 VAT change to put up cost of social housing new builds
4 July 2011: HM Revenue & Customs (HMRC) looks set to withdraw a long standing tax break for developers by the back door, warns PKF Accountants & business advisers.
Close examination of a draft update of HMRC’s guidance to the construction industry has revealed that its current policy of allowing design/architect’s costs to be provided VAT free, as part of an all in one ‘design and build’ contract to construct a zero-rated building, may be withdrawn. HMRC’s plans to apply VAT to the design element of these contracts will inevitably increase the cost of constructing new social housing, residential care homes and charity buildings. [See notes 1 and 2 below for a full explanation].
Hamid Ghafoor, Partner and national head of social housing at PKF, said: “This tiny amendment to HMRC’s manuals will have a massive impact on housing associations, care home operators and the voluntary sector. Introducing VAT to design costs could add £30 million per year to the overall cost of new builds for housing associations alone. Inevitably, this will translate into a reduction in the number and quality of new buildings constructed for the housing of vulnerable or less well off people.”
Jim Gempton, Director of VAT at PKF, said: “Not only does this change remove the VAT relief from regular users of design and build contracts, it limits the options of small developers who risk being forced by the current economic climate to rent out new houses originally built for outright sale. It may also force contractors to divulge the value of their design costs to their clients, which can be highly commercially sensitive information. “
“HMRC has yet to comment on the reasons behind its proposal, and we can only assume this comes from a policy rethink based on recent rulings in the European Courts. This doesn’t stack up as there is plenty of European case law to support the status quo – if the rules are changed in this way, a challenge in the courts seems inevitable.”
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For further information, please contact: Andy Konieczko, 020 7065 0537, andrew.konieczko@uk.pkf.com
Notes to Editors:
Construction work on new homes, charity buildings and ‘relevant residential’ buildings, such as care homes and student accommodation, is zero-rated. However, the services of designers, architects and other construction professionals working on these projects are normally subject to VAT at 20%. Until now it has been HMRC’s policy to allow those buying design and construction services on this type of building under a single ‘design and build’ contract to buy both together as a zero-rated package. This benefits developers who are not entitled to recover VAT on all their costs, such as housing associations, charities and residential care home operators.
If the policy is adopted, contractors will be forced to apportion their fees and charge VAT on the design element. Developers in the affected sectors estimate that the change will make 5-10% of their construction costs subject to VAT. At the new 20% VAT rate, a development of 20 properties costing £1 million to build will now cost the developer £10,000 - £20,000 more.
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