Public & Private

Registered Social Landlords and Local authorities could face bigger VAT bills involving hundreds of thousands of pounds if a case referred to the European Court of Justice goes the government's way.

Historically, Customs & Excise has not objected to a special arrangement that has ensured that the differing VAT regimes applied to local authorities and RSLs do not adversely affect the transfer of housing under large-scale voluntary transfer. Now, even though it served both public and social housing sectors well, the arrangement could be challenged.

Under the scheme, the local authority continues to hold title to the housing while the RSL funds the refurbishment and often acts as the contractor. The council recovers VAT on the costs, and when the work is completed the property is transferred to the RSL.

The VAT savings, usually shared between the two parties, are immense. The recent transfer of housing from Herefordshire council to Herefordshire Housing, for example, identified VAT savings of £9m.

However, in 2001 Customs & Excise won what it considered to be a landmark decision in the VAT tribunal involving the Halifax Bank. The key finding was that if a VAT payer undertakes a transaction with no business or commercial rationale, but intended solely to avoid paying tax, it could be considered to be tax avoidance.

There must be sound business and commercial reasons for arranging things in a particular fashion

This ruling has been used by Excise to challenge a number of tax-efficient transactions in the private sector. As yet, similar arrangements in the public sector have not been as closely scrutinised. Is there one rule for the private sector and one for the public? Or are the arrangements between RSL and local authorities also tax avoidance as they are made primarily with VAT savings in mind?

Fortunately, the decision in the Halifax case is considered by many commentators to be flawed, and it has been referred to the European Court of Justice for its view.

The marriage of the VAT recoverability of local authorities and the finance-raising powers of the RSL has been fundamental to the success of regenerating social housing, and Customs & Excise has even given a strong steer towards this route being taken.

It will be some time before the position becomes clear, but it is unwise for local authorities and RSLs to rely on Excise to continue to smile favourably on the historical methods. Excise may be forced to act equally to both public and private sectors.