Opinion: sensible tax planning for housing associations
Published by Max Salsbury for 24dash.com in Housing and also in Communities
TaxImage: Tax via Shutterstock
Here Andrea Sofield, partner and head of Not For Profit Tax at Grant Thornton UK LLP, argues that housing association's should take an interest in their tax affairs:
Given the current levels of public sector deficit, issues surrounding tax planning have become more prominent in the general public's consciousness.
This has resulted in businesses reflecting on their own approach to tax far more than they may have done previously. It is not just about the understanding of whether a scheme entered into could potentially be considered vehicles for tax avoidance or evasion, but increasingly includes consideration of the ethical issues involved in pursuing the goal of efficient tax planning.
As such, aggressive tax planning is becoming a thing of the past as getting it wrong can result in a lot of time and effort being spent dealing with HM Revenue & Customs (HMRC) as well as the real cost of penalties and interest.
There may also be a reputational risk if an association does not operate in a fair, open and transparent manner. Board members should take an interest in their organisation's tax affairs and make sure they have an agreed protocol ensuring the association is minimising tax costs in a responsible manner.
This is worth illustrating with a few examples.
House development companies
In seeking to reduce their costs of developing, associations are again showing interest in establishing in-house development companies. This helps associations legitimately remove VAT on professional service costs associated with new development and also mitigates VAT on major conversion projects. There are good reasons for associations to consider this approach to reducing costs. These include:
• HMRC is clearly aware of and is happy with this arrangement, which has been around the sector for many years
• it provides a level playing field with 'for profit' developers
• reducing VAT costs is still possible for certain contractual arrangements such as design and build, but these may not be the best deal for an association commercially
• reducing VAT costs can support the delivery of more social/affordable homes.
Salary sacrifice schemes
Another area where HMRC approves tax efficiency measures is around the full use of the tax free allowances (e.g. for mobile workers) and the use of salary sacrifice schemes, which can provide tax and National Insurance contribution (NIC) savings. These approaches seek to pay employees in a tax efficient manner. Again there are good reasons to look at such schemes for employees including:
• the HMRC is clearly aware of and approves such arrangements
• in recent times the ability to provide annual pay increases has been difficult and so helping employees maximise the value of their total remuneration package has benefits for individuals and the association alike
• a large proportion of housing staff are at the lower end of the pay scale and therefore such arrangements benefit those most in need
• these schemes are widely in operation by other organisations and can be useful for staff recruitment and retention.
Recently HMRC introduced new VAT legislation on the provision of shared services and the VAT exemption. These have the benefit of enabling two or more associations to share costs, perhaps a repairs service, thereby having access to better skills and expertise, without any VAT disadvantage. Inevitably some will look for other advantages, such as trying to sell services from one organisation to another at a profit. This is unlikely to succeed and as such it is important to understand the purpose of what is being proposed before embarking on an approach that might not work.
For non-charitable activities the use of gift aid from subsidiaries remains a useful tax planning tool. Using profits from more commercial activities to subsidise the charitable activities of the association is a widely accepted approach.
Those arrangements less likely to succeed will generally involve protracted negotiation with third party suppliers and involve arrangements not commonly used either within the sector or by commercial providers of similar services.
Inevitably there are a whole host of transactions such as mergers and acquisitions, joint ventures and establishing subsidiaries, where there can be hidden or unforeseen consequences. Ensuring that the association is not 'caught out' by ensuring that any tax risks are assessed in advance is vital and will continue to be an important part of any planning and project management arrangements.
Such tax implications must be considered at the outset of any project and of course there is always the obvious, but necessary, challenge from a non-executive director of "have you thought about the tax consequences?" that must not be over looked.
Board members need to take an assessment of tax-saving ideas to ensure they have a sound business rationale, there are no reputational risks, they will not involve protracted work and fees for little reward and that they will not result in being deemed ineffective and at risk of penalties from the HMRC. This assessment needs to be undertaken early to make sure all planning and preparation is efficient and robust.