Has panic set in? You’ve been reading a Housing Association contract, or the words have been casually dropped in a meeting. Golden Brick. What’s that I hear you cry?
Where are you going to get a golden brick from? Is it in the budget?
Well, breathe easy and take a pew. Now is not the time to call your local brick stockist. Nor is it the time to worry whether a gold brick will clash with the expensive Wienerbergers that the local planning authority has been insisting on.
The aforementioned brick supplier is likely to have a field day at your expense if you call to source about a bar of bullion.
There is no golden brick, physically at least.
Oh, and whilst we’re at it, there are no skyhooks or glass hammers on sale at your local builder’s merchants either, or anywhere for that matter.
Golden Brick is a term used to identify a specific build stage. The stage in the construction of a building that can be clearly identified and used contractually. A trigger in a contract: “When the construction reaches Golden Brick……”
Why is Golden Brick needed?
The Golden Brick stage is used to separate the land acquisition from the cost of construction for tax purposes.
Predominantly, this applies to Registered Housing Landlords (RSL), often referred to as Registered Providers (RP) or Housing Associations (HA). Organisations that provide affordable and social housing.
The UK government applies Value Added Tax (VAT) to the purchase cost of land that an RSL could not recover.
A deposit is usually paid when contracts are exchanged between the seller and the buyer’s solicitors when purchasing development land. However, at this time, construction works will not have commenced.
The deposit can be held by a stakeholder and released once the contracts are ready for completion and the sale is completed.
To mitigate against the purchase of the land being subject to VAT, the completion is delayed until the development build has reached the Golden Brick stage.
With Golden Brick reached, and the development is now classed as New Build, it becomes zero VAT rated. As a result, the RSL can now complete the purchase without any VAT implications.
This process converts the land purchases from VATable to VAT-free transactions.
However, the seller’s ability to recover their VAT is not affected by the change.
When is the Golden Brick laid?
The ‘normal’ brick to be classed as the Golden Brick is the first to be laid on a foundation.
Therefore, any works before this cannot be considered as a Golden Brick trigger.
The groundworks for an entire development could be completed, miles of estate roads laid, hundreds of parking bays installed, enough drainage to empty the Danube, all of these works do not count as Golden Brick.
Once the ground has been excavated and foundations poured, most likely then requiring Building Controls inspection and signoff, the first brick or block can be laid and considered the Golden Brick.
Is the Golden Brick stage reached above or below the Damp Course Membrane (DPC)?
DPC is often regarded as the threshold of moving from below-ground to above-ground works, where the groundwork contractor hands over the reins of a plot to the bricklayers.
However, the definition of Golden Brick is above the foundation, not necessarily above ground level.
Some RSLs deem DPC as their preferred tripper point, meaning substructure brickwork, below ground drainage, and the ground floor will be required before Golden Brick is reached. This will delay payment to the landowner but might assist the RSL’s cash flow.
What happens after Golden Brick?
Foundations poured, and the first above-foundation brick laid, Golden Brick stage has been achieved. The buyer and seller will mutually agree Golden Brick has been reached, allowing their respective solicitors to finalise the deal.
Contracts are completed, monies are released and transferred to the seller.
Is the whole of the development VAT rated?
The UK Government designates new building developments as being zero-rated. Meaning a builder, contractor or subcontractor must zero-rate their work.
Meaning builders, contractors, or subcontractors cannot charge VAT on the supply and fitting of goods or any labour.
The contractor will likely have to pay VAT themselves when purchasing materials. However, this is recoverable through their own VAT returns.
Zero-rating applies to:
- New build house or development
- Conversion of existing building into a habitable dwelling
- When a building has been renovated following ten years of disuse
So what material costs are recoverable?
The majority of what goes into the fabric of a building, including but not limited to:
- Pre-Cast floors etc
- Beams Steel
- Rainwater pipes
These are followed by the key elements that make a house habitable and function, namely mechanical, electrical and plumbing. Radiators, fixed towel radiators and boilers are included within this.
Kitchens are exempt as well, so no VAT charge for kitchen units and worktops. Appliances are, however, subject to VAT.
Plenty of fittings are zero-rated, too. Light fittings, flooring (wooden, tiles and linoleum), solar panels, TV ariels, mirrors, fireplaces and fires.
Swimming pools and saunas are also exempt if they are within or linked to the new build.
What items are not VAT recoverable?
It’s beyond likely that before a bucket goes into the ground, fees have been incurred from the construction specialist such as architects, civil engineers, structural engineers, landscape architects.
You would expect that the design process will require additional input from other specialists as well, for SAPs calculations, as an example. Plus, there’s likely to be someone managing the works, a Project Manager perhaps.
All of these are subject to VAT.
Furthermore, hired equipment like toilets, scaffolding and consumables (hand tools, brushes…) are subject to VAT, too.
Once built, some finishing touches also come under the banner of being subject to VAT. As mentioned above, kitchen appliances, including hobs, ovens, dishwashers, wine coolers, fridge freezers, espresso machines etc.
Bedroom furniture is also subject to VAT, as are carpets.
Why is Golden Brick important?
As you can see from the lists above, most construction elements are not subject to VAT, resulting in significant build cost savings.
Where RSLs are primarily local government-funded or charitable organisations, these cost savings are critical.
However, when the land cost can equate to a significant proportion of the overall development costs, often equalling the build cost, the Golden Brick approach becomes even more vital.
Golden Brick is a vehicle that enables an affordable and social housing provider to benefit from zero VAT rating of a new build development, incorporating the purchase cost of the land under this tax-free umbrella.
It is achieved by delaying the completion of the land purchase until Golden Brick is reached.
Golden brick is any construction above the foundation.