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HMRC internal manual

VAT Partial Exemption Guidance

HM Revenue & Customs
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Guidance for specific trade sectors: Housing associations: Registered Social Landlords (RSL)


Partial Exemption Guidance for the Housing Association Sector

Additional guidance has been written and compiled jointly by HM Revenue and Customs (HMRC) and the National Housing Federation, the Scottish Federation of Housing Associations and Community Housing Cymru and with the knowledge of the Northern Ireland Federation of Housing Associations. It is intended to help Housing Associations gain approval for a fair and reasonable partial exemption special method (PESM) with the minimum of cost and delay.

The additional guidance can be found on the HMRC website at HM Revenue & Customs: Partial Exemption Frameworks 

There are two other areas which also affect PE methods in the sector, namely shared ownership schemes and umbrella schemes.

Shared ownership schemes

Shared ownership schemes are arrangements whereby people who are unable to afford to buy a property outright, and who qualify for the scheme, are able to acquire the equity in a property from the RSL in stages. For each agreement there will be a shared ownership lease typically for a term of 99 - 125 years. This will provide for a premium to paid by the tenant for an initial proportion of the equity (between 25% and 75%) and rent to be paid in respect of the remainder. Further premiums may be paid subsequently for additional proportions of the equity, with a proportionate reduction in rent, until the tenant has acquired a 100% share. The lease may provide for a transfer of freehold title once this has been achieved.

Provided that… and… the lease will…
the shared ownership lease is the first grant of a major interest the RSL is the person constructing the lease will qualify for zero-rating under item 1, group 5, Schedule 8, VAT Act 1994.

A premium or first rental payment will be an acceptable consideration for the supply and full initial deduction of directly attributable input tax will be allowed (see V1-8A Construction and note 14 to group 5 of Schedule 8).

Accordingly, if the above conditions are met, input tax which may be incurred by the RSL on:

  • land purchased for shared ownership development (where the right to disapply an election to waive exemption has not been exercised);
  • professional and marketing fees used for the sale;
  • services relating to the construction

is attributable to the first payment under the grant and is therefore deductible in full.

Subsequent premiums and rental payments under the lease are consideration for exempt supplies. Input tax on any ongoing costs such as the administration of the collection of rents and service charges, or legal costs incurred in respect of further equity transfers, will thus be exempt input tax.

In the event that land is a capital item under regulation 113(b), any subsequent exempt supplies arising directly from the first grant (i.e. under the lease) are to be disregarded in determining the extent to which the use is determined in any interval under the scheme. Regulation 116(3) refers.

HAG agency schemes (“umbrella schemes”)

An example of an umbrella scheme is where a larger established RSL (the developer) acquires a freehold and constructs new dwellings on behalf of a smaller RSL (the client), which may not have the necessary experience or expertise to develop the property in its own right. The developer will draw on any Housing Corporation grants receivable by the client and will finance the remaining cost itself.

On completion of the development, the dwellings will be transferred to the client who will let them to their tenants. The total consideration will normally comprise the grants received and the developer’s costs plus any interest incurred by them on financing the development. (Note: as with any sales activity by RSL, inclusion of sale values is likely to distort a single pot outputs method). As a freehold sale and first grant of a major interest, the transfer will be zero-rated under Item 1, Group 5 of Schedule 8 to the VAT Act. Consequently the developer is able to deduct any input tax on costs incurred on the development.

If the client can’t pay on completion and the transfer is delayed, it may be that the client will find the tenants and set up the usual rental agreements with them but, as the developer still has the title in the property, who’s supplying what to whom in any intervening period between completion and transfer?

This really depends on the contracts and there will be differing outcomes in different cases. As a very broad brush approach, no adjustment will be necessary to input tax incurred by the developer provided that the scheme agreement between the developer and the client:

  • clearly sets out the intention to sell the property to the client; and
  • the property is let by the client as principal; and
  • any additional payments to the developer are truly no more than the recovery of additional interest/insurance because of the delay in the sale.

If these conditions are met the amounts in question can be regarded as further consideration for the zero-rated property sale.

These conditions will not always be present and therefore each case will need to be decided on its own merits. Not all contracts are the same and a developing RSL may enter into different arrangements with each of its clients. Examples are:

  • The client at all times has the freehold and thus no transfer is envisaged (the developer acted as a managing agent for the client). This is not really an umbrella scheme and the supply by the “developer” is one of arranging the works.
  • The final transfer is under an option to purchase (which may or may not go ahead, and it is thus possible that the developer could retain the property or sell it to a third party RSL.
  • The developer will be principal in respect of rents receivable during any delay period with the client acting as agent in collecting the rents. This gives rise to consideration being payable to the developer for exempt rentals to tenants and thus a clawback adjustment may be applicable. (However, if the contract limits the amount payable to the interest costs incurred by the developer due to the delay, then no consideration is attributable to the rental supplies by the developer).