be careful not to be caught out by some complex rules introduced by HMRC to stop people taking an unfair advantage by advance invoicing. You should also consider whether efficiencies can be made to your own VAT position in preparation for the VAT rate change. Housing associations need to understand that contractors should, where possible, be asked to issue invoices before 1 January 2010 and apply the 15% VAT rate to their bills. But can invoices issued after 1 January 2010 charging the 17.5% rate be apportioned between the different VAT rates where the work undertaken crosses the rate change? VAT efficiencies could be secured where contractors' invoices are for significant sums and your housing association cannot reclaim all the VAT thereon.

Case involving Community Housing Association concluded

This case has finally been concluded in the High Court, and readers will no doubt be familiar with the details. Although Community Housing Association was ultimately successful, it was a long struggle to get there. The principles established are, however, important.

Clearly, before you embark upon any major project, some advance thought should be given to the VAT implications. For housing associations, VAT is effectively an outright cost on developments made available for rent. If there is a change of intention, and a recharge is to be made with VAT, any VAT on costs incurred in making that recharge should be recoverable. However, it is important that in making that recharge, something is actually supplied to the benefit of that other party.

In the Community case, it was the benefit of the works and professional costs incurred to date which became a cost component of the supply, and therefore VAT was correctly recoverable. However, this will not always be the case, and care should be taken when making recharges with a view to recovering VAT on costs incurred.

VAT recovery on shared ownership developments

Have you ensured that you have made full VAT recovery on any shared ownership developments? This may sound obvious, but it is a point which is often overlooked, and once purchase invoices have passed through the accounts system, picking up the reclaimable VAT at a later date will be unlikely. The amounts on professional fees alone can be significant. This should be a relatively easy claim to put together, so if you would like further advice or assistance, please get in touch.

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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