VAT DIY refund scheme
Why are the VAT rules for self-builders so unfair? Nichola Ross Martin assesses the idiosyncrasies of the new scheme.
HMRC changed the forms that need to be filled out under its VAT DIY house builders and converters refund scheme with effect from 15 August 2009.
The old leaflet on the topic has been withdrawn, and applicants must now complete form VAT 431NB for new houses and VAT 431C covers conversions, both of which come with some fairly detailed guidance. Unfortunately, the same petty idiosyncrasies remain which will affect self-builders - these poor souls are put on a worse footing by doing the work themselves rather than engaging a builder.
A self-builder is unable to reclaim VAT on the cost of services such as architects, engineers and planning consultants, and also on certain consumables used in their build. This creates some inequalities; for example, if you buy a kit house, the kit is not subject to VAT, but the manufacturer will include designer and engineers’ fees in the cost of the package, which is zero rated.
However, if you personally build the equivalent of a kit house on site, you will need the same professional services and under the VAT DIY self-build scheme, you will incur VAT at standard rate on these costs.
When engaging a builder, they may use a the services of a designer to map out roof trusses, for example, or they might engage an engineer to work out loadings or certain tolerances, particularly if steel or beams are used in the build. The builder can reclaim VAT on these and will not charge the client VAT on them as they are inclusive to the service, which is zero rated. Conversely, self-builders are not able to reclaim the VAT on the costs of these professionals if they engage them themselves.
Obviously you can ask any VAT registered builder who is working for you to help you out and put them through his books. However, the danger here is that the builder will be tempted to include a mark up, putting you in a lose/lose situation.
A truly baffling part of the guidance relates to materials: You can only make a claim for materials which are incorporated into a building, or are stated in the planning requirements. Therefore, you can reclaim the cost of cement and sand, but you cannot reclaim the cost of white spirit as it is used to clean brushes. Sandpaper cannot be claimed for, despite the fact that you cannot apply another coat of paint without sanding down the first layer, but you wouldn’t be charged VAT on the sandpaper used by a builder and he can reclaim it.
The same bugbear applies to tools; you cannot reclaim VAT on tools, even though you are likely to consume and lose a good deal of small items, particularly when it comes to paint brushes and loose tools. Again, builders face no such restriction. Bizarrely, you can claim the cost of a soap dish. The last time I looked, soap dishes were generally detachable for cleaning purposes, so they are hardly incorporated into a building.
The most unfair part of the whole scheme is that you can only send in one claim. If you decide to submit a claim before the dwelling is officially ‘signed off’ by the building regulations inspector, you will not be able to submit an additional claim for that property. So if cash flow is tight and you really need that VAT refund to finish the build, you are basically stuffed. You must borrow your VAT from the bank if you want to be able to reclaim VAT on the finishing costs.
Self-builders that do make it to the finish then find that their VAT claim must be submitted no later than three months after the construction work has been completed.
We’ll have to save conversions for another day, but I will add that half the fun of a conversion project is trying the work out the rules and then making sure that your architect and builder understand the rules too. It’s all part of the fun of ‘project management’.
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Nichola Ross Martin FCA, heads up www.rossmartin.co.uk a unique practical tax database with Virtual Tax Partner support for accountants.