HMRC plans to close ‘design and build’ loophole often used by landlords
New VAT rule could cost sector £183m
Housing providers could be saddled with a tax bill of up to £183 million under VAT changes being drafted by HM Revenue and Customs.
HMRC has launched a consultation on changing the rules on value added tax on architects’ and surveyors’ fees for new build homes.
The proposals would call time on housing associations’ traditional practice of signing ‘design and build’ contracts with developers to avoid paying VAT at 20 per cent on design fees.
Instead it would mean contractors would have to charge VAT on design services. This means associations would have to pay levels of VAT as if they had contracted with the architects directly. Councils would not be affected as they can recover VAT.
Adam Cutler, senior manager for indirect taxes at auditor Deloitte, said the move would cost the sector around £1,500 per unit, based on average build costs. If applied to the 122,300 homes associations expect to build over the next four years, this would cost the sector £183 million, he added.
Mr Cutler said the proposal was an ‘unwelcome surprise’ for the sector.
He said: ‘If this will reduce the number of new homes you can provide, require you to increase rents, or even render certain developments completely unviable, this needs to be communicated too. The issue also affects charities, the education sector and others.’
The National Housing Federation was more cautious, estimating the impact will be £108 million - the equivalent of 2,600 affordable homes. The NHF said it was talking to HMRC about the validity of the proposed changes and will, with the help of auditor KPMG, propose a transitional relief period. The consultation ends on 8 July and the changes could come into effect next summer.
In a briefing note to NHF members, Joseph Carr, finance policy leader, said: ‘Given that housing associations are soon to sign up to four-year contracts with the Homes and Communities Agency, the timing of the VAT change is not only unwelcome but couldn’t have occurred at a worse possible time.’
Mick Kent, chief executive of 27,000-home association Bromford Group, which is currently working on proposals with two other associations to try to get a VAT exemption for shared services, said: ‘On the face of it this seems quite unhelpful, given everything else that is going on, although we have yet to crunch the figures and work out the full impact.’
Mr Kent said he would be taking advice from consultants and lawyers on how to mitigate any impact.
HMRC is considering changing the rules in a long-delayed response to a European Court of Justice ruling in 2006. Talacre Beach Caravan Sales, a caravan supplier, argued in vain that removable equipment inside the caravans should be VAT-free, the same as the caravan themselves.
An HMRC spokesperson said: ‘If we receive any representations that an alternative interpretation of either legislation or case law is possible, we will consider these with our lawyers.’