Canary wharf flats and offices

Do for-profit RPs get tax breaks?

Adam Cutler, Director, VAT
10/06/2019
Canary wharf flats and offices

It seems that every week recently there is news of another for-profit RP being created.

As discussed in Social Housing magazine, these are being created for three main reasons:

  • housebuilders deciding to set-up their own captive RP
  • build-to-rent specialists which need an in-house RP to access grants and/or fulfil planning obligations
  • investment vehicles attracted by the security of RP income models.

Whatever the reason, there are some that will question whether it is right that a for-profit company should have access to benefits originally intended for non-profit organisations.

So do these benefits enjoyed by for-profit RPs extend to beneficial tax treatments? The answer is a mixed bag. Most of the main tax breaks that non-profit RPs enjoy actually have nothing to do with their RP status.

Firstly, most (although certainly not all) non-profit RPs are accepted by HMRC as having charitable status. This includes community benefit societies which have adopted charitable rules as well as registered charities. These bodies do not pay corporation tax on their surpluses generated from investment activities (which includes property rental) or trading activities that fall within their primary charitable purposes (which normally covers development for shared ownership). As directors of charitable RPs will know, this status has to be monitored carefully. Many have had to set-up trading subsidiaries to undertake activities that would fall outside of their charitable objects, particularly development for open market sale.

Although there is no tax to save, charities are normally exempt from the requirements of the Construction Industry Scheme (CIS), which saves some paperwork. Charities can claim exemption from stamp duty land tax (SDLT) on property acquisitions, although only to the extent they will use the property for charitable purposes. Charities also benefit from some VAT reliefs, such as VAT-free advertising and works to make properties more accessible for disabled tenants – although getting suppliers to apply these VAT rules in practice is another matter. So clearly a for-profit RP will not enjoy any of these tax reliefs for charities.

However, the main VAT benefits that RPs enjoy are available to any residential property developer or investor. Residential rents and service charges are exempt from VAT regardless of the identity of the landlord.

Most costs of constructing new homes should be VAT-free, and some works to change the layout or thermal efficiency of buildings can be subject to only 5% VAT.

So what tax reliefs are available only to RPs (and RSLs in Scotland and Wales, and RHAs in Northern Ireland)?

If a traditional RP acquires land using some grant; from another RP, a housing action Trust or a local authority; or if the acquirer is a tenant-controlled RP, it is able to claim exemption from SDLT (still known as ‘RSL relief’). These rules were updated by the Housing and Regeneration Act 2008 so that a for-profit RP can also claim SDLT exemption where the purchase has some public subsidy.

From a VAT perspective, the unique opportunity open to RPs is when it is acquiring land for development where the vendor has exercised the option to tax and would normally have to charge 20% VAT. An RP can provide a certificate to the vendor confirming its status and intentions, and the sale becomes exempt from VAT. Converting non-residential buildings into residential use is also VAT-free when provided to an RP. With effect from 1 October 2019, it is proposed that certain energy saving works will be subject to 5% VAT when provided to an RP, but not to other landlords. All of these VAT reliefs are available to any organisation listed on the Regulator of Social Housing’s list that is not a local authority, so a for-profit RP will also benefit from these VAT reliefs.

Conclusion

If the government has decided that for-profit RPs should be given grant, it makes little point taking this away again in SDLT. As for the VAT benefits, most for-profit RPs are unlikely to avail themselves of them at the time being, as they will acquiring completed properties from associated companies or third parties rather than developing themselves. If for-profit RPs begin developing on a scale approaching some non-profit RPs, it will be interesting to see whether the government allows them to keep this favourable treatment.

This was first published in Social Housing magazine in May 2019.

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Adam Cutler
Adam Cutler
Director, VAT
London