This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our privacy statement for more information on the cookies we use and how to delete or block them.
Article:

Tax implications of COVID-19 for Social Housing

24 April 2020

As COVID-19 continues to impact people across the globe, your utmost priority will rightly be the health and wellbeing of your tenants and employees. While this should continue to remain a priority, there are also some implications for your housing association that need consideration, both in the short term and the longer term, to ensure the sustainability of your housing association and, ultimately, the wellbeing of your tenants.

We are seeing various issues begin to arise from COVID-19 that can have an impact on both the Corporation Tax and VAT position of housing groups – in particular, change of tenure and payment of accrued qualifying charitable donations by subsidiaries that have fallen into negative reserves. We have outlined below some of the key areas for consideration and our interpretation of the impact at 22 April 2020. As with all things COVID-19 related, this is a fast moving area, so this article will be updated periodically as relevant guidance, experience and best practice emerges.

There are also some issues arising from COVID-19 that may impact on your ability to prepare accounts and audit reports, which are outlined in our other COVID-19 article here.

The below is not meant to be an exhaustive list, but highlights the key areas we are already discussing with clients, other advisors and regulators, both within the housing sector and outside of it.

We are also aware that keeping up to date with the latest developments may be more of a challenge for in-house tax managers under current circumstances, with less face to face time with external advisors and the absence of physical seminars. So, in order to help with this, we are running a number of webinars over the coming weeks to keep you up to date. Details will be published on our COVID-19 hub, which brings together information around the impact of COVID-19 and the current support available in managing this, and is being updated as the situation evolves.

If you would like to discuss any of these matters further in relation to your own housing association, please contact us.

AREA 

ISSUE

TAX IMPLICATION

Change of tenure

As a result of the slow house sale conditions caused by COVID-19, many housing associations are considering switching developed properties from ‘sale’ to ‘rent’ in order to improve cashflow in the short-to-medium term. 

 

 

There are potential Corporation Tax issues arising from the appropriation of properties to/from stock and from the sale of properties to subsidiaries, all of which can constitute chargeable disposals and may therefore give rise to a Corporation Tax liability.

Where a change of tenure and/or transfer of properties to a subsidiary is being considered, contemporaneous documentation evidencing the following will be of the utmost importance in order to defend against potential challenges from HMRC:

  • the point at which the intention to change tenure crystallised
  • the values at which properties to be transferred within the group are to pass.

For VAT purposes, the change from outright sale to rent is a change from a taxable intention to an exempt one.

This can result in the repayment of some, or all, of input tax previously recovered and will need to be considered and quantified as part of the business case.

Losses

Managing losses in charitable groups can give rise to a number of Corporation Tax issues if not handled correctly.

Where losses are surrendered for group relief without payment, a mismatch between accounting and tax losses may result. This can have an impact on future qualifying charitable donations (QCDs), and may ultimately mean that subsidiaries are unable to fully offset the taxable profits of future periods by way of donation.

Where one subsidiary surrenders losses to another on a £-for-£ basis, any excess over and above the tax value of the surrendered loss may be viewed as a distribution to the parent - meaning that sufficient distributable reserves will need to be available to fund the payment.

Funding of subsidiaries

Some commercial subsidiaries of housing associations are seeing a fall in profits, so additional funding is being provided by the parent association.

Funding of troubled subsidiaries by a charitable parent – whether via loan or share issue – must be considered carefully in the context of the approved charitable investment (ACI) rules.

Any investment in a subsidiary that is not made on commercial terms and/or does not generate an acceptable financial return for the charity risks failing to qualify as an ACI. In which case, the charity will suffer a Corporation Tax liability on an amount of otherwise exempt income, equal to the amount of the investment.

Extra care should be taken over amounts owed by subsidiaries to their parents in respect of existing debts, management fees or services provided. Where these amounts remain unpaid over long periods of time, HMRC may take the view that they are in effect investments in the subsidiary, therefore, subject to the ACI rules.

Payment of QCDs

100% subsidiaries of charitable housing associations have nine months following the end of a given accounting period to donate away the taxable profits of that accounting period to their parent. All donations must be made in cash from available distributable reserves at the point at which the payment is made (rather than the balance sheet date).

 

 

If, by the time an accrued QCD is paid, the subsidiary has gone into a negative reserves position, the payment of the QCD could constitute an unlawful distribution. This would leave the subsidiary unable to donate away its taxable profit for the preceding accounting period, therefore, unable to mitigate its Corporation Tax liability for the period.

Timing of payments will need to be considered in light of any potential decrease in the profitability of commercial subsidiaries.

Corporate Interest Restriction (CIR)

Some housing associations are considering taking on additional lending in order to ease cashflow problems resulting from the impact of COVID-19. This could potentially increase the amount of finance interest payable outside the group, such that the group is brought into the CIR regime.

 

 

Where this is the case, the group will be required to comply with the additional reporting requirements under CIR and will also be subject to a restriction on the tax deductions available in respect of its interest payments.

CIR will need to be considered generally where additional external lending is to be taken on.

It should also be noted that where any lending is capitalised in the group (particularly on stock), there is the potential for complex interactions between the CIR rules and other aspects of the UK tax regime.

 VAT deferral

HMRC have granted an automatic option to defer payment for VAT that falls due between 20 March and 30 June. The deferred VAT must be paid by 31 March 2021.

 

VAT returns must still be submitted as normal.

Entities that are in a VAT payment position may want to take advantage of the deferral opportunity to improve cashflow.

Entities that are in a VAT repayment position should still expect to receive payment from HMRC as normal, although we recommend submitting the returns as quickly as possible.

 VAT on abortive costs

Many housing associations do not have a standardised procedure in place for treating the VAT on projects that were stopped before settling on a firm intention. 

If such costs are likely to increase, consideration should be given to deciding on a treatment.

If the costs are within a design and build subsidiary, consider whether these can be passed up to the housing association, and what the associated VAT treatment is.