To be or not to be VAT is the question

You could be forgiven for not having noticed that the rate of value-added tax on the cost of repair and maintenance of social housing could be reduced from 17.5% to a lower rate, maybe even 5%.

The reason you might not know about this possible VAT reduction is that the announcement was buried in the government’s response in November 2004 to a report published by the ODPM in July 2004 entitled The Role of Historic Buildings in Urban Regeneration (HT 10 December, page 8). It was not expected that this exercise would affect registered social landlords in any significant way – councils are of course VAT exempt – but the response did make a small reference to social housing and VAT.

VAT represents an additional cost for registered social landlords and a rate reduction would therefore be a most welcome saving.

European Union member states, including the UK, are currently permitted to introduce VAT-reduced rates on a prescribed list of goods and services as specified in the European Community Sixth VAT Directive. The list includes a category for the “supply, construction, renovation and alteration of housing provided as part of a social policy”.

The government has used this to reduce the rate of VAT – from 17.5% to 5% – on expenditure such as residential conversions and the renovation of housing that has been empty for more than three years.

The EU Commission has, however, made proposals to amend the list to include the repair and maintenance of social housing. If that proposal is agreed, the government has stated that it will “examine the potential costs and benefits of applying a wider relief in the UK, focusing on those measures that offer the best-targeted and most efficient support for its key social objectives”.

So, a reduced rate of VAT on the cost of repair and maintenance of social housing may be on its way, but don’t hold your breath – the ways of the EU are long and complex.

While waiting to see what happens to the above proposal, it would be timely to outline some of the current rules for the zero and reduced rate (5%) of VAT as they affect RSLs.

For RSLs, the most well-known zero-rated cost is the construction of new dwellings (houses and flats). However, zero rating also applies to the conversion by an RSL of a non-residential building into a residential building or for certain types of communal residential use (known as “relevant residential” use – for instance, an old people’s home).

Zero rating applies to the conversion by an RSL of a non-residential building into a residential building or into an old people’s home

For other developers, the VAT rate is 17.5%. A “non-residential building” is carefully defined in the VAT legislation, but provided the conditions are met, this can clearly be a significant cost saving for RSLs.

The reduced rate of 5% VAT operates in a number of different ways to the possible advantage of RSLs. For example, if a building contains six single household dwellings and is altered so that it then contains nine such dwellings, or vice versa, the cost of the works is subject to VAT at 5%, not 17.5%.

A “single household dwelling” is, broadly, one that is designed for occupation by a single household and consists of self-contained living accommodation such as a flat in a block.

Care must be taken in applying the 5% rate to a block where the number of flats changes on some floors and not others, but again this can be a valuable cost saving for RSLs. Imagine a three-storey block with one flat per floor, for instance. If all flats were altered so that two flats remained on first and second floors, and one flat on the third floor, the 5% rate would only apply to works on the first and second floors.

The 5% rate can also apply in the context of conversions into multiple occupancy dwellings. A “multiple occupancy dwelling” is, broadly, one designed for occupation by people who don’t form a single household and consists of self-contained living accommodation. Temporary hostel accommodation would be an example of this.

If a building that does not contain any multiple occupancy dwellings is converted into one that does – and it is not intended to be used for a “relevant residential” purpose – the cost of the works is subject to VAT at 5%, not 17.5%. The reduced rate will apply if the original building contained single household dwellings, was wholly non-residential, or was a mix of non-residential and single household dwellings.

So there are already a number of potential VAT savings that can be relevant to RSLs. This should keep them warm during the months ahead while waiting for the “big one” – a reduced rate on the cost of repair and maintenance of social housing.