Design and build companies for VAT purposes: the importance of getting it right

As development activity continues to increase, we have also seen an increase in activity by HM Revenue and Customs (HMRC). Prior to releasing VAT refunds to design and build companies, HMRC have been carrying out a number of validations checks, which if not handled correctly, can quickly turn into a detailed review of arrangements, lengthy correspondence and ultimately a denial of a VAT claim. We have summarised some of the key issues and areas that must be considered.


For housing associations that develop new homes for rent, the VAT charged on the professional services of architects, surveyors, consultants and supervisors can represent an extra financial burden. These services are excluded from the zero rate of VAT applied to construction services and as the VAT charged relates to an onward VAT exempt supply, it cannot normally be recovered. 

To mitigate this, some housing associations undertake an arrangement whereby they set up a separately VAT registered design and build company. The design and build company then purchases the professional services and construction services, and incorporates them into a single onward supply of design and build services to the housing association. These services can then in principle be zero rated as the predominant supply is the construction of new dwellings, meaning that the housing association reduces its exposure to irrecoverable input tax. The design and build company can recover the VAT incurred on professional fees, as it relates to its onward taxable supply.

Sound business principles

This is a recognised and accepted arrangement by HMRC, however, it is important to ensure that it is implemented effectively. Fundamentally, the arrangement should be structured on sound business principles, and HMRC has shown it is ready to challenge arrangements that fall short. Most notably, in a 2016 judgment, a housing association lost an appeal after the tribunal found that it had effectively not been making taxable supplies, whilst a 2009 High Court decision involving another housing association prompted a HMRC briefing that reasserted the need for basic VAT principles of supply and consideration to be met. It added that ‘the mere raising of funds between companies does not automatically create supplies. Careful analysis may be called for, especially if the companies are closely associated.’

Thus for design and build subsidiaries of housing associations the key features of the relationship should ensure the following:

  • Contracts and related instructions are in place between parties.
  • Invoices are raised and income received.
  • A profit is made – at arm’s length arrangements.
  • Statutory accounts reflect the transactions.

The design and build company is effectively required to act in a commercial manner and should understand the costs that it has incurred on a project it is involved in delivering.

Key transactions

In terms of the arrangement as a whole, the following needs to be considered:

  • Any costs and overheads incurred by the housing association in administering tasks that are the responsibility of the design and build company would need to be recharged by the housing association to the design and build company. To mitigate corporation tax for the housing association, one option to consider would be to do this at cost with no profit element under a Cost Sharing Agreement. This management charge would be subject to VAT where applicable.
  • The design and build company would incur professional fees, including VAT, along with construction services of building new homes from building contractors (zero-rated). Usually, cashflow is not an issue providing that the housing association is on shorter payment terms than the payment terms between the design and build company and the external suppliers. If loan facilities are required for the design and build company by the housing association, legal advice should be sought and the terms considered in relation to demonstrating the arm’s length relationship. If the housing association making the loan is a charity, the loan arrangement is likely to require approval by HMRC.
  • The design and build company combines the above costs, and supplies them to the housing association as part of a single package of zero-rated design and build services. The design and build company would usually apply a percentage mark up to its charges. Gift aid legislation and other reliefs can enable the design and build company to mitigate corporation tax.

It is important to note that we have occasionally seen HMRC officers challenge the basis for zero-rating of services provided by a design and build company, if they were provided before planning permission for the scheme in question was granted. This seems a particular issue for HMRC if the scheme is later aborted. The timings of the design and build arrangement require careful planning. 


Failure to maintain the operational integrity of the design and build model can result in disputes as these arrangements are regularly scrutinised by HMRC. If housing associations are considering setting up a design and build company or already have one in place, we would strongly recommend that the arrangements between the parties are robust. This can be achieved through regular review of the arrangements and provision of regular training to key staff members and the board to ensure that the correct processes and controls are in place.

Please get in contact Daniel Guy or Audrey Fearing if you wish to talk through your arrangements and explore whether there are any particular risks or concerns.


RSM is a leading provider of audit, tax and consulting services, with around 3,800 partners and staff in the UK. We're working with our tax advisors RSM to help shape government policy on taxation as it affects the sector and to keep housing associations informed of key issues.

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Who to speak to

Adam Gravely, Finance Policy Officer