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Mergers and tax: ‘Help my housing group is huge!’

Adam Cutler, Director, VAT and Customs Duty services
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Housing organisation mergers can lead to a bloated corporate group. As seen in Social Housing’s series on merger considerations, Adam Cutler discusses some of the practical tax issues that can emerge in the post-event tidy-up.

A common feature of mergers is that you end up with a corporate group with an unwieldy number of organisations. There is usually a drive to rationalise a new group quickly, but this needs to be done carefully otherwise some very expensive tax costs can arise.

If consolidation requires properties to be moved between entities, this can have unexpected tax consequences. Sales of new homes are only zero-rated for VAT purposes if the same organisation that developed them then sells them. HMRC’s concessions on cladding remediation are only available where works are provided to the original landlord. If a property moves from a charity to a non-charity there can be a clawback of Stamp Duty Land Tax (SDLT) and VAT reliefs. Moving entities around the group also needs to be done with care. Most registered providers are incorporated as community benefit societies. These are not treated the same as companies for SDLT and capital gains grouping rules.

Moving where an organisation sits within the corporate ‘family tree’ can lead to it leaving its group, which may mean a clawback of reliefs previously claimed.

If there will be charges between group companies, this can create an unnecessary VAT cost. It is likely to be beneficial for most entities to be part of a single group registration for VAT so that they are treated as effectively one company for VAT purposes. If two entities are amalgamating, a new VAT registration may be necessary. While there are lots of permutations here, all of them require a lot of form-filling. HMRC’s time limits are very short here: two housing groups that merged on 1 April and wanted to become a single VAT group from this date would only have until 30 April to apply to HMRC. With so many other things to deal with, this can easily be missed.

Additionally, refreshing any agreements with HMRC should not be delayed. Two housing associations may have agreed partial exemption special methods to deal with their VAT recovery with HMRC, which worked well for them individually, but neither of these provide a workable solution for the merged group. Similar remarks apply to any PAYE settlement agreements with HMRC for staff benefits. Even if an agreement with HMRC does seem work, do not assume that it carries on automatically if there is a change of tax reference or new organisations are added to the agreed policy.

If two larger housing groups merge, they may find themselves with subsidiaries that duplicate activities. The most common scenario is probably design-and-build companies, which are acting as lead contractor on the development of new homes. The simplest course of action in this scenario is to make it very clear to the developments team that only one of these will be used for all projects in the future. 

It may be possible to novate some projects in progress from the surplus subsidiary, but it can take several years before this can be fully closed down. Even once a development has been completed, you may need to keep this company in place for several years while snagging retention periods and other warranties run their course.

Well before a merger takes place, a lot of thought should have been given to which organisation will employ staff and how reward policies will be consolidated. HMRC will also need to be contacted regarding PAYE schemes (opening and/or closing) as well as associated issues such as PAYE Settlement Agreements. Equalising pay and conditions needs to be considered on a post-tax basis, taking into account not just salary but also pension rights and other benefits.

Having said all of the above, mergers should provide an opportunity for tax savings. Generally, overall VAT recovery is greater in one large organisation compared with two smaller ones. Design-and-build companies and non-charitable subsidiaries may not have been viable given the development pipelines of the two previous entities, but are for the merged group. If the parties were previously working together in a cost sharing group, they can now create a VAT group instead, which is much simpler to operate. It may be viable for the merged group to employ someone to do something they previously each had to outsource, saving VAT as well as the supplier’s profit margin. If nothing else, there should be cost savings arising from fewer tax returns to prepare.

In a merger, organisations will rightly prioritise ensuring that delivery of essential services will continue seamlessly. Tax will, and should, be well down the list of priorities. However, compliance deadlines can come up very quickly – some within a matter of days after the merger – and the earlier you can address these the better.

This article first appeared in Social Housing magazine.

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Adam Cutler
Adam Cutler
Director, VAT and Customs Duty Services