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Last-minute VAT query saves £40,000

In Neil Warren's favourite VAT query from 2019, an accountant saves a client £40,000 five minutes before they purchased a building plot.

21st Jan 2020
Independent VAT Consultant
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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.”

Building materials

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.

Happy ending

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.  

Housing associations

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.

Replies (6)

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By Ian McTernan CTA
22nd Jan 2020 11:24

Goes to show how crazily complex the VAT rules are- and why we should all consult VAT experts on any significant questions that arise. I freely admit I'm not a VAT expert and refer clients to one whenever something crops up that I am not 100% sure about (and even then I might refer it anyway).

This is especially true where property is concerned as the amounts get very large very quickly!

Well done Neil and others like you who understand those crazy rules and instruct us mere mortals in how they work!

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Hallerud at Easter
By DJKL
22nd Jan 2020 13:20

Of course does the seller not need intimation of purchaser's intent to self build and the disapplication BEFORE the price is agreed, whilst in this case last gasp tax advice worked in a lot of cases the seller might well either refuse to sell to the buyer on being informed or change the price they would be happy to sell plot at to that particular buyer.

I have been there with this years ago, a sale of 5 house plots to what I thought was a builder only for him to wish to change things at near last gasp to five distinct house plot sales each to individual members of his family who were each going to build houses for own use- apparently!!

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By rememberscarborough
22nd Jan 2020 13:49

Our tax system is totally and utterly broken. Nothing has changed with this transaction but the two different methods result in a huge financial difference. The tax system shouldn't be about who's got the "smartest" accountant but it does appear HMRC are intent on trying to scam people one way or another.

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Replying to rememberscarborough:
Hallerud at Easter
By DJKL
22nd Jan 2020 14:07

Well they have changed, the seller may now have a vat bill and so effectively a lower net of vat price.

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By Justin Bryant
23rd Jan 2020 17:55

With respect and to be fair, potentially disapplying an OTT is not that complicated an issue and I see it at least one or two times a year. It also saves SDLT of course (so the total tax saving was £40,800).

CGS claw-back is only an issue where the property has been owned <10 years. The only other potential downside for the Vendor of the OTT disapplication (via a 1614D certificate issued by the Buyer to the Vendor) is that they cannot recover input VAT on their selling fees (e.g. conveyancing fees).

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Replying to Justin Bryant:
Psycho
By Wilson Philips
24th Jan 2020 10:20

Hmmm ... you should perhaps stick to SDLT planning, Justin.

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