HM Revenue & Customs (HMRC) operates a VAT refund scheme for 'DIY' house builders or house converters. Those building their own home or converting a commercial property into a residential property could claim back thousands of pounds of VAT charged to them on the purchase of building materials.
The scheme allows anyone who is acting in a non-business or private capacity to reclaim VAT on costs and put them into the same position as if they had purchased a new property from a developer (the first sale by the developer to a customer is zero rated i.e. VAT free). You do not have to do the work yourself; engaging a builder or various tradesmen to do the work will be acceptable and allow a claim to be made.
There are a number of hurdles to face and a deadline by which a claim must be submitted, but provided you comply with all the rules outlined by HMRC, the chances are you will qualify for a VAT refund. As the average price for building a standard three bedroom house is £210,000 the VAT at stake could be anything up to £42,000!
One of the most critical factors to address before making a claim is to be certain that the property qualifies under the definition of a 'dwelling' as per the VAT Act 1994. The planning permission application and local council decision documents become extremely important in determining this point. A number of recent VAT Tribunal cases have resulted in properties being deemed not to be dwellings due to a restriction on the use or ability to be disposed of, and thus a DIY claim cannot be made.
In some cases the VAT charged by the contractors or tradesmen may fall under the reduced rate of VAT at 5%. It is necessary to ensure that they have charged the correct VAT rate, as HMRC may reject any invoice if the wrong VAT rate has been used. And just to add to the complexity of the issue. the reduced VAT rate is widely misused/misunderstood.
You are advised to keep accurate records from the outset of a project and in such a way as can easily be provided to HMRC as part of the submission pack. Given there is a three month deadline to submit the application once practical completion/sign off has been achieved, it is imperative to be ready to submit when the time comes, as some cases have failed where the deadline has been exceeded.
You must also be aware of the types of items that are deemed building materials which can be claimed, and those which are not. If invoices contain a mix of both, it is necessary to apportion the claim accurately. Also original, full invoices are required – pro forma invoices, statements, credit card receipts and order forms are not acceptable.
HMRC has been known to issue penalties to applicants who make inaccurate claims, so it is important to ensure claims meet the appropriate criteria.
We would recommend specialist advice is sought on this matter, please contact a member of our VAT team
for a free initial discussion.