Millions in VAT windfall for transfers

Councils and RSLs will be able to recover the VAT they incur from carrying out repairs and improvements on transferred homes.

A DTLR letter sent to the Association of London Government, the Local Government Association, the National Housing Federation and the Audit Commission stated: “There is a procedure for mitigating the impact of the VAT on the transfer which Customs and Excise have confirmed is acceptable to them.”

It is understood HM Customs has given up its claim to the money, following representations to the DTLR led by consultant KPMG.

Under the new proposals, transferring council homes will constitute a “non-business activity” for local authorities.

Stock would be sold as if an agreed amount of repairs and improvements had already been carried out.

The council would then enter into an agreement that the new landlord will carry out those repairs on its behalf, meaning the town hall could then recover the VAT on behalf of the new landlord.

Currently, transfer prices are artificially inflated for levy purposes. The DTLR letter admits that this “unintentionally undermines the procedure as it does not differentiate between actual and notional capital receipts”.

But now the large-scale voluntary transfer levy’s September 1999 determination will be amended.

David Hall, executive director at consultant Hacas Chapman Hendy, said: “The current levy formula was a critical stumbling block to these VAT schemes.

“The proposed amendment could potentially be of benefit to both local authorities and new landlords embarking on stock transfer.”

Federation transfer projects director Stephen Duckworth (pictured), said: “It is good news that the DTLR and Customs and Excise have been able to reach agreement on a way to reduce the VAT burden on stock transfers.

“As local authorities can recover VAT on works to their housing, this helps to level the playing field, at least for transfers in their early stages.”