It's day six of our festive blog series: What does the term "Golden Brick" mean, who uses it and why? In this article we explore the usefulness of the golden brick, the formalities which determine whether it applies and alternative approaches.

Golden brick is a term used to describe the level of construction a new development needs to reach in order to qualify for zero rating. This enables housing associations (who can't recover VAT) to purchase land free of VAT which might otherwise be charged. It also allows the developer to recover its own VAT. Without it, either the developer would be unable to recover its VAT, or, if it opted to tax in order to recover its VAT, the housing association would be liable to pay VAT that the housing association would be unable to recover.

HMRC requires the building to be "clearly under construction" in order to have reached the golden brick stage. In the context of most buildings, this will be when the foundations are complete and the walls of the building have started to be constructed. However, if there is a non-residential element on the ground floor then the golden brick stage will have been reached when the bricks of the walls above that non-residential floor are under construction.

Often transactions are structured in such a way that the housing association is involved early on and pays a deposit before construction has started. This deposit must be held as stakeholder in order to avoid a tax point arising before the golden brick stage has been reached. Only after the golden brick stage has been reached should the sale complete and the deposit be released if the parties want to preserve their different VAT requirements.

It might be possible to structure the transaction in such a way that it constitutes a transfer as a going concern (TOGC) and achieve the same result of the initial developer recovering VAT without VAT being charged on the TOGC. This would also enable a sale before the golden brick stage had been reached. The important criteria in this instance would be the ongoing development. The development would need to be actively under construction at the time of the TOGC.

See our full series of festive blogs here.