This is an arrangement that, by changing the structure of the transfer and the contractual terms, allows the VAT on the post-transfer improvement works to be recovered. Without such an arrangement the VAT incurred by the registered social landlord in undertaking the works is irrecoverable and increases the cost of those works by 17.5%.
The VAT shelter essentially involves the council retaining responsibility to undertake specified improvement works to dwellings and the registered social landlord paying a price for their transfer that reflects their improved state.
Successfully implementing the VAT shelter is, however, not something that can be taken for granted. There are hurdles that both the council and the landlord have to get over before all the risks can be managed and the cost savings achieved. Both parties have to reach agreement with Customs & Excise.
However, these issues can be managed. St Edmundsbury BC recently became the first council to successfully implement the VAT shelter, and others have followed including the transfer by Knowsley MBC. Both reduced the VAT cost of the post-transfer works by millions. Any council considering a housing transfer, whether whole or partial, should be investigating whether it can reduce the VAT cost in the same way.
Director of local government VAT services, PricewaterhouseCoopers