Saving VAT on residential self-builds and DIY conversions. One of the most common VAT subjects is VAT on self-builds (or “DIY” builds) and DIY conversions. Many of you will know that there is a scheme whereby you can claim VAT on certain goods and/or services. It applies if you’re building an entirely new home, whereas DIY conversions apply if you’re converting an existing property to create a new dwelling, for example converting a barn into a dwelling.
So if you’re buying building materials or engaging contractors, you may be able claim some or all of the VAT on these costs. This can be a very useful saving and make a significant difference to the project’s overall cost. And certain contractors’ services will qualify for the zero-rate or reduced rate of VAT.
But as with all things VAT related, the rules are complicated and I’ve seen many situations over the years where DIY builders have had claims rejected by HMRC, meaning that they end up having to find additional money to fund the project. If you’ve borrowed £200,000 and spent £220,000, but HMRC refuse your claim for the £20,000 VAT, then you may find yourself having to borrow more money at a higher rate of interest. I’ve even seen situations where people have had to sell their newly built dream home because they can’t fund the additional VAT cost.
And because most “DIY” builders/converters are private individuals, it’s often their first time they’ve dealt with VAT and they often don’t fully understand all of the rules.
These situations are bad enough if you’re running a business, but just think about the stress and disappointment you could face if it’s your family home and you’re currently living with relatives, or in rented accommodation with your children and you find that you can’t afford to move in.
I’ll be discussing this subject over the next couple of months, but let’s start with explaining the main principles of the reclaim scheme and the main problem areas.
How does the reclaim scheme work?
There are two separate schemes; one for new build and one for conversions. The principles are similar and the process is the same.
The main difference is that in the case of new build, you can only claim VAT on goods; whereas for conversions you can claim VAT on contractors’ services and related goods. The reason is quite logical: contractors’ services for new build are generally liable for the zero-rate of VAT, whilst the 5% reduced rate is charged for conversions.
In either case, you have to submit your claim with invoices within three months of completion of the project.
HMRC guidance and forms
HMRC’s guidance is very helpful and explains the rules in some details: http://tinyurl.com/hhwmfex.
- VAT claims for new build are made on VAT form 431B: http://tinyurl.com/gu4zz9m
- VAT claims for conversion are made on VAT form 431C: http://tinyurl.com/pt9ec7h
You can also claim for self-builds or conversions for certain other types of residential use, such as a hospice, or certain charitable use.
Main problem areas
The scheme itself is simple enough in principle. But there are a few issues that cause problems on a regular basis. I’ve summarised the main ones below:
The property doesn’t qualify
Among other rules, the property that is being built or converted must satisfy certain criteria to qualify. For example, the new “dwelling” mustn’t be subject to any restrictions on disposal, in other words it can be bought or sold independently of any existing property. So building a guest house or “granny” annex in the grounds of your existing property probably won’t meet this criteria.
You can’t claim overpaid VAT
I explained above that you can only claim VAT on services if your project is a conversion, because new build services are generally zero-rated. However most conversion services are liable to the reduced rate of 5%. So if you’re doing a conversion, e.g. a barn conversion, you can only claim VAT on contractors’ invoices if it’s the right amount of VAT.
In other words, if your contractor charges 20% for work that is eligible for 5%, then you can’t claim ANY of the VAT on those services. You have to ask the contractor to charge the correct rate of VAT in the first place.
Getting the paperwork right
Finally, HMRC won’t pay a claim unless you provide proper VAT invoices. This means making sure that your contractor/supplier provides a proper VAT invoice, not just a receipt, especially if you pay cash. You can find a full list of the information that should be included on VAT invoices in HMRC’s VAT Notice 700; The VAT Guide; section 16.3 http://tinyurl.com/p97npe7.
Either way, make sure that you do your homework and plan for VAT right from the start of your project, otherwise it could cost a lot more than you’d anticipated.
Marie
February, 2016