QIA | December 19, 2023

A walk down the Golden Brick road – VAT, Golden Brick and modern methods of construction

Golden Brick is a mechanism which allows a developer of a new build residential property to sell a partly-constructed building and for the sale to be treated as a zero-rated supply. This will be beneficial to both the developer (where there is input tax payable by them that they would be able to recover) and the buyer.

Registered providers (“RPs”) often use Golden Brick to purchase development sites for the construction of affordable housing. This includes housing associations who are generally unable to recover VAT. HMRC have produced helpful guidance concerning the VAT treatment of deposits in relation to such transactions, where timing is key.

Such a transaction will only be zero-rated where the construction of the dwelling has commenced and has “progressed” beyond Golden Brick.

What is “Golden Brick”?

For the so-called Golden Brick to exist, it is generally considered that the foundations of the property need to have been laid and something more, which in traditional terms is the first course of bricks. This means that the building needs to be under construction, and (as has been considered by the First-tier Tribunal (Tax Chamber)) until walls are under construction, the building itself is not yet under construction – despite the presence of foundations.

But how does this work where there are in fact no actual bricks used in the construction? For example, a multi-storey construction which is erected using steel beams and concrete, or glass walls instead of traditional brick walls. At what point can it be said that the building is under construction?

Modern methods of construction (“MMC”)

The position is even more unclear where modular construction is used with, for example, prefabricated buildings being assembled. In the case of MMC the various parts of a building can be produced off-site and assembled on-site over a day or so.

HMRC’s published guidance to-date, does not offer much assistance. It merely refers to construction “beyond foundation level”. From this it seems clear that as far as HMRC is concerned you must do more than prepare the foundations of the property or simply excavate the foundation trenches. However, HMRC are known to be looking at MMC with a view to considering how Golden Brick should operate in relation to them.

Until HMRC form (and share) any revised view (which is likely to take some time) you must look at the residential property that is under construction – what it is going to be made of and at what point is it right to say it is under construction?

Curiously, there is no binding authority setting out a requirement for the existence of a Golden Brick, having only been considered by the First-tier Tribunal and the VAT and Duties Tribunal going as far back as 1983. The earliest of those cases (which is the lead case on Golden Brick) concerned foundation trenches where concrete had not been poured. Here the Tribunal considered (probably rightly) that construction was not underway on the facts of that case. However, subsequent Tribunal cases rely on it as an example decision that bricks are required above foundation level for a dwelling to be in the course of construction – and that is not the case. In theory this creates sufficient headroom for HMRC to take a pragmatic view in relation to MMC and for that view not to upset existing case decisions. It also means that a brave developer might be prepared to take a commercial view on the point.

Hopefully HMRC will clarify their position soon to remove uncertainty from the market; one would like to think that the existing shortage of housing stock is a great incentive to do so.