Changes to Housing Associations partial exemption methods

From May 2020 it will no longer be possible for housing associations to backdate new partial exemption special methods beyond the start of the current VAT year. Organisations that suspect their existing partial exemption method is no longer appropriate should take action now while the potential to backdate new arrangements for four years still exists.

What is the issue?

Most housing associations incur VAT on costs that is used to generate both taxable (standard, reduced or zero-rated income) and VAT-exempt income. Examples would be: 

• Audit fees
• Office equipment
• An architect designing flats that will be partly for sale, partly for rent
• A van that is used for both chargeable and non-chargeable repairs

VAT on these costs is partly recoverable – the process of calculating how much VAT can be recovered is known as partial exemption. Housing associations can adopt the “standard” method, which uses ratio of taxable income to the total of taxable and exempt income. However, many will find this gives an unfair result, and will seek to agree a bespoke – “special” – method with HMRC.

Whatever route is chosen, a method that worked well a few years ago can quickly become inappropriate if circumstances change. A method that was based on doing works for a local authority will need replacing when those contracts come to an end.  In a merger situation, both parties might have methods that worked well for them individually but do not work for the combined group.

Since 2009, a “Framework” has been in place for agreeing new partial exemption special methods in the housing sector. New methods that were in line with this framework could be backdated four years from the beginning of the VAT year in which the application was made.  This was helpful in relieving the pressure to negotiate a new method, especially in a merger situation where it can take some time for a single VAT compliance system to bed in.

What is changing?

HMRC has announced that, with effect from May 2020, it will no longer backdate new partial exemption methods beyond the start of the current VAT year. For most housing associations, the VAT year runs to 31 March. So this means if you applied for a new partial exemption method:

Before 1 April 2020, it could be backdated to 1 April 2015

• In April 2020, it could be backdated to 1 April 2016
• In May 2020, it could only be backdated to 1 April 2020. 

This new policy was long-expected, and brings housing associations in line with HMRC’s general policy on backdating partial exemption methods.

What should housing associations do?

If you believe your existing partial exemption method has not been appropriate for a while, you should use this window of opportunity to apply for a new method that can be backdated more than a year. With most housing associations gearing up for year end in February and March, this is something that should be addressed in January.

To discuss your partial exemption method, please contact Adam Cutler.