The DIY scheme allows those converting a commercial property into a residential home or building a residential home from scratch to reclaim VAT on their build costs. On a conversion, services by a contractor (and building materials also supplied with those services) should be subject to the reduced rate of VAT (5%). In the past, where 17.5% had been charged HMRC would refund 5% and ask you to go back to the contractor to recover the remaining part. However, HMRC have recently reused a number of claims unless a correct invoice for 5% is received and therefore going back to your contractors is the only option for any recovery.
It remains our advice that ensuring the correct liability on invoices in the first place will ensure an easier claim process at the end! Follow our top ten tips, put together by consultant Zaenia Rogers which is featured in the latest edition of Self Build & Design magazine, to ensure your project goes smoothly:
1. Understand key HMRC definitions at the Planning Stage. In order to budget for your build you will need to know whether you are able to claim VAT back on the build. It’s worth ensuring at this stage that your ideas meet the definitions for ‘new residential dwelling’ or ‘qualifying conversion’. This will help make sure your planning application is completed to ensure that a claim can be made. There are strict definitions around separate use and disposal in planning permissions and what constitutes a ‘new build’ for VAT.
2. Who can reside in the property? You can build the property for another relative to reside in, the key point is that it will become someone’s abode without a sale or rental. Therefore you can complete the build and have invoices in your name, even if the property is for your elderly mother to reside in. Obviously you still need to ensure the correct definitions are met as detailed in point 1).
3. Using Contractors. Despite the name of the scheme, you are able to use contractors to undertake the work for you. The only difference here will be the vat rate on their services will vary depending on the nature of the works and materials provided.
4. Get the right VAT rate. It is important to get the right rate from your contractors. Services provided on a new construction of a new dwelling will qualify for the zero rate, whereas the reduced rate (5%) will apply for qualifying conversions. If your contractor has charged you 20% where the reduced rate (5%) should have been applied, then commonly HMRC refuse to refund any VAT. In the main, HMRC insist you go back to your contractor and get the invoices re-issued with the reduced rate, sometimes a problem if your contractor has gone ‘bust’ in the meantime!
5. Aid your cash flow. If you wish to source your own goods, still ask your main contractor to make the final purchase of the goods and sell them on to you with his services of installing them. For a new build project, this means the contractor can sell the goods to you at the zero rate of VAT, whereas if you purchase them yourself you are more often than not going to have to pay standard rate VAT (20%) and then wait until the end of the project to claim this VAT back from HMRC. The contractor will be able to recover the VAT on the purchase on his VAT return.
6. What can you claim. A valid claim can be made on any building materials you purchase and use on the build project. If you purchase goods from the EU you will incur VAT from the appropriate country, on a DIY claim, you can convert this amount into sterling and still recover it. Also services of conversion charged at the reduced rate can be recovered. In the main, services on which the standard rate is incurred cannot be recovered, these include professional fees such as architects.
7. Claim on time. The claim form must be submitted within 3 months of completion of the conversion/construction, usually this is when the certificate of completion is issued, although it can be earlier if the certificate is delayed. In any event, if for any reason you cannot meet this deadline you MUST write to HMRC in advance and request an extension.
8. Use the right form. HMRC publish the forms on their website. Using the correct forms will help to ensure less delays and a quicker refund.
9. Send everything Recorded Delivery! You are sending all original invoices and a form which will have taken time to complete, as this is your money at stake, take time to send it recorded delivery to ensure nothing is lost. To safeguard your position even more, photocopy EVERYTHING before you send it – it can avoid lengthy delays in the event of the originals going missing!
10. Seek Advice. If you are in any doubt it is best to check with a reputable VAT advisor as mistakes can be costly.
Tribunals don’t always prove anything as highlighted by the recent Tribunal case of John Price which concluded that ‘blinds’ were indeed ‘building materials’ for VAT purposes and thus the VAT could be recovered through a Housebuilders DIY claim (where VAT is recovered on a house you build to live in – as long as all items are classified as building materials by HMRC).
HMRC have always stated that window furniture were NOT ‘building materials’ – so where does that leave the matter? Well, HMRC have decided not to appeal as they state in their Revenue & Customs Brief 02/11 that their ‘view remains unchanged’ and they will ‘not be changing their policy’.
We will have to wait for further Tribunals on the matter before we see any policy changes here – a reminder that Tribunal decisions are indicative but certainly not a reason for HMRC to back down!
Full details of the business brief are available here: http://www.hmrc.gov.uk/briefs/vat/brief0211.htm and if you’d like further advice on this then please contact consultant Zaenia Rogers: email@example.com or call on 01962 735350.
Getting professional advice before you start your project is highly recommended. The following two recent cases highlight this point:
The first case involved a house builder, who built a property attached to a pontoon. On advice from the HMRC vat helpline he submitted a DIY builder’s scheme claim. Upon receiving his claim HMRC refused it on the basis it was a houseboat and therefore excluded from the DIY scheme and furthermore, stating that advice given on the National Helpline ‘could not be accountable for any advice given’!
The tribunal dismissed the appeal because they concluded the property was a houseboat. Tribunal added that the house builder had every right to be aggrieved that the law discriminates against houseboat builders, but this did not alter that fact that he could not get his refund of over £18,400!
The second recent case considered whether an AGA was a building material for VAT purposes. As the heat provided was incidental the tribunal agreed with HMRC and dismissed his appeal for a refund. Again, advice upfront would have probably saved him the trip to the Tribunal centre. The HMRC DIY forms state AGA’s “must be fitted to a heating module or boiler” in order to qualify.
Losing such an amount to any house builder can seriously affect cash flow and budgets. Of course professional advice upfront could have prevented such budget constraints – not always by changing the situation, but at least both the above cases would have been aware of the sunk VAT costs from the start!
Check your invoices! It is also important to check that you are paying the correct rate of VAT on contractor’s invoices. Many cases this year highlight that if the reduced rate applies to the works in question, HMRC will only refund the 5%. Therefore if you have been charged and paid 17.5%, the 12.5% is something you need to obtain back from the contractor as incorrectly charged VAT. The problem can arise, as in the case of CAM Anderson, that when you return to the contractor for a credit note, the contractor is outside the time limits for VAT to be able to issue one to you!
Know your facts and don’t be afraid to challenge HMRC, as Mr & Mrs Wendels did and won against HMRC in the courts. They built a house on the land next to their cattery business but a question arose over whether it met all the criteria of being a residential dwelling. The claim for VAT was refused by HMRC as they said the property could not be separately disposed of (one particular criteria).
The Wendels appealed the case and successfully argued the conditions for a residential new dwelling for VAT were met, they received their VAT back. The case highlights the specific criteria that must be applied for a property to even be considered ‘residential’ for VAT purposes – even if the average Joe would clearly say it is!
Most aspects of a new build, conversion, or refurbishment can be planned effectively to minimise the VAT due. Professional advice at the outset could prevent nasty surprises at the end of your project. Our experience in dealing with similar projects and our knowledge of the complex and extensive legislation can help prevent any nasty and costly surprises.