A leading residential development lawyer has highlighted the key benefits of golden brick and turnkey agreements for developers in relation to their construction projects, in order to make the most of the financial benefits they bring.
Golden brick agreements allow housebuilders to structure the sale of affordable housing dwellings being sold to housing associations, which mitigates VAT exposure, reduces Stamp Duty liabilities and improves cash flow during the course of the project.
HMRC guidance states that for golden brick benefits to be achieved, a development must be “clearly under construction” – after foundations and initial brickwork are complete. Paul Harris, a senior property lawyer from Worcestershire law firm mfg Solicitors, has said that this can benefit both registered providers and developers.
Paul said: “In the context of a social housing development, VAT implications play a significant role in determining the cost-effectiveness of the type of agreement used between a registered provider and a developer.
“A key benefit of a golden brick agreement for developers is that they receive a substantial payment at golden brick stage and VAT can be recovered on the construction costs which can help with cash flow. For registered providers they can be satisfied that VAT is not payable at the point that the land and partially completed dwellings are legally transferred to the registered provider.
“A golden brick sale is treated as a zero-rated supply for VAT purposes.”
Paul added that another benefit for registered providers was reduced Stamp Duty Land Tax (SDLT) payments, as SDLT is only paid on the value of the land and the initial construction. This in turn makes golden brick agreements more attractive to a developer as registered providers are more likely to want to buy under this form of agreement.
Paul has also offered advice for developers considering turnkey agreements, which sees them take full responsibility for all aspects of a project, from design and engineering, through to construction and commissioning.
He added: “In a turnkey agreement, the developer transfers ownership only upon practical completion of the entire project, meaning when it’s fully built and operational. In essence, the client only has to “turn the key” for it to be put into use.
“The sale of a fully completed residential dwelling is a zero-rated supply and therefore no VAT is payable on the purchase price. However, a turnkey agreement may be less desirable from a developer’s point of view as they do not receive full payment until practical completion has occurred.
“Both types of contracts will have provisions for certifying when practical completion of the construction of a dwelling has taken place. From a developer’s perspective they will want to
self-certify that practical completion has taken place rather than have an inspection procedure to allow a registered provider to confirm if practical completion has taken place.
“Overall, developers should seek expert advice on the best agreement plan for them and their project. If the right approach is taken there are wide-reaching and long-term benefits.”
Readers looking for further information can email Paul through [email protected].
mfg Solicitors has offices in Bromsgrove, Worcester, Birmingham, Kidderminster, Ludlow and Telford.