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?
- The construction of a private dwelling.
- The conversion of a non-residential building to a private dwelling. Within this category are ‘barn conversions.’
- The construction of a new building solely for use for a ‘relevant residential purpose’ or a ‘relevant charitable purpose.’
- The conversion of a non-residential building solely for us for a ‘relevant residential purpose’ or a ‘relevant charitable purpose.’
The main legislation is VAT Act 1994, s35, and VAT Regulations 1995, regs 200 & 201.
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:
- 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.
- A claim cannot include VAT on professional fees. In contrast, a developer will recover VAT on professional fees.
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.
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:
- 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.
- 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.
- 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.
As in all significant transactions, advice is best sought early!