Q:
Hello Can anybody help me, As my house was under compulsory purchase order the council asked me if I wanted to buy one property owned by them. I accepted. The property needed refurbishment. Actual work took 12 weeks approx. but I was able to move in only 13 months later. That was because then the council informed me that they couldnt’ sell the house directly to me but they had to sell it to a Housing Association and we could buy it from them as this would have speeded up the whole process. As this turned out to be untrue ( the housing association merged with another association , we had to wait for them to register the property before starting legal procedure etc.). We started asking questions and found out that the council had sold the house to the H.A. as to avoid paying VAT and the HA had also received a grant of 1.6 m as this property was included in a scheme that was running in another part of the neighbourhood.
I’m aware that transferring stock to ha is quite common however I believed it couldn’t be done solely for the purpose of avoid paying vat and the Council had stated in many occasions that they were conducting a private treaty sale with us. ..Could somebody help as to what are the rules concerning vat and stock transfer… I also thought that the AH had to carry out the work ( the reason why the got a grant) but it turned out that it had been actually the council that carried out the work. … Any help would be deeply appreciated 🙂
A:
Hi
I can understand why you are confused, but I think that there is a legitimate reason for things being done the way you describe.
First of all, the normal VAT recovery rules state taht in order to recover VAT, you have to be carrying out a business activity which is TAXABLE, ie liable to VAT at 17.5%, 5% or 0%. If your supplies are exempt, you don’t charge VAT on the income (eg rental income) but you can’t recover the VAT on related costs.
Local councils are subject to certain special VAT rules which mean that they are allowed to recover VAT on certain non-business costs, including their statutory responsibilities such as care and welfare services, looking after the streets, and certain housing activities, including situations where they provide domestic accommodation to people seeking housing . Normally the sale or rent of refurbished homes is exempt from VAT and if it were a business activity, the council wouldn’t be able to recover VAT on the cost of the refurbishments.
The sale or lease of domestic accommodation by housing associations is a business activity when performed by housing associations (thus they are subject to the same rules as private landlords) and because it is exempt from VAT (ie VAT isn’t charged on the sale or rental income), the housing association can’t recover VAT on related costs.
It’s my understanding that local authorities are now required, by law, to dispose of most of their council house stock and housing associations have been given grants to purchase the properties concerned. However because councils are allowed to recover VAT on refurbishment costs under their special VAT rules, it makes sense for them to carry out the refurbishment work before the sale so that the housing association doesn’t have to bear the cost of the VAT on the cost of the refurbishments.
So it seems that the way that things have happened in your case are probably perfectly legal from a VAT perspective and I hope this helps clarify things for you
Marie