Whether you’re a building contractor, commercial property developer or you’re doing any sort of DIY/self-build project, the subject of VAT and building materials is one of the most frustrating and difficult.
Why is this? Well it’s all to do with the VAT cost. If the goods qualify as “building materials”, then the contractors can charge the zero-rate when the goods are used in new construction or the reduced rate in certain conversions and renovations. DIY builders (i.e. self-build for personal/family use) and commercial developers making zero-rated sales of new property can usually claim VAT on these costs.
So the definition can make the difference between paying/claiming VAT at 5%, 20% or nothing at all. If you’re a contractor and don’t charge enough VAT, then you could end up having to pay the VAT to HMRC out of your own pocket. And if you’re a developer making exempt supplies (e.g. renting property) you’ll have to budget to pay for irrecoverable VAT on goods that aren’t “building materials”.
So how do I find out whether goods are “building materials”
To work out whether the goods are “building materials”, you have to find out whether the goods meet the criteria set out in VAT Notice 708, Buildings and construction, s13 http://tinyurl.com/n6gttof.
For most types of expenditure, the VAT liability and recovery position will be quite obvious – for example contractors can zero-rate the supply and installation of bricks and mortar used in new construction and the VAT on the purchase of these materials can be claimed under the DIY refund scheme.
But the term doesn’t include everything and that’s when you have to see if the goods concerned meet the criteria.
The definition is set out in Notice 708, section 13.2. There are 5 criteria:
- The articles are incorporated into the buildings (or its site)
- the articles are “ordinarily” incorporated by builders into that type of building
- other than kitchen furniture, the articles are not finished or prefabricated furniture, or materials for the construction of fitted furniture
- with certain exceptions, the articles are not gas or electrical appliances
- the articles are not carpets or carpeting material
Section 13 then goes on to explain the above criteria in some detail, with useful lists of goods that fall into each category and goods that don’t fall into the category.
To qualify as “building materials” the goods have to meet EVERY ONE of these criteria.
So what exactly IS a vanity unit then?
HMRC’s lists are very helpful and quite comprehensive, but they can’t cover every single type of expenditure. For example, wardrobes and “elaborate vanity units” don’t qualify as building materials, but they don’t define the meaning of “vanity unit”, whether elaborate or not! This means that you have to work your way through the criteria to work out whether or not the goods qualify. And sometimes the criteria aren’t don’t seem to make a lot of sense.
Let’s think about a typical example: electric gates and electric garage doors.
Most new homes now include electric garage doors and many larger homes are protected by electric gates. So from the layperson’s perspective, you’d think that these would qualify as “building materials” because they’re normally included in new homes.
Unfortunately, that’s wrong.
One of the 5 “building materials” criteria is that ” with certain exceptions, the articles are not gas or electrical appliances”. The notice goes on to say that “certain electronic items are not regarded as “building materials” because they aren’t “ordinarily installed” in dwellings, including the following:
“electrical components for garage doors and gates (including remote controls)”
What does that mean in practice?
It means that manual gates and garage doors are normally regarded as “building materials”. If you subsequently add electronic components to make the gates or the doors electronically operated, then the components aren’t regarded as “building materials”. However if the electronic components are integrated into the gates or doors then neither are “building materials”. This means that the contractor has to charge 20% VAT for the goods and labour and DIY claimants and commercial developers can’t able it back.
Other common problem areas are vanity units, garden plants/trees and integrated appliances. Many of these issues have been the subject of VAT Tribunal appeals over the years so it’s very difficult to give definitive guidance about any of these issues. It’s difficult even to define certain things – what exactly IS a vanity unit?
And just to confuse the issue, sometimes the labour cost for installing the goods may qualify for the zero-rate if they are supplied and installed in the course of construction of new dwellings or other qualifying residential property. See VAT Notice 708, paragraph 11.2 for more information about VAT on related services.
As I said earlier, for most types of expenditure, the VAT liability and recovery position will be quite obvious, but sometimes you need to dig a bit deeper into the rules to work out the answer.
Watch out for my new book “VAT for DIY property developers” which is written specifically to help those of you developing for personal/family use or thinking about residential property development as a business. Available as an ebook on vatexchange.co.uk and in print on Amazon early in the new year.
Marie
December, 2016