The VAT DIY Housebuilders scheme is the scheme which enables private individuals who build their own home to recover VAT on the cost of certain goods. Commercial housebuilders can recover such VAT through their VAT returns and the purpose of the DIY Housebuilders scheme is to ensure that private individuals who construct homes themselves are entitled to the same VAT relief.
The scheme is relatively straightforward and basically requires the claimant to submit a claim within 3 months of receiving the certificate of completion. It also applies to certain conversions where, for example, a new dwelling is built from an existing building. The claim forms and explanatory notes for new construction can be downloaded from the HMRC website here http://tinyurl.com/35ngewd.
The forms are relatively easy to complete, but require the claimant to make a declaration that the property will only be used as their dwelling and not for any business purposes. The problem is that this might not always be possible, particularly when the claimant is unable to sell their existing dwelling and may have to consider various other options, such as leasing the new property on a short lease until the existing home is sold, or even selling the new property outright.
This is extremely important as in principle, the sale or lease of the property would consitute a business activitiy for VAT purposes and the DIY housebuilders scheme can’t be used in such circumstances. VAT on business activities can only be recovered if the business owner is registered for VAT.
Does that mean the claimant would have to register for VAT to recover the VAT?
Probably not. HMRC are aware that claimants’ circumstances can change and will allow claims in certain circumstances even if the claimant can’t live in the property as planned.
The 2 important most important factors about the refund scheme are as follows:
• Entitlement to a Refund Scheme claim is determined at the time of completion of the work.
• Certain business activity can be ignored when making a claim.
What this means in practice is that if, for example, you aren’t able to live in the new property once it is completed because your circumstances have changed, and you have to use it for certain limited business use – such as renting it out on a short lease, then you should still be entitled to make the claim. This also applies even if you end up having to sell the property instead. So in most cases, you’d be allowed to recover the VAT through the scheme as long as it was your intention, at the time of completion, to live in the property at some point.
The problem is that this information is not explained on the application form or accompanying explanatory notes. More of a problem is that some HMRC officers don’t seem to be aware of these facts – potential claimants who explain that they’ve had to lease or sell their new property are often told that they are not eligible to make a claim and this is simply not correct.
To be honest, it is so many years since I ever approved a claim when I was a VAT officer myself or helped a client prepare a claim that I didn’t know about these points. I’ve only come across them recently while looking into the subject to help with a couple of queries.
So where is this information?
The information is in HMRC’s internal guidance, which is primarily provided for their employees, but can be accessed by any member of the public through the HMRC website. I don’t normally encourage people to look at this guidance because it pre-supposes a working knowledge of VAT and that you’re already familiar with and understand the information in the public notices.
However, the guidance given about the DIY Housebuilders Scheme is quite readable even for those with limited experience about VAT. It is included within the volume entitled V1-8A: Construction, which deals with all VAT aspects relating to the construction industry. You have to download the whole document which is here: http://tinyurl.com/yjar98u on the HMRC website. The section relating to DIY Housebuilder claims is section 22 at page 210 onwards.
What does the guidance say?
The guidance contains some very helpful information that will be helpful for anyone who is caught up in one of these situations and can’t live in the property as soon as it is completed.
First of all, it says at section 22.8.7 that “Entitlement to a Refund Scheme claim is determined at the time of completion of the work”.
This is a very important statement and while I’m no expert in how HMRC interpret this statement, I would assume that they will accept a common sense approach. So as long as it remains your intention to live in the property at the time the work is completed, then you’re entitled to claim the VAT. Even if you can’t live in the property straightaway and are having to consider other options once the property is completed, the reason you built the property was to live in it, therefore you are entitled to make the claim.
And that should apply even if you can’t move in straightaway and have to use the property for certain business purposes. At section 22.8 on page 219 of the guidance, it explains that certain business activity can be ignored when considering a claim. This is very helpful as it includes two of the most common situations that can arise:
• selling a dwelling soon after its completion as a result of a change in circumstance; or
• the temporary letting of a house by a self-builder who can demonstrate an intention to use it as their private residence at some stage.
In other words, you can still make the claim as long as it was your intention to live in the property when the building was completed even if you aren’t able to do so because of a change in circumstances.
What if our intention changes before completion?
HMRC clearly understand that people’s circumstances change and at sections 22.8.7 and 22.8.8 they explain how you should go about making a claim for VAT IF YOUR CIRCUMSTANCES CHANGE PART WAY THROUGH THE PROJECT, ie before completion. So if you start out intending to use the property as your dwelling and then decide to sell it, then you can register for VAT as a business. Conversely if you register for VAT as a business on the basis that you intend to sell the property then change your mind and decide to live in it, you can make a DIY Housebuilders claim.
There is some very helpful information in the guidance about these situations and I’d recommend spending some time reading through it to see if it applies to your circumstances.
Submitting a claim when you can’t live in the property straightaway
But by far the most common situation is where DIY builders have to lease the property while waiting to sell their existing home. So I’ve given pointers below on how I would proceed in preparing a claim in these circumstances.
• Get the claim in on time
First of all the claim must has to be submitted within 3 months of the date of completion of the property. So get the claim into HMRC as soon as possible on the basis that you are going to live in the property at some point. Complete the claim properly and send the invoices, certificate of completion and all of the information that they request. There is a checklist on the form so you can make sure you’ve included everything you need before sending it off. Even if they dispute the claim, at least you’ve got it in on time and that’s one less thing to worry about.
If the form is late, then explain why it’s late in writing. If it’s just a matter of a few weeks or a couple of months, then I suspect that they would accept as long as there is a reasonable explanation.
• Completing the application
The claim form explains that you can’t use the scheme if you are going to use the property for business purposes (ie selling or letting) – section 16 asks if you or relatives, are intending to live in the property, so this is where you have to make your declaration about what you are going to do with the property. So if it was your intention, at the time that the work was completed, to live in the property, then you can tick “yes”.
However, if you’ve had to let the property out on a short term let while you sell your existing home then I would recommend that you explain this to HMRC on the form (or in an attached letter). Refer to the information given in the internal HMRC guidance at V1-8A: Construction, section 22 and explain that you understand that in such circumstances the leasing activity can be ignored for the purposes of the claim. This way, they are in possession of all of the facts and it shouldn’t come back to bite you at a later date.
What if HMRC refuses the claim?
If HMRC still don’t accept the claim, you can normally appeal the decision. Usually they allow 30 days from the date of their decision for such appeals to be made. I’ve never had to deal with an appeal against a refusal for a DIY claim, but I would suggest that if you are in this situation, then this is the point when it would be a good idea to take professional advice from a VAT consultant. This would obviously cost further money and you might be loath to incur further costs when there is no guarantee of success.
There’s no easy answer to this one and at the end of the day, you have to decide whether or not it’s worth spending further money. Most VAT consultants I know would be happy to have an initial no-obligation discussion with someone in these circumstances free of charge, then at least you can make a more informed decision about whether or not it’s worth appealing and the potential costs.