We look at some of the key VAT issues and proposed changes that impact housing associations.
With continuing pressure to tackle the lack of social housing, and to maintain the current estate, VAT is an issue that housing associations cannot ignore. Despite extensive lobbying for the removal of the VAT charge for cladding repairs in the wake of Grenfell, VAT remains a significant burden on housing association finances.
As the provision of social housing by registered social landlords is an exempt activity, housing associations are subject to VAT partial exemption rules which unfortunately results in an the association suffering irrecoverable VAT. Like most partially exempt businesses, there are three key considerations when dealing with VAT.
- Should I be charged VAT?
This first point is common sense. If you are not charged VAT in the first place, there is no need to worry if you are able to recover it. There are a number of areas where a housing association may be able to reduce the amount of VAT it incurs:
- There are certain reliefs that are available to charities and it is important that, where available, housing associations maximize the application of these reliefs;
- Housing associations have the ability to disapply an option to tax when acquiring land for development;
- The VAT on professional fees in relation to new build developments may be avoided depending upon the contractual route adopted;
- Where non-core activities are undertaken by a subsidiary company, VAT grouping may avoid irrecoverable VAT on cross charges;
- Where more than one housing association comes together to share costs; the application of the cost sharing exemption may minimize costs.
We can work with you to ensure that you are not incurring VAT unnecessarily.
2. How can I recover more of the VAT that has been correctly charged?
Once you have exhausted the available reliefs and VAT has been correctly charged to the housing association, the next step is to ensure that as much of this VAT as possible is recovered. Again there are a number of areas that housing associations should consider:
- Does your partial exemption and non-business calculation properly reflect the activities being undertaken?
- Where providing services to local authorities or government departments, is it better to categorize any income received as grant income or as consideration for a service?
- Although the right to buy ended in Scotland in 2016, does the opportunity still exist to benefit from additional recoveries arising from such sales?
We have extensive experience of advising housing associations on their partial exemption methodology to ensure the method accurately reflects their activities, maximizes the input tax recovery and is agreed with HM Revenue & Customs (“HMRC”). In addition, we have assisted clients to recategorize income streams in the most VAT efficient manner.
3. Are your VAT processes efficient and compliant?
As well as considering the VAT recovery position for the housing association, it is also necessary to ensure that the correct VAT position is applied to income sources. Some of the areas which require specific consideration include:
- Factoring to owner occupiers;
- Rental of commercial properties and garages;
- Energy generation and energy saving schemes;
- Provision of other welfare services.
We have significant experience of assisting with the design, implementation and testing of VAT reporting systems. We help our clients to put in place efficient processes to correctly account for VAT, which reflect the agreed partial exemption method and which make sure that VAT costs are not being unnecessarily incurred.
Finally, housing associations are not immune to the VAT changes taking place in 2019. Where the taxable turnover exceeds £85,000, the requirement to comply with Making Tax Digital for VAT from April 2019 will equally apply to housing associations. In addition, the introduction of the domestic reverse charge on construction services from 1 October 2019 will apply to any housing association that currently receives services under the construction industry scheme.
AAB’s Indirect Tax team has experience of assisting housing associations with the above issues and we can work with you to ensure that you fully understand and maximize your VAT position. For more information contact Alistair Duncan, Director, (firstname.lastname@example.org) or your usual AAB contact.
To find out more about Alistair and the VAT & Duty team, click here.