6  Value Added Tax

An essential feature of a non-HRA Project is that land is transferred to the private sector for development, in contrast with an HRA scheme where the land interest will remain with the Authority.  As a consequence of this difference in the holding of the land interest, there will be a significant difference in the VAT treatment of a non-HRA Project compared with that for an HRA scheme.

Where a local authority undertakes activities in pursuance of its statutory functions, for example the provision of social housing or care units, under special VAT provisions applicable only to local authorities, it will generally be able to recover the VAT it incurs in undertaking those activities.

Therefore, where a project consists of an HRA scheme and dwellings or care units are retained by the local authority, which acts as landlord to the tenants, the Authority is nonetheless entitled to recover from HMRC the VAT it incurs in undertaking these functions. For this reason, VAT is largely, if not wholly, recoverable for HRA projects.

However, the special VAT provisions which apply to local authorities do not apply to the private sector.  Within a non-HRA Project, where the private sector will receive the land interest and will develop the dwellings or care units and let them to tenants, the private sector party will make VAT exempt supplies in the form of the rents such that, subject to de minimis limits, it will not be entitled to recover the VAT which it incurs in making those exempt supplies.  Typically, this will result in the VAT incurred on construction and development services, on-going facilities management services and housing management services being non-recoverable.  VAT can therefore represent a substantial additional cost component for a non-HRA Project.

It may be possible to minimise the additional VAT costs presented by non-HRA Projects by carefully structuring arrangements and, in particular, the party to which the land is transferred.