Monday, 23 February 2009 THE TAX JOURNAL 19

Land

Early modelsIn their earliest incarnation ABV structures commonly took the form of contractual JVs. This contractual model has been widely used by PSOs and its use encouraged by policy-makers.

The types of transaction which suit the contractual JV format are typically those which a PSO would not want to deliver on its own, and instead would sub-contract to a more specialised provider. These include small- and large-scale housing stock transfers and town centre redevelopment

schemes. The private sector partner usually shoulders the majority of the risk and takes the majority of the profits, while the PSO accesses a certain level of profit via overage arrangements. These contractual JV arrangements have a considerable property bias and the essential JV arrangements, including risk allocation and profit share, are written into the property documentation.

ABVsM o r e s o p h i s t i c a t e d l a n d - b a s e d arrangements are now being developed with a wider range of participants and investors and this has led to an ABV model which uses a separate vehicle to hold the assets.

ABV participators include one or more PSOs owning development or investment land assets (for example, a local authority or RDA), a private sector partner with development or investment expertise, and one or more third-party funders (generally an institutional investor – perhaps a pension fund – and a debt provider). The

remit of some ABVs is to develop out a number of (commercial, residential or mixed) sites and share in the profits. Alternatively, ABVs may be established to deliver a new building for the PSO by leveraging its surplus land assets. Housing ABVs may be set up with the aim of redeveloping a residential site into a mixture of private, shared ownership and social rented housing, such that the PSO secures regeneration of a run-down residential area and the private sector partner(s) make their return from the

private residential elements of the scheme.Typically, the PSO will contribute

assets to the ABV on deferred payment terms and the PSO will then participate in the overall profit from the project.

Choice of JV vehicleWhere the partners identify that the project will be best delivered via a JV vehicle, the obvious first question is what type of vehicle is most suitable? Tax considerations are a major factor to be considered in the choice of vehicle, given the different tax characteristics of PSOs and private sector parties. The basic decision is between a corporate entity (for example, a company limited by shares or guarantee, or a community interest company) and a vehicle taxed as a partnership (a limited partnership (LP) or limited liability partnership (LLP)). For some projects it may be appropriate to consider the use of an industrial and provident society and/or the benefits of charitable registration, and the tax advantages that accompany them. It is, however, unusual for charitable vehicles

Land-based PPPsJohn Christian, Corporate Tax Partner, and Jennie Newton, Senior Tax Associate, Pinsent Masons, look at some of the tax issues affecting land-based public-private partnerships

despite the current downturn in property investment and development, one area where

development activity has the best chance of continuing is in relation to major land-based projects with public sector partners.

Public-private partnership – or PPP – is an umbrella term for many types of private sector collaboration with the public sector to deliver infrastructure or other projects. This article focuses on specific types of PPPs which have developed in recent years to generate value from public sector land holdings. The topic is littered with acronyms but the general term that has emerged for these projects is ‘asset-backed vehicles’ – or ABVs – and we will use this in the article.

ABVs have enabled asset-rich public sector organisations (PSOs) to generate value from surplus assets to meet government objectives such as regeneration or housing.

Some of the earliest ABV models were developed for regional development agencies (RDAs) looking to attract private sector finance and expertise to develop the RDA land portfolio. The model has also been adapted by local authorities with the development of local asset-backed vehicles (LABVs). Other public sector bodies are exploring the ABV model, including NHS trusts and universities, and it has become one of the vehicles for delivery of the government’s housing objective through local housing companies (LHCs).

ABVs have the same basic features. They will involve co-working, joint ownership of assets, and cost- and profit-sharing. There will usually be profit accruing to the partners from the activity. The project is usually achieved through a joint venture (JV) arrangement, either a contractual JV or a JV using a vehicle such as a company or partnership.

While there will be tax issues to consider in establishing, operating and terminating an ABV, there will be other drivers of equal or greater importance. An examination of such drivers is outside the scope of this article but they will include state aid, procurement, powers, governance and public sector balance sheet treatment of such structures.

The tax issues are similar to those arising on most PPPs but the land-based nature of ABVs raises additional issues.

Other public sector bodies are exploring the ABV model, including NHS trusts and universities, and it has become one of the vehicles for delivery of the government’s housing objective through local housing companies (LHCs)

20 THE TAX JOURNAL Monday, 23 February 2009

Land

to be used. Although PSOs may see a JV vehicle as a ‘not-for-profit’ entity, this will usually not fit with the private sector partner’s aims.

Many public sector partners are exempt from tax (for example, government departments, local authorities and NHS trusts) or have charitable status (such as universities), and in such cases there may be tax advantages in using a partnership JV rather than a JV company. From a direct tax perspective, partnerships are tax-transparent in the sense that the partnership is not itself subject to tax but the partners are taxed on their share of the partnership profits. If an LP or LLP vehicle is used, a local authority partner will not pay tax on its share of the partnership profits. By contrast, if a corporate JV vehicle is used, tax will be chargeable at vehicle level before being distributed to the local authority, which will be unable to recover the tax paid by the vehicle.

Partnership models have tended to become the norm for ABVs because of the public sector tax treatment. Private sector partners will usually be open to a partnership vehicle, although development partners may prefer a corporate vehicle if there is potential for the substantial shareholding exemption (SSE) to apply on an exit in a development ABV. Private sector partners in a development ABV may also want to compare the ability to access losses in a partnership against a corporate structure, given the restrictions in ICTA 1988, s 118 in particular.

Private sector partners may also wish to consider partnership structures in light of the proposed foreign profits rules, which will remove the general exemption for UK-UK dividends. Although dividend exemptions remain under the rules, there may be uncertainties around their application to some of the complex minority shareholdings held by private sector investors in such structures. Further, for debt-funded ABVs, the application of the interest capping rules to consortium-owned vehicles may, on current proposals, produce anomalous results and the pros and cons of partnership structures may be considered in this context.

There are issues to be addressed when considering a JV partnership. LPs by their very nature are likely to constitute collective investment schemes (CISs) for regulatory purposes and so will require an FSA-authorised operator (at additional cost). LLPs may be more suited for property development projects where partners are more likely to have day-to-day management and control of the project (and therefore escape being a CIS). Certain tax-exempt investors, such as pension funds, in a

property investment LLP will effectively be taxable on their participation (Finance Act 2004, s 186) – an LP may sometimes be used for this reason in an investment project. But in all cases care should be taken to avoid a partnership vehicle qualifying as an unauthorised unit trust for tax purposes, which will create an additional layer of taxation.

Contribution of assets to the ABV – direct taxes and SDLTContributions of land assets will usually be made by the public sector to the ABV vehicle, often for deferred consideration. As with any property deal, an assessment should be made to establish whether the property transactions (and those of the vehicle going forward) are investment or trading. This will depend on a number of factors, most importantly the intention of the relevant taxpayer in acquiring the property asset. The answer to this question will impact on the direct tax treatment and liability of transactions and of the project overall. Where the public sector partner is taxable, the contribution may give rise to a chargeable gain (it would be less common that the land is held as trading stock) and the contribution may be structured to defer triggering of a chargeable gain up front.

The contribution will also give rise to SDLT. Where the vehicle is a company, SDLT will be payable on the consideration for the contribution of assets, which will generally be at market value.

A partnership vehicle may offer an SDLT saving where a partner contributes land into an LP or LLP in which it is or becomes a member. SDLT is payable in relation to the market value of land assets contributed into the partnership

by a partner. The saving arises because SDLT is only payable on the ‘share’ of the property interest attributable to the other partner(s). For example, where a PSO holds a 49% partnership interest in a JV partnership, the partnership’s SDLT liability is charged on 51% of the open-market value of the property interest at the time it is contributed, rather than on the full value of the assets contributed. SDLT can be further minimised if land can be contributed into the partnership as early in the PPP process as possible to take advantage of lower land values. The payment of any deferred purchase price, withdrawal of capital, reduction in partnership interest or obtaining repayment of a loan to partnership members may trigger SDLT charges under anti-avoidance rules (in Finance Act 2003, Sch 15, para 17A) and these provisions need to be considered carefully.

Although there is a potential SDLT saving on contribution of land to a partnership rather than a company, this should be balanced against the possibility of higher SDLT charges on future sales, or changes in members’ partnership interests (which will reflect any growth in value of partnership assets) and the application of the anti-avoidance rules previously mentioned. Partners should always consider their exit strategy – securing an SDLT advantage on set-up might be less important than minimising SDLT charges on exit.

Contribution of assets to the ABV – VATThe VAT analysis is likely to be fairly project-specific, governed by whether the land assets to be contributed into the ABV comprise commercial or residential property, investment assets or trading stock.

John Christian Jennie Newton

Monday, 23 February 2009 THE TAX JOURNAL 21

Land

In some cases, such as the contribution of investment properties where tenants are paying a commercial rent, then (provided that other conditions are met) the transfer of properties to the JV vehicle may qualify as the transfer of a going concern (TOGC) for VAT purposes such that no VAT is payable. In other cases, such as the contribution of investment properties where a peppercorn rent is paid, or the contribution of development sites where there is no ongoing development work, the transfer of properties to the JV vehicle may not qualify as a TOGC. Bearing this in mind, any PSO contributing land to an ABV JV vehicle should consider its own VAT position in relation to that land. Where property contributed in as a TOGC constitutes a Capital Goods Scheme asset for the contributor, the JV vehicle will inherit the contributor’s Capital Goods Scheme position and becomes responsible for making adjustments for any remaining intervals. Where the TOGC position is unclear and where the issue is commercially significant, it may be possible for the contributor to seek an advance ruling on the VAT status of the transaction via HMRC’s written clearance procedure for business customers.

Operating the ABV – VATWhatever form it takes, the ABV JV vehicle will need its own separate VAT registration. The JV’s VAT profile will, put crudely, be governed by what it does with its contributed assets and whether or not it has opted to tax. It may be subject to a less favourable VAT regime than that enjoyed by some of its participators, for example PSOs subject to VATA 1994, s 33 – particularly given the current moratorium on the s 33 partial exemption rules. VAT pitfalls exist in relation to housing projects. A vehicle which builds housing on its land and then disposes of that housing by way of freehold sale or grants of long leases should have an advantageous VAT position, in that its supplies will be zero-rated but it can recover VAT on the majority of its construction costs. However, a vehicle which builds housing but then makes exempt supplies of that housing, for example short-term letting of social housing, will face an increased VAT partial exemption and will therefore find its ability to recover input VAT incurred in connection with the construction restricted. This may not in itself be a problem on a new-build project (where most of the supplies could be zero-rated) but could be a bigger problem on a project involving the refurbishment of existing

housing. Any ongoing VAT incurred by the JV vehicle in relation to social housing will not be recoverable.

ConclusionNotwithstanding the current economic climate the future for ABVs looks assured. There is a general move towards partnering, rather than expensive one-off procurement. Efficient ABV structures may assist local government in achieving the government’s three-year target to save £4.9 billion.

Many professionals in the regeneration sector believe that long-term partnerships between the public and private sectors could be the best way to create resources to take forward regeneration in the future.

From a tax perspective ABVs offer an interesting interplay between the sometimes competing direct and indirect tax positions of the public and private sector.

John Christian is a Corporate Tax Partner, and Jennie Newton is a Senior Tax Associate at Pinsent Masons. John Christian can be contacted on 0113 294 5296 or at john.christian@pinsentmasons.com. Jennie Newton can be contacted at 0121 626 5761 or at jennie.newton@pinsentmasons.com.

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Caroline SchnellTax Lawyer

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