I receive many VAT queries from accountants in the course of a year and a lot of them are forgotten as soon as I press the send button on the email. But a few of the questions stick in my mind because they have an extra twist. My favourite query of 2019 shows how a misunderstanding of the finer details of VAT can be a potential danger zone.
Land sale to build a new house
The accountant had a client who decided to buy a plot of land and build his own house on it, then occupy the property as his main residence. He was going to purchase the land for £200,000 from a local farmer, who wanted to charge VAT on the sale (£40,000 of VAT) because he had an option to tax election in place. The client asked the accountant if he could claim this VAT back from HMRC and the accountant’s reply was as follows:
“Yes, that’s fine because the VAT DIY scheme means you can claim VAT from HMRC on ‘goods’ that relate to the house you are building, and land is classed as goods. But you can’t claim the VAT back from HMRC until the house has been finished and you’ve got a certificate of completion from an architect.”
The reply from the accountant contains a lot of factual accuracies:
There is a DIY scheme in place that allows VAT to be claimed on certain expenses linked to the construction of a new dwelling
Such claims are made when a person (or a relative) intends to live in the property themselves when it has been completed, ie it has a non-business outcome
The claim must be made within three months of the completion date of the property.
However, the problem is that a DIY housebuilders claim only relates to VAT paid on ‘building materials’ purchased in the course of constructing a new dwelling and not ‘goods’, and land is not a building material.
The accountant had a doubt in the back of her mind about the advice given to her client. In her own words: “Something didn’t feel quite right.” So she contacted me minutes before contracts were due to be exchanged to check her thinking.
The good news is that although VAT cannot be claimed on the purchase of land with the DIY scheme, a buyer can ask the seller to override their option to tax election if the land will be used for the self-build of a new dwelling (VAT Notice 742A, para 3.7). The buyer must give written confirmation of his intention to the seller before the deal takes place.
This meant that the land sale by the farmer was exempt from VAT (£200,000 no VAT) rather than standard rated. The VAT problem melted away with the morning mist.
The only other occasion when an option to tax election can be overridden on a land rather than building sale is if the sale is being made to a housing association that will use it to build new dwellings, or buildings to be used for a relevant residential purpose (eg elderly care home). The housing association needs to complete form VAT1614G and give it to the seller before the deal takes place (VAT Notice 742A, para 3.6)
New Year’s resolution
Make it your 2020 resolution to always consider the finer detail of the VAT rules – one word can make all the difference. For example, the VAT outcome of some supplies can depend on whether the word in the regulations is ‘or’ as opposed to ‘and’, ie whether all conditions need to be met or just one of them.