Public & private

The Treasury recently delivered a final decision on the controversial corporation tax issues that arise from stock transfers to non-charitable registered social landlords that have VAT shelters (HT 7 May, page 14).

It reaffirmed the technical position consistently taken by the Inland Revenue – that non-charitable associations should not be able to offset the cost of repairs pending at the time of transfer against their rental income for corporation tax purposes.

By not using a VAT-efficient contract and therefore incurring an increased VAT cost, non-charitable RSLs who undertake large-scale voluntary transfer will effectively lose 15% of whatever they spend on such repairs.

The issue for policy-makers is the impact that a decision not to change the tax law will have on meeting the decent homes standard.

It will mean non-charitable RSLs will have significantly less cash available to spend on properties acquired by large-scale voluntary transfer than they had hoped, and this will affect their progress towards the standard.

It will also be even harder to make the sums add up for any negative-value transfers to these RSLs, although the ODPM's recent announcement may help in this regard.

If there is a tax disincentive for such RSLs to accept large-scale voluntary transfers, then some counterbalancing incentive may be necessary to maintain momentum.

The Treasury's decision appears to close the possibility of a solution through a change in tax law. If this cannot be revisited, the affected parties – RSLs, local authorities and the National Housing Federation – may look to find another way of redressing the balance.

For example, this might be by allowing transfers to take place at reduced values or with increased dowries, although this has its own implications.

Non-charitable RSLs will have much less cash to spend on trying to meet the decent homes standard

But what about non-charitable RSLs that have already entered VAT-efficient contracts with local authorities?

Each RSL will have its own projected tax profile. Some will not have a corporation tax liability for some years.

They will need to consider the financial impact of the Inland Revenue's view. They may wish to consider adopting charitable rules before a tax liability arises, but the consequences of becoming a charity also need to be assessed.

Others may have a corporation tax liability more immediately. Although they can consider the expected pattern of tax-deductible expenditure, it is unlikely that they will be able to alter the pattern of projected spend to reduce their corporation tax liability to any significant extent.

Another possibility sometimes considered is to reduce taxable profits by means of gift aid payments. Again, there are limitations on the extent gift aid can be relied on and it is rarely seen as a long-term strategy.

Another route is to explore varying parts of the contract with the local authority.

It remains the case that charitable RSLs and local authorities can still choose to enter contractual arrangements that will allow the RSL to suffer no net VAT cost on works identified at the time of the transfer. This allows them to maximise spending on meeting the decent homes standard.