Grand designs reap £25k VAT refund
In a case of high drama, a couple won their argument to reclaim VAT incurred on building their dream home, as Scottish law was not correctly reflected in the HMRC guidance.
Simon and Joanne Cotton (TC07553) worked hard to convert a former council works depot into a second home in the Scottish borders, and reclaimed £25,683 under the VAT do-it-yourself (DIY) scheme for the project. However, HMRC disallowed the claim relying on the guidance in their VAT construction manual.
VAT legislation and planning rules
A new home is zero-rated for VAT subject to the appropriate regulations in VATA 1994 Sch 8, Gp5. The DIY scheme puts the self-builder on similar ground by way of a refund scheme, but only after completion (see VATA 1994, s35 and VAT Regulations 1995 [SI 1995/2518], reg 201).
As for the planning rules, the Building Act 2003 in Scotland gives ministers powers to set building regulations and technical specifications. A building warrant is issued when planning permission is granted along with a construction compliance and notification plan setting out the various stages at which local planning officials should inspect the works. A building is completed when a notification of acceptance of a certificate of completion is issued.
A planning application was made for the Cottons’ project in July 2015, and approved in March 2016. A building warrant was issued in November 2016, and construction works started immediately.
By March 2017 works were almost competed but domestic circumstances involving schooling and family illness changed the Cottons’ plans. Property agents suggested they let the property temporarily as holiday accommodation and they informed the local council of this change of use.
Further works were required to adapt the home for holiday accommodation. A revised building warrant was issued in March 2018, and a notification of acceptance of a completion certificate was issued in April 2018.
Was the VAT refund claim out of time?
The Cottons submitted a refund claim to HMRC in May 2018, but in September 2018 HMRC informed them that as the building had been completed in April 2017, the application was out of time.
The Cottons had made two previous DIY claims in England where HMRC had told them that a VAT refund could not be made until a certificate of completion was issued by the local authority. Scottish law required the notice of acceptance of the certificate of completion, which wasn’t issued until April 2018. The Cottons then submitted a refund claim within the three months complying with VAT reg 201 (a) and (b).
HMRC argued that regs 201 (a) and (b) state there is no one form of evidence, and that a certificate of completion is not the definitive evidence of the date of completion. The building was ready for occupation in April 2017 and the extra works required for holiday accommodation did not change this.
HMRC relied on linking the claim submission in reg 201(b)(i) with evidence of completion. It argued that the taxpayers could have forwarded details of rating valuation as other documentary evidence.
HMRC said that the test in Note (2) (d) to Gp5, Sch 8 had failed as it was no longer a dwelling, but self-catering accommodation and it was listed as such for business rate purposes. The taxpayers reiterated that this was simply a temporary move and their plan was still to move to Scotland, which the FTT accepted.
Scottish and English law
HMRC’s VAT construction manual para VCONSTO2530 and the DIY claim form (VAT431NB) at para 14 state that in the absence of a certificate of completion, other evidence such as a habitation letter from the local authority, or entry into a valuation list will suffice, furthermore VAT notice 708, para 3.3.2 also reflects this. The Cottons had read at least some of this guidance.
However, the FTT’s view was that had the property been in England the Cottons would have submitted their claim form in March 2017 reflecting the internal HMRC guidance above and their experience in England.
However, under the 2003 Act Scottish law required a notice of acceptance and this was not issued until April 2018. The property was not habitable until then and therefore the Cottons acted correctly in delaying their claim. The appeal was therefore allowed.
A puzzling outcome?
There appears nothing to stop the Cottons from continuing to let the Scottish property indefinitely if they so choose. They have their VAT refund, but with no corresponding VAT outputs on rental income putting them at an advantage over VAT registered businesses who would have to include VAT in rental charges.
There is also an issue over the technicalities between English and Scottish planning law, which is not addressed in official guidance and clearly confused matters here.
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James has over 30 years experience in VAT having trained with HM Customs & Excise he has worked in practice, including a Big Four firm as well as running his own consultancy. He also has extensive experience in public sector VAT, as well as previously advising the Federation of small businesses.