Social housing
Delivering new social housing presents difficult challenges with VAT being one of these.
As a means of addressing the VAT concern, last year’s Budget announced the introduction of a new zero rate for land intended for the construction of social housing across the UK. Currently, an option to tax is disapplied against the sale of land to a registered social housing provider for the construction of social housing and is helpful, but this can lead to VAT recovery problems for the seller. As a result, negotiations between parties can be protracted and costly.
In the summer, the government invited contributions from interested parties in an eight-week consultation that ran from 23 June 2026 to 18 August 2026. The results of the consultation are now eagerly awaited, although it should be said that implementation is likely to be same way away.
Capital Goods Scheme changes
The Capital Goods Scheme (CGS) ensures a fair and reasonable attribution of input VAT on high-value capital assets used in both taxable and exempt business activities over time. It requires businesses to adjust the VAT originally reclaimed based on changes in use.
The CGS threshold for land, buildings and civil engineering works increased from £250k to £600k, excluding VAT, on 29 July 2026.
If a capital item falls within the scheme under the threshold that applied before 29 July 2026, it will stay in the scheme until the end of its adjustment period.
The new £600k threshold applies to land acquired on or after 29 July 2026 and to buildings and civil engineering works acquired, constructed, refurbished, fitted out or extended on or after that date.
Zero rating denied
Upholding the decision of the First-tier Tribunal in 2025, the Upper Tribunal has ruled in favour of HMRC in determining that a bedroom wing was part of a healthcare facility rather than residential accommodation. This meant that the Appellant, NHS Ayrshire and Arran Health Board, could not benefit from relief on the construction of the wing.
The Appellant contended that the wing in its secure adolescent mental health facility was effectively residential accommodation and therefore construction services and building materials used in building the wing qualified for zero rating. HMRC disagreed on the basis that the facility was fundamentally a hospital or similar institution falling outside the scope of the ‘relevant residential purpose’ relief. The First-tier Tribunal and the Upper Tribunal agreed with HMRC.
The Tribunals found that the bedroom wing could not be viewed in isolation from the wider facility. The young people residing there were receiving ongoing psychiatric treatment and care throughout the complex, including in the accommodation areas, meaning the building’s primary purpose was healthcare rather than residential accommodation.
Occasional sales
The First-tier Tribunal has released its decision in Compound Photonics Group Ltd, agreeing with HMRC that the company had no economic activity once it had sold off its operating business. The taxpayer argued that it had retained its Intellectual Property with an intention to exploit this and therefore remained registrable and entitled to input tax recovery. Unfortunately, the Tribunal found that there was no evidence of an intention to make taxable supplies, the taxpayer’s vague assertions were insufficient. However, the Tribunal did agree that the sale of the Intellectual Property some years later was an economic activity and the company could recover input tax directly linked to the sale. HMRC had unsuccessfully argued that a one-off transaction could not be a business activity.
As part of its case, HMRC argued that a one-off transaction could not meet the tests for economic activity as set out by the Wakefield College case. This argument was rejected by the First-tier Tribunal who pointed out that a property developer SPV, which had as its sole purpose the construction and sale of a commercial building, would have no economic activity if this view were correct.
Biodiversity Net Gain
Biodiversity Net Gain (BNG) has become a significant consideration for developers in England following the introduction of mandatory BNG requirements under the Environment Act 2021. While much attention has focused on environmental compliance, the VAT treatment of BNG transactions can also have a material financial impact.
Where a developer purchases off-site biodiversity units from a landowner, HMRC’s recently published guidance indicates that these arrangements will generally be treated as supplies of services for VAT purposes. As a result, VAT-registered landowners selling biodiversity units are likely to be required to charge VAT at the standard rate on those supplies.
For developers, the recoverability of that VAT will depend on the nature of their own activities. Residential developers making primarily zero-rated supplies of new homes should generally be able to recover associated input VAT. However, VAT can create an irrecoverable cost where developers are involved in exempt activities.
Developers undertaking habitat creation themselves should also consider the VAT treatment of construction, landscaping, planting and ongoing maintenance costs. These costs commonly attract VAT at the standard rate, and the availability of recovery should be reviewed as part of project planning.
Electricity bills
One of the Government’s first actions with Andy Burnham as Prime Minister was to announce a temporary zero rate of VAT for domestic electricity bills. The zero rate will also apply to non-business charity use and will benefit small businesses who take advantage of the current reduced rate for de minimis use. The rate will initially be in place between 1 October 2026 and 31 March 2027. A decision as to whether to extend it beyond this date will be taken later.
Places of worship
Following the cessation of the Listed Places of Worship VAT refund scheme on 31 March 2026, the Government has released a research briefing on VAT and Churches. The Briefing confirms the establishment of a new Places of Worship Renewal Fund which will provide grants to eligible projects over a four-year period. The fund has an annual budget of £23 million. Details of how to apply for a grant can be found on the Historic England website.
Digitising the option to tax process
A new process is to be rolled out later this year that will enable option to tax notifications and revocations to be submitted online. This change will speed up the notification process and herald a move away from the current paper-based system.
