What does Rent to Buy mean from a VAT perspective?

Rent to Buy helps tenants in England save for a deposit to buy a home by offering properties at a discounted rate – this is normally 20% below market rent.

The scheme is available in England, apart from London. Properties in London are covered by a separate scheme called London Living Rent.

The main features of the scheme are that:

• Organisations must be Registered Providers with the Regulator of Social Housing to own and/or manage Rent to Buy homes.
• The tenant must be eligible for Rent to Buy.
• The properties will be let at a discounted rent, for a period of up to five years, during which it is expected that tenants will save for the deposit to purchase their home.
• The registered provider will receive grant funding to cover the level of discount provided to the tenant.
• After the initial letting period, the Registered Provider can continue to offer the property as Rent to Buy, sell the home on an outright basis with the tenant being given the right of first refusal; or retain and convert the property as rented housing on either an affordable or market rent basis. A property purchase under Shared Ownership is also permitted under the scheme.

What does this mean from a VAT perspective?

For VAT purposes, the first grant in a major interest (freehold sale of lease exceeding 21 years) in residential property by a person constructing is taxable at the zero-rate. As such, there may be an opportunity for Registered Providers to recover input tax incurred on costs in relation to Rent to Buy properties (such as professional fees). This follows the principles set out in the High Court case of Briararch Limited and Curtis Henderson Limited which established that where a business had an underlying intention to make a taxable supply, any input tax incurred should be apportioned to take account of future supplies with a right to input tax deduction.

For example, if a Registered Provider lets a Rent to Buy property for five years, with the underlying intention to sell it, assuming that the Registered Provider has not recovered any input tax on associated costs on the basis that it is generating VAT exempt rental income, there is an argument that a proportion of the input tax incurred on associated costs could be recoverable in accordance with the taxable use of the property over a period. Equally, if the Registered Provider has sought to recover in full any input tax incurred on associated costs on the basis that it intends to make a taxable supply, this may be subject to challenge by HMRC given the initial VAT exempt rental period.

In addition, we understand that Registered Providers partaking in the scheme receive grant income to cover the discounted market rent i.e – the shortfall of 20% on these properties. Following the principles set out in the case of Keeping Newcastle Warm, it was held that there is a difference between a global subsidy, paid to cover general operating costs, and a subsidy granted by a donor to the recipient to enable a third party to obtain a specific service – or obtain it more cheaply. Therefore, under Rent to Buy, it could be argued that the payment of the grant to cover the shortfall forms part of the consideration for the initial letting period and is granted by way of third party consideration which would be exempt from VAT (rather than outside the scope as grant income). 

We would recommend that Registered Providers review their position to determine whether the payment of grant has been treated as outside the scope of VAT (rather than as further consideration attributable to the initial VAT exempt letting period) as this may have resulted in an over recovery of residual input tax if this exempt income has been excluded from the partial exemption calculation.

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.