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HMRC internal manual

VAT Government and Public Bodies

Other local authority activities: housing and community projects: housing stock transferred following improvement by a local authority

A registered social landlord (RSL) may agree to purchase housing stock on terms that require the transferring local authority to first undertake substantial works of refurbishment in order to upgrade the properties (see VATGPB8315). This is normally a contractual requirement upon the local authority.

The scale of the operation is often very large with thousands of residential units being passed to the RSL. It is impractical for the parties to enter into a piecemeal arrangement whereby a housing unit only passes to the RSL once the local authority has upgraded it. In any event it is more practical for the entire estate to pass to the RSL in a single transfer.

Consequently, what normally happens is that the housing passes to the RSL before it has been upgraded, but the local authority enters into a binding obligation to ensure that the necessary works are undertaken at its expense. The local authority can (subject to certain conditions) recover the VAT incurred on these works under section 33 (see VATGPB4000) despite the fact that the work is undertaken after the housing has been transferred.

Under the conditions:

  • the transfer contract must contain a clear obligation on the part of the local authority to carry out the works, or there must exist a suitable addendum or other document detailing this obligation
  • the scope and quantum of the works must have been agreed prior to the transfer and this information should form part of the contract
  • the scope of the works should only relate to Council tenants, common areas and the outside fabric for right to buy leaseholders or freeholders
  • the works in question must be supplied to the local authority who will have entered into one or more contracts for the works and paid consideration, and
  • from time to time the local authority will be expected to substantiate any VAT claims by providing a clear audit trail which links the VAT to the works required under the transfer contract.

So long as these conditions are met the local authority is entitled to recover the VAT charged on the works. This remains the case even if the parties have agreed to the RSL undertaking the works as building contractor and charging the local authority accordingly. This might arise where the RSL undertakes other works that are not the responsibility of the local authority in which case it may be commercially sensible for the RSL to undertake all the works.

The local authority cannot recover VAT on works that are the responsibility of the RSL, such as day-to-day repairs and maintenance, after the transfer has taken place.