VAT Do-It-Yourself Scheme

This article outlines how the VAT D-I-Y scheme works. The scheme applies to an individual, or an organisation, which want to construct (or convert) a building for his/her (its) own use. The various conditions of the scheme are explained; and I have highlighted a few potential pitfalls for you to avoid!

What sort of projects are eligible?

  1. The construction of a private dwelling.
  2. The conversion of a non-residential building to a private dwelling. Within this category are ‘barn conversions.’
  3. The construction of a new building solely for use for a ‘relevant residential purpose’ or a ‘relevant charitable purpose.’
  4. The conversion of a non-residential building solely for us for a ‘relevant residential purpose’ or a ‘relevant charitable purpose.’

Legislation

The main legislation is VAT Act 1994, s35, and VAT Regulations 1995, regs 200 & 201.

Overview

The principle purpose of the D-I-Y scheme is to put the private person in the same position as a person purchasing from a property developer. In this respect, the claimant can claim VAT on materials purchased for the project (subject to specified exclusions). Supplies of construction services will always be zero rated (for a new build project). Supplies of conversion services will be charged at 5%.

There are two important differences, though, which the claimant needs to be aware of:

  1. A claim can only be made at the end of the project (and within 3 months of Completion.) This means that the claimant has to fund the VAT during the project. The VAT claimed is only received after Completion, and he cannot make interim claims. In contrast, a developer can recover VAT throughout construction, usually on a monthly basis.
  2. A claim cannot include VAT on professional fees. In contrast, a developer will recover VAT on professional fees.

HMRC Guidance

HMRC publish combined notes and claim forms: VAT 431NB (for a New Build) and VAT431C (for Conversions). They are amongst HMRC’s clearer publications! A claimant should obtain a copy as early as possible (http://search.hmrc.gov.uk/kb5/hmrc/hmrc/results.page?qt=vat431)

Once the claimant is ready to submit a detailed line-by-line schedule of invoices, he is entitled to submit his own version on MSExcel, or similar spreadsheet. Original invoices also have to be provided, so everything should be sent by Special Delivery.

HMRC have a designated office which deals with all claims. This is helpful, as the team handling the claims have a degree of expertise.

Specific Issues

Having dealt with a number of claims over the years, and having read a number of Tribunal cases, there are a number of issues that repeatedly cause problems, and can result in claims being lost entirely:

  1. The legal definition of a ‘dwelling’ excludes a situation where there is a restriction in the use or disposal of the building. This is quite common in certain rural areas. Such a restriction would appeal in the Planning Permission, but may be elsewhere in documentation. HMRC have become increasingly adept at spotting such restrictions. The result is frequently that the claim is rejected.

For example, the Planning Permission may require that the occupier be employed in a specific industry, or that the property may not be disposed of separately to an adjacent building.

Some such wording falls short of a restriction. In some cases, HMRC’s rejection has successfully been overturned. Do be aware of this issue. It may be possible to have the terms of the Planning Permission amended.

  1. Where a non-residential building is converted to a dwelling, any services supplied are chargeable at the reduced 5% rate. The supplier should be advised of this, and asked to charge VAT at 5%. (The reduced rate does not apply to professional services.) HMRC will not repay VAT at 20% on services.

The supply and installation of builders’ materials is a supply of services; do make sure the wording of the invoices is clear and accurate.

  1. If the claimant is buying land, VAT should not be charged. The claimant should advise the Vendor accordingly. Again, HMRC will not repay VAT paid on the purchase of land.

 

Conclusion

      As in all significant transactions, advice is best sought early!

Comments
The VAT Doctor's picture

T Fox / Catchpole

The VAT Doctor | | Permalink

Nice article.

Mentioned this on Twitter too.  These recent cases are causing a real headache at HMRC towers.  I had a meeting with 'Policy' recently and they basically said, don't mention this, we don't agree!

For people who are unaware, both of these (DIY) cases looked at the same type of problem.  Namely a development where a dwelling occupied two buildings.  In one case, there was a courtyard and there were two barns facing each other that were converted to living accommodation, one part had kichen, bedrooms, louge etc and the other had bedrooms i believe.  Both were covered under the planning consent as being part of one dwelling.  HMRC tried to argue neither structure was a dwelling.  The Tribunal disagreed.  Essentially, the tribunal said the Interpretation Act allowed a 'building designed as a dwelling' to include buildings  too and, as both buildings were used as one dwelling, both parts were eligible for relief.

The arguments used by the tribunal in these cases are essentially those used by the dissenting judge in the Zielinski Baker case, which of course related to listed buildings, but also related to whether an outbuilding used as part of a dwelling (as a swimming pool), but not physically connected, could be zero-rated.  HMRC argued, and still do, that a dwelling can only be ONE building.

I am aware that the CIOT have written to HMRC policy about this, because if Fox and Catchpole are correct in law, Zielinski Baker is wrong.  My personal view is that Zielinski Baker was incorrectly decided and the proposition that a dwelling can contain different buildings, used together as one living accommodation, is a compelling one that must be correct.

So what does this mean?  Well it could potentially open up claims in respect of detached swimming pools, sheds, summer houses etc.

This is all open to debate of course!

Constantly Confused's picture

A question if I may

Constantly Confused | | Permalink

I've often wondered, but never discovered, whether in a situation where a builder refuses to ZR their services (which I have seen now and again) through a lack of VAT knowledge/a cautious nature, can the VAT suffered still be recovered under the DIY scheme, or do HMRC consider it to be VAT incorrectly charged and refuse its recovery?

 

DMGbus's picture

Unjust enrichment of HMRC

DMGbus | | Permalink

If a contractor incorrectly charges too much VAT (be it 5% instead of 0%, 20% instead of 5% or 20% instead of 0%) HMRC will stubbonly refuse to repay the excess VAT on the basis that

" as it was not correctly chargeable it is not VAT - as it is not VAT it cannot be recovered as input tax "

" it is a civil matter between the claimant and the supplier "

" not our [HMRC] problem "

" goodbye [from HMRC] "

I can see this unjustly enriching HMRC in cases where the supplier (contractor) refuses to refund the excess VAT to the customer, but that contractor has accounted for the excess VAT to HMRC.  In such a circumstance contractors declarted output tax exceeds customers recoverable input tax. 

Disputes can occur between contractor and customer and this is where the customer can suffer particularly in the circumstances outlined and HMRC most certainly can get unjustly enriched.

Constantly Confused's picture

As I suspected

Constantly Confused | | Permalink

As I say, I don't see it very often, but there have certainly been a few builders who point blank refused to ZR.  At least now I know it's more than a cashflow issue!

 

Many thanks.

The VAT Doctor's picture

Negotiate!

The VAT Doctor | | Permalink

DMGbus, I agree.  There have been many times when I have had to persuade a builder that he really is entitled to zero-rate, or 5% rate.  So, all it may need is someone explaining the position to the builder, or more likely his accountant/bookkeeper.

 

leshoward's picture

reduced and lower rates

leshoward | | Permalink

I also come across builders who refuse to apply the reduced or lower rates, thinking that they are leaving themselves vulnerable to HMRC attack. It does leave the final client in a difficult position, because they have to bear the cost.

leshoward's picture

Zielinski Baker comment

leshoward | | Permalink

I agree that ZB was incorrectly decided. I have lost other cases on it as well. The logic of the decision does not follow the wording of the legislation. I have a current case which will turn on this exact point, but I don't know if the Client will withdraw or not.

The VAT Doctor's picture

Carrying on may be profitible for all

The VAT Doctor | | Permalink

leshoward wrote:

I agree that ZB was incorrectly decided. I have lost other cases on it as well. The logic of the decision does not follow the wording of the legislation. I have a current case which will turn on this exact point, but I don't know if the Client will withdraw or not.

Would be great if they carried on Les.  HMRC are sensitive on this though, particularly in those instances where the second structure is a swimming pool!  I also had another case a few years ago where HMRC ruled that a swimming pool complex that was separate but which provided some of the power to a listed building was an approved alteration, on the basis of the connection (by the pipework).  Pretty surprised to get that ruling!

Does "moving in date" affect a refund claim?

doctorwho | | Permalink

Is there any time limit for an individual to move in the building after receiving the completion certificate or it does not matter? Do individuals in England need "certificate of habitation" once they already have got "certificate of completion". Please comment.

leshoward's picture

Completion or date of moving in    1 thanks

leshoward | | Permalink

The regulations refer to formal Completion. Usually, moving in is around that date. However, I have seen a number of cases where one is several months (or longer) before the other. How long a person waits after Completion before moving in cannot matter legally. However, it would always be worth making a note explaining why, to pre-empt any questions from HMRC.

Add comment
Log in or register to post comments
This blog

this blog raises and addresses VAT issues.

I work with Accountants, Charities, and SMEs, providing VAT support. I come across a wide variety of interesting people, and a wide variety of VAT issues. Some of them will find their way to this blog.

And, I play guitar, but you probably guessed that!