What is “golden brick”?
“Golden Brick” is a mechanism which enables a developer to complete a sale of VAT elected land to a Registered Provider (RP) before practical completion of the affordable housing dwellings and for that sale to be treated as a zero- rated supply for VAT purposes rather than a standard rated supply.
Why is it needed?
It’s usual for planning permission for new residential developments to be granted subject to an obligation to provide a certain percentage of those new residential dwellings as affordable housing.
Affordable housing is housing which is provided to people who are struggling with housing costs and whose needs are not met by the open market. It can take different forms:
- social rented housing
- affordable rented housing
- intermediate housing.
Whatever form it takes, it is always provided at a price below market rate by either local planning authorities or RPs and a significant proportion of it is delivered through the planning system by private developers selling to RPs.
It’s important to note that:
- A developer acquiring a development site will usually opt to tax in respect of the site so that it can recover input VAT incurred on, for example acquisition costs, construction costs and professional fees;
- The sale of VAT elected bare land is a standard rated supply for VAT purposes;
- The sale of newly constructed domestic dwellings is a zero- rated supply for VAT purposes; and
- Most RPs cannot recover VAT.
Therefore, RPs are reluctant to buy VAT elected bare land as they would incur a VAT charge which they would be unable to subsequently recover. Consequently, affordable housing sales from a developer to an RP are structured as either:
- Turn-key projects where legal ownership of the dwellings is not transferred to the RP until they are practically complete; or
- Golden brick projects where legal ownership of the dwellings is transferred to the RP while the dwellings are still in the course of construction ie before practical completion once “golden brick” level has been achieved.
A golden brick project is a zero- rated supply for VAT purposes (even though the land is VAT elected). It has the advantage of improving the developer's cash flow during the project as the developer receives a substantial payment at golden brick and subsequent payments at various work stages post golden brick up to practical completion.
What constitutes “golden brick”?
There is no legislative definition of “golden Brick” but HMRC guidance states that for golden brick to be achieved a building must be " clearly under construction" and it is accepted that a building is being constructed when work has progressed above foundation level. In a traditional build scenario this is usually when walls begin to be constructed upon the foundations. When dealing with modern methods of construction (MMC) particular care needs to be taken to ensure that the specification of the relevant MMC product satisfies the rules to qualify for zero-rating.
Why is it important?
A significant proportion of affordable housing is delivered through the planning system by private developers selling to RPs and golden brick arrangements address the apparent VAT conflict between the developer and the RP. Such arrangements can be beneficial for both developer and RP. However, it is important to structure and document such transactions correctly to protect the interests of both developer and RP and to avoid either one of them falling foul of the HMRC rules.
