The government consultation on expanding VAT zero rating for social housing is a welcome development and, if implemented properly, should be a boost for both developers and RSLs. But, in our view, the current proposals do not go far enough and there are easier wins that the government could pick up.
Introduction: The Problem with VAT
On 23 June 2026, the UK Government introduced a much-awaited consultation on extending VAT zero rating to the acquisition of land by RSLs for social housing.
The VAT issues around social housing are well known: to recover VAT on your costs, you need to charge VAT to your customers. But registered providers of social housing / registered social landlords (from now on I will just refer to RSLs as including both) cannot. The main supply they make is letting housing to occupiers, which is invariably exempt from VAT. This mismatch causes tension in social housing developments.
Typically, these developments have three parties: the Landowner, who sells the land to the Developer; the Developer, who normally buys the site and sells it to the RSL; and the RSL, who buys the site and then employs the Developer under a funding agreement to build the housing. Most landowners with development sites are now opting to tax them, i.e. they have elected to remove the default VAT exemption on land they own. This means that they charge VAT on the land sale to the Developer but can recover VAT on their own costs. The Developer then has a conundrum: if they opt to tax, the Developer gets their VAT back, but the RSL has to pay VAT which they cannot recover; if they do not and make an exempt sale, the Developer cannot recover their own VAT. Either way, that VAT becomes a sticking cost.
The statutory toolkit for dealing with this problem is pretty bare, and the tools are rusty. Anyone can disapply an option to tax over property they buy to convert to dwellings (convert here has a special VAT meaning); RSLs can also disapply an option to tax on land on which they intend to construct dwellings. Neither method is infallible (the disapplication power isn’t unilateral once the price has been agreed), and neither is a proper fix: all it does is push irrecoverable VAT on to the Developer.
Market practice is usually to fix this with zero rating: the ability of a seller to charge VAT at 0%, meaning they can recover their VAT without passing a VAT cost on to the buyer. The parties can adopt a complex transaction structure which carries higher legal costs, takes time and may incur land taxes (SDLT, LBTT or LTT depending on where the land is) or the Developer can sell the land at “Golden Brick”. Golden Brick is the point when the land is sufficiently developed that it is recognised as buildings rather than bare land. Traditionally, this is the point when the first bricks above foundation level are laid, though different approaches apply to different methods of construction. This works because a sale of buildings which are dwellings by the person constructing them is zero rated.
If zero rating doesn’t work then the parties have to manage the hit as best they can, for example, by reducing the land price and charging VAT to spread the pain.
The Problem with Golden Brick
It is increasingly non-viable.
To progress a site to golden brick, the Developer needs to: clear the site (and maybe demolish existing buildings), carry out any necessary remediation, install whatever site infrastructure and access is needed, dig the foundation plots, install the foundations and build above them. In a multi-development site, each individual building must be at golden brick for the zero rating to apply. Often, achieving golden brick is the most cost-intensive stage of a development.
These works need to be funded, but most RSLs cannot draw down their grant funding until they actually own the land. So, the Developer typically needs to fund the works from working capital or take out short-term financing.
This has a number of negative implications. Where the site needs heavy works such as brownfield sites, the works cost may be prohibitive and social housing falls off the table. The need to manage working capital means that many developers can only progress golden brick projects in tranches — progressing several units, selling them, and then moving on to the next lot. This bottlenecks the supply of affordable housing land. Additional compliance is needed to track each unit in the development. For more modern methods of construction, parties can disagree on when golden brick is actually reached, and taking a conservative position loads more costs on to the Developer. Smaller developers without access to capital or lending are effectively pushed out of the market.
There are other costs too. If the developer has to partly build a site out before selling it on, then they cannot claim sub-sale relief (SSDR in Scotland, Pre-Completion Transaction Relief everywhere else) from the relevant land taxes.
Somehow a social housing development winds up looking more costly than a commercial project or general house building.
The Proposed Solution
The government proposes to resolve this tension by allowing the sale of bare land to an RSL intending to construct social housing to be zero rated.
This is a great idea. In simple cases, it means that the need for Golden Brick, complex structures or horse-trading over costs falls away: the Developer can zero rate the sale of the bare land without doing any work. The Developer gets their VAT back without passing the problem to the RSL. They can probably claim sub-sale relief. There is no need to find funding for the Golden Brick works. The only losers are the humble tax lawyers, and we shan’t shed them a tear.
But for anything which isn’t simple, bare land, this proposal falls short.
Bare Land?
By restricting zero rating to bare land, more complex sites are excluded. For example, brownfield and ex-industrial sites are likely excluded meaning that the Developer still needs to fund and carry out the clearance and/or remediation works first. They also lose access to land tax reliefs since they would have a period of land ownership before they could make the onward sale. Likewise, existing buildings which may be converted to housing would be ineligible for zero rating.
In the best-case scenario, the “Golden Brick” problem still exists in many cases. In the worst, certain types of land become economically ineligible for social housing. In Scotland, this would be deeply problematic. The Scottish Government has prioritised developing brownfield land, as well as building more city-centre social housing by converting existing stock. By confining the zero rate to bare land, the government risks frustrating these objectives.
It is also at odds with the existing law, which allows a RSL to disapply an option to tax over any land for construction and conversion.
In our view, the restriction to bare land should go.
Construction?
A similar issue arises if the new zero rate is only for land intended for the construction of new dwellings. Existing buildings which may be converted become problematic and, potentially, non-viable for social housing.
This shouldn’t be the case. In many cases, conversion may be more cost-effective, can preserve historic buildings, and can allow social housing to be built much closer to urban centres and the places where most jobs actually are.
The oddness of the restriction is compounded by the fact that RSLs benefit from special rules allowing them to zero rate the actual conversion works (anyone else pays VAT at 5%). So, under the proposal as it stands, the land acquisition bears VAT but the actual development does not.
This makes little sense from a policy perspective, let alone as a consistent piece of VAT legislation. The answer is simple: zero rating should not be restricted to construction works.
Remediation?
The VAT status of remediation works is less clear, but the question to be asked is: if an RSL acquires a site needing remediation works, can they zero rate that cost? At the moment the legal answer is “it depends”. There is no explicit provision in the VAT Act zero rating the remediation of land for housebuilding purposes. Zero rating may be available where the works are procured in the “course of construction of dwellings”. This presents practical and theoretical issues. When does construction start? What if there are delays between remediation and building? Technically, it means that planning permission for the dwellings needs to have been granted before the remediation can begin.
In our view, there is a strong case for extending zero rating to remediation services procured by an RSL as well.
Conclusion
If the plan is to simplify social housing transactions, and facilitate greater supply, the government’s proposal is a great start. This would be an important change to a VAT regime which doesn’t properly reflect the social housing market operating within it. It would simplify some transactions and speed up developments, and this is to be welcomed.
But, as proposed, it could also backfire by making some parcels of land less viable by comparison. This would be a retrograde step when we are actively looking to recommission existing buildings and develop out brownfield sites. It also risks keeping smaller developers priced out.
If the UK Government is serious about supporting the social housing market, it shouldn’t just pass the proposed amendments, it needs to go further and make the new rules wider.
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