The ‘Golden Brick’ in a changing world: VAT on Modular and Timber Frame Housing

'Modular Housing’ is the buzzword of the day. No longer does it hark back to the pre-fab days of old. Instead, it is increasingly being seen as a high quality, precision-engineered solution to many of the construction industry’s problems. As part of this trend, we are seeing contract structures changing, to keep up with the practicalities of off-site/partial off-site construction.

One of the key considerations is VAT. The sale of land for residential buildings is generally VAT exempt. Whilst this is designed to help make land available for development, it often means that developers aren’t able to recover related VAT costs. They therefore often make VAT options to allow VAT to be charged on their sale of land, in order to reclaim the costs incurred on a development. However, this is problematic for housing association purchasers, who are unable to recover VAT on the purchase price.Transactions are therefore structured to allow for the sale of land to be zero-rated (i.e. it is a VATable supply, but VAT is charged at 0%). This is known as the ‘golden brick’ rule. To benefit from the zero-rating, the sale of land can be made once the building has been constructed to golden brick stage i.e. the first (golden) brick has been laid upon the building’s foundations. But how does it work if you’re building the house off-site…or aren’t even using actual bricks…?The ability to zero-rate at golden brick stage for modular home construction will depend on how the modular construction is carried out (for example, to what extent there is a podium style foundation which can be seen above ground level). There are various possibilities, some of which are set out below to illustrate how the analysis is different depending on the facts.Foundations in firstIf the foundation (including the parts of the foundation onto which the finished home will be attached) has been built but does not come up above ground level, and the construction of the home off-site has not yet taken place, then this is unlikely to satisfy the golden brick test that has been established by the courts. This is because, in order for a building to be considered to be “in the course of construction”, you must be able to see evidence of it.Foundations at the same time as house construction Regardless of the way the foundation has been built, where the home has been built off-site at the same time as the foundations have been constructed and will be brought on to the site shortly thereafter, it is probably wise that the sale takes place after the home has been fitted onto the foundation to ensure that the parties are able to zero-rate the transaction.Foundations above ground levelIf the foundation does come above ground level and there will be a significant delay between completion of the foundation and the home being attached to it, it will depend on the specifics of the foundation and the extent to which it comes above ground level as to whether the golden brick test is satisfied. It may be prudent to wait until the home is completed and brought on site in order to zero-rate the sale, but this may of course have cash-flow consequences for developers.Timber framesThe position is slightly different for timber-frame homes. Here, it is possible to build the foundation and then have a layer above ground level before the remainder of the house is built. In any case, clearly there will be a point when parts of the frames have been attached to the foundation where it becomes clear that the construction has gone beyond foundation level. Therefore, at such point, this should satisfy the golden brick test of a building being clearly under construction.The test does not require actual bricks to be used, but instead places emphasis on the fact that a building is in the course of construction. Unlike modular homes, the timber frames are built onsite and so it is a matter of completing the sale when the first set of frames above ground level have been attached to the foundations.To summarise, a well-advised developer should ensure that the precise ‘Golden Brick’ works status is incorporated into the contract, as the physical state of the construction works ultimately determines the ability to zero-rate the sale.Please get in touch with our Residential Development team if you would like to discuss anything mentioned in this blog.