Q:
Hi
I’m hoping you’ll be able to provide me with a bit of advice on re-claiming VAT on materials used in constructing a newbuild property.
It’s a little bit of a saga but please bear with me.
In 1992 my husband and I bought a plot of land with outline planning consent for a bungalow with a view to building it ourselves as our home. We had no other intention. Had it all gone to plan back then, of course, we would have been able to recoup the VAT under the Selfbuild Scheme. In fact, I still have the original documentation!
However, it didn’t go to plan, mainly because of a restrictive covenant only allowing construction of a single storey garage or a greenhouse (solicitor missed it – don’t even go there!!!), so we shelved the project on the advice of a second solicitor. This second solicitor also told us to buy a home as we’d never be in a position to build.
This we did but his advice was also wrong (can’t we just pick em eh?!) and all these years later we’ve just received the Local Authority Completion Certificate – yeah!! We re-commenced building in July 2008.
Trouble is that an HMRC inspector advised me to register both me and my husband as self employed so we could recoup the cost of the equipment we’ve had to buy along the way. He’s been s/e since Oct 2007 (£800 earned at the time) and I’ve been s/e since July 2009. We’ve had no other income at all from this self employment since re-commencing building but the inspector said it was ok as we were undertaking the project with a view to eventual profit albeit one big lump sum realised on sale. We’ve also had full Working Tax Credits based on £nil income since June 2009.
Ok, now for our query. At no point until recently did anyone mention that we can’t claim the VAT as selfbuilders if we link the newbuild to a business. Does anyone have any advice for me? A local accountant has told me we should voluntarily apply for VAT registration and submit quarterly returns for each of us. Does this sound like something we should do? (We have a knack for obtaining and following the wrong advice so need several opinions before moving forward on these sorts of things!!)
In case it’s relevant, the VAT comes to around £5k and the eventual profit around £100k.
Another thing, in case this is relevant too, our intentions have waivered from ‘we’re gonna live in it’ to ‘we’re happy where we are, let’s sell n make a few bob’. We still haven’t decided what we’re going to do and wonder if what we decide will affect any VAT claim.
Thanks in advance
P.S You don’t know anything about Capital Gains do you??
A:
Hi
Thanks for your query and welcome to the forum. To start at the end first, I don’t know anything about Capital Gains – it’s difficult enough to stay on top of the VAT rules never mind any other tax stuff. But I can confirm the correct rules about recovering VAT on the cost of constructing a new dwelling.
You say that you’ve had “no other income” from your self employment so for the purposes of this post, I’ll assume that means you made no other sales of goods or services at all.
Now, bear in mind that the information I give here isn’t to be taken as definitive advice. But it does seem to me that you’ve been given misleading information about your situation and that’s probably because of confusion about the two different ways of recovering VAT on newbuild dwellings. You either register for VAT as a business because you intend to sell the property OR you claim VAT under the DIY housebuilders scheme (ie the selfbuild scheme) if you’re going to use the property as your own home.
And because the rules about reclaiming VAT in each situation differ, you have to be careful about time limits as you normally have to make a claim under selfbuild scheme withinh three months of completion.
Normally, you’d only register for VAT if you are carrying something out as a business activity. I won’t go into the technical terms here as it would take all day but just to avoid any doubt, you can only register for VAT and recover VAT on your purchases and expenses if your supplies (ie sales) will be TAXABLE for VAT purposes, which could be at teh standard rate, the zero-rate or the reduced 5% rate.
The freehold sale of a new dwelling, or a long lease, over 21 years, is zero-rated for VAT purposes. Letting the property on a shorter lease, whether its 20 years or 6 months, is exempt from VAT. If your supplies will be exempt from VAT, then you can’t register and you can’t recover VAT on your purchases and expenses other than in certain limited situations.
And just to make things even more complicated, remember that the definition of the term “taxable” is different as it applies to different taxes, such as income tax or tax on capital gains. Here I’m only talking about VAT.
So when you registered for VAT, you would only be able to recover the VAT on the materials and equipment if the intention was to sell the new home as a taxable supply, ie a freehold sale or a lease exceeding 21 years. If you rent the house out on a short term lease – which for VAT purposes is 21 years or under, then your supplies would be exempt and in principle, you wouldn’t be able to register for VAT. I know that a lot of housebuilders have been forced to do short term lets because the market has been slow and that affects their entitlement to recover the VAT on the construction costs.
In principle, there’s no time limit on reclaiming VAT if you’re registered for VAT. However there is normally a time limit of 3 months from the date of completion for making a claim under the DIY housebuilders scheme. Here’s the link to the HMRC information about making such claims – http://www.hmrc.gov.uk/vat/sectors/consumers/new-home.htm.
So, you have to decide what you’re going to do with the property before you can recover the VAT on the costs because claiming the VAT through a VAT registration or through the self-build scheme.
I know that the VAT rules on property are complicated and I never give definitive advice other than through my formal consultancy business. But I hope that this information at least helps you to understand the difference between claiming the VAT back by registering for VAT because you’re carrying out a business activity and the DIY selfbuild scheme.
Marie
Q:
Hi Marie
Thanks so much for your comprehensive reply.
Now then, HMRC have told me we won’t be able to claim the VAT as self builders as we’ve linked the property to a business. They implied that this would still be the case even if we do move in as it will still have been linked to a business. I realise, from first hand experience, that not everyone I speak with at HMRC gives correct advice so am interested to know if this is, in fact, true.
We’re still debating over whether or not to move in but having a straightforward yes or no would certainly lend weight to matters.
HMRC also told me we would have to register for VAT upon sale of the property anyway as turnover will exceed £70k each (we are sole traders rather than a partnership (couldn’t find any advice to suggest which would be more beneficial for us so kept with sole trader)). If we don’t voluntarily register for VAT now, aren’t we just delaying the inevitable?
By the way, in case you’re wondering why I’m double-checking everything told to me by HMRC, that local accountant told me NOT to ask HMRC for any further advice as the call centre staff don’t have sufficient training.
What you’ve said about leases is very interesting – I hadn’t realised this would make any difference. Are we still unable to reclaim the VAT even if we sell after letting the property for a short period too?
It all seems to be a bit of a minefield!
Many thanks again in anticipation
A:
Hi
First of all, I apologise for the delay in replying to your query – things became busy during the run up to Christmas and I’ve only just caught up. However, I think it may be to your benefit. Since your initial query, I had a query from an accountant about a client of his who was in a similar situation. I did some further digging into the subject and found some information that should help both of you.
As a VAT consultant, my clients are almost always businesses and over the years, I’ve only ever given very general advice to clients claiming VAT through the DIY Housebuilders scheme. Most of these situations – and there haven’t been very many – have been very straightforward, so I’ve never really had to look beyond the basic practical stuff of helping clients to prepare the claim etc.
But with 2 similar situations in a short space of time, it seemed to me that there must be other people who’ve been stuck because of not being able to sell their existing homes, or other changes in circumstances, who have had to reconsider their plans for the new property. I had a dig round and found some very interesting information in the HMRC internal guidance (or manuals, to give them their proper name) which applies to these sorts of situations. Their internal guidance used to be available only to their staff, but can now be accessed by the public through http://www.hmrc.gov.uk. I normally don’t recommend that people refer to this guidance as it assumes a working knowledge of VAT, but the section about DIY Housebuilders is quite readable and not too long, so you should be able to follow it quite easily.
I have written an article which is here on the website https://vatexchange.co.uk/DIY-Housebuilders-claims-jan-2011XXXX which summarises the main issues and I think you will see that it deals with your circumstances pretty well. I’ve explained what to do when submitting your claim and set out the relevant links to the guidance for you to quote. Don’t be put off by someone telling you that the claim won’t be considered because it was linked to a possible business – that’s not correct and you have to insist that they consider your claim in the light of the information contained in their internal guidance.
The important point is that the guidance explains how the scheme can be used by DIY Housebuilders whose circumstances change and have to consider other options about how to use the property once it is completed, even though their ultimate intention and preference is to live in it. So read the article and have a look at the guidance and I think you’ll find what you need to deal with your claim.
I wouldn’t normally go into this level of detail or spend this much time on a forum query but I do believe that you’ve been given misleading advice from HMRC and I get really frustrated when this sort of thing happens. As I’d not dealt with this situation before, I’ve never had to dig deeper for information about the subject so didn’t know what the HMRC guidance contained, but we all learn something every day! And the information I’ve found will help anyone else who is in a similar situation in future.
Let me know how you get on with it all and good luck with your claim.
Marie
13 January 2011