Decision follows VAT ruling that threatens landlords with massive corporation tax bills
One of the UK's newest housing associations plans to become a charity after a row over tax that would have cost it £15m.

Maidstone Housing Trust, officially launched on Monday, is to become a charity because of the row over corporation tax for non-charitable associations that have VAT shelters.

The Inland Revenue has ruled that non-charitable transfer associations that have VAT shelters will no longer be able to offset the cost of repairs to some homes against corporation tax (HT 21 November 2003, page 14).

This could leave some of the UK's biggest landlords with multimillion-pound tax bills that dwarf the VAT savings. A growing number of associations are considering becoming charities to avoid the tax bills because the VAT shelter tax rule does not apply to charities and charities can obtain relief on both VAT and corporation tax. But there are disadvantages (see "Pros and Cons", below).

Maidstone will have incurred an estimated £750,000 in corporation tax in the six months between transfer and becoming a charity.

This will be paid for by savings from the VAT shelter: by becoming a charity, it will save £8m through the shelter in five years and will not be liable for corporation tax.

The remainder will be split 55%:45% between the association and council.

Bob Wilson, head of finance policy at the National Housing Federation, said the tax row was forcing associations to accept the extra restrictions of charitable status. "Organisations are being pushed down a route they cannot come back from," he said.

"It's restrictive and under [the NHF's rebranding project for social housing], we are looking at our members being able to do more things and having more flexibility with more freedom."

Peter Stringer, chief executive of Maidstone Housing Trust, said: "The board have agreed in principle to proceed with charitable status. We have commissioned [market researcher] Quest to do a tenant satisfaction survey to inform our charitable status application."

He said becoming a charity would not affect the promises the trust made to tenants when it transferred because gains from the VAT shelter had not been expected to deliver these services.

However additional work such as proposed developments on old garage sites would be impeded.

The Inland Revenue is talking to ODPM, the National Housing Federation and accountant KPMG, which designed the VAT shelters.

If the Revenue backs down in the next six months, Maidstone will not become a charity.

Meanwhile, the NHF is briefing the ODPM select committee on the potential consequences of the VAT shelter row.

The pros and cons of becoming a charity

Pros
  • Those with VAT shelters not liable for corporation tax
  • Tenants might like the extra regulation of the association and responsibilities for board members
Cons
  • Overseen by the Charity Commission as well as the Housing Corporation
  • Obliged to stick to a stated charitable purpose, potentially restricting to whom the association can let property
  • Barred from commercial activities, like renting at market rates, unless it fits with the association’s stated charitable purpose or is done through a non-charitable subsidiary
  • Charitable housing association board members have a greater degree of liability than their non-charitable counterparts. This could make it harder to attract board members