Case Study: DIY Home Builders VAT Reclaim

The DIY House Builders VAT scheme is available for people who build their own homes to reclaim the VAT incurred on their building costs. This scheme puts self-builders in the same position as people who buy new houses from housebuilders in that the costs are zero rated for VAT.

In its guidance to applicants HMRC sets out a strict and rigorous application process for each applicant to follow in order to be successful.

Two important conditions for making a claim stand out:

  • Only one claim can be made per project; and
  • The reclaim application must be submitted within 3 months of the building being “completed”.

Completion certificates are mentioned several times on the application form (VAT431NB) and there is a section outlining their importance in the accompanying notes and when completing a claim form most people would consider that the date of the completion certificate was the relevant date for the clock to start ticking on making a claim. So in an ideal situation, a property will be completed on time and on budget, a completion certificate will be issued, a family will move into the house and an application to recover the VAT will be dispatched to HMRC within 3 months seeking a reclaim of the VAT on the project.

In recent years, we have become aware that HMRC has rejected several claims where the builder and family have moved into the property prior to the work being fully completed. These claims have been rejected even where a completion certificate has been issued and the reclaim application is submitted within 3 months of the certificate date. Within the application form there is a question which asks when the property was first occupied which then leads to the initial challenge by HMRC. Given the strict timescale for submitting claims, it can render some claims “out of time” and self-builders have lost out on the VAT they paid on the construction of their homes.

We recently assisted one DIY builder who was faced with this very issue.  Due to financial and extreme economic pressures our client had to move into the property midway though the project. The house was built, however several rooms were incomplete but he was left with no option to move firstly into the garage building of the property and then into the main house and then continue work when he had time and budget to undertake the additional work.

In this particular case, a completion certificate was issued on 26 May 2017 and a claim was submitted on 10 August 2017 (within the 3-month timescale), however the claim was rejected because HMRC considered that the building was completed well before the completion certificate was issued.

We advised our client through an independent review process and then Alternative Dispute Resolution (ADR) but were not able to change HMRC’s position on the date when they considered that the building was complete. HMRC’s position was that the building was complete either in December 2008 when the property first started to be occupied; or, in June 2016 when the last invoice was received.

Our client was brave enough to take his case to the VAT Tribunal and was successful in what was a significant personal (and financial) triumph.  What was most interesting about the Tribunal judgment was the Chairman’s comments on what the law means by “completion” (rather than HMRC’s definition which was relied on throughout the appeal process).

The VAT legislation explains that specific documents are required in order to make a claim; namely, a certificate of completion from a local authority or other documentary evidence of completion of the building. The Tribunal Chairman goes on to describe that having this rule gives clear guidance for both a claimant and HMRC on where the 3-month clock starts clicking for a DIY claim. The Chairman ruled that it is only where there is no certificate in place that other completion date alternatives can be given. This may apply where a claimant wants to submit a claim well in advance of a formal completion certificate being issued (which would negate his ability to make a further claim). Tellingly, the judgment goes on to point out that, based on the statute, neither the date of occupation or the date of the last item of expenditure should be used as alternatives to determine the completion date, although HMRC relied on these in this case.

A lot of the discussion during the Tribunal revolved around the clarification of what the legislation means to be ‘complete’. On this point the Tribunal found in our client’s favour and ruled that the meaning of ‘completion’ is to be given its plain meaning and can be defined by the issuing of a certificate of completion as this is a clear-cut definition. The Tribunal also rejected HMRC’s argument that the primary date of completion was the date of the last invoice included in the refund as it is considered that DIY new builds often occurs in bursts of activity then periods of inactivity. The tribunal also noted that from the photographic evidence submitted, there were still several rooms of the property ‘incomplete’ at the date of sale.

Conclusion

This case has helped highlight how strict and compliant DIY housebuilders must be in order to be successful with their claims. It also highlights that HMRC can be challenged where taxpayers are denied claims. Unfortunately, the costs associated with going to VAT Tribunal often outweigh the VAT at stake, so taxpayers are often in the invidious position of having to accept HMRC’s position. In this case, our client was confident enough to represent himself clearly worked in his favour with Tribunal Chairman – a position that the majority of laypeople would want to face!

HMRC has decided not to appeal this case, which is a relief for the taxpayer, however it still leaves legal uncertainty. As this is a Tribunal decision it cannot be relied on by other taxpayers in future cases (although the Tribunal Chairman’s comments on “completion” are very telling).

We would recommend that anyone who has had recent DIY claims rejected by HMRC to speak to a VAT adviser to see if it may be possible to appeal the decision.

TC07240: STUART FARQUHARSON

[2019] UKFTT 425 (TC)

HMRC Clarify Import VAT Treatment for Distributors

Businesses who regularly import goods into the UK will be aware of the customs procedure that allows the “importer of record” of the goods to recover the import VAT charged once they have received the corresponding C79 “Import VAT Statement” from HM Revenue & Customs (“HMRC”).

HMRC recently published Brief 2/19 “Import VAT deducted as input tax by non-business owners” which concerns businesses who recover input tax after they have imported the goods despite being “non-owners” of those goods, is incorrect.

In the Brief, HMRC uses the example of toll operators who act on behalf of foreign clients and do not actually own the goods that are being imported.

For clarification, the way in which a Toll operator in the UK operates is by importing the goods (commonly within the pharmaceutical sector), processes them and then distributes the goods within the UK for clinical trials. At no point do the Toll operators take ownership of the goods. Title of the goods remains with the overseas supplier

The role of the toll operators here is merely to act as the importer of record to release the goods into the UK economy and distribute them throughout the UK. They do not at any point take ownership of those goods. Despite this toll operators will receive the corresponding C79 for those goods, however, they will not in fact be entitled to recover the input tax incurred as they “non-owners” of those goods.

The correct procedure for the owner to be the importer of record and reclaim the import VAT, is either:

  • If registered for VAT in the UK – Recover on a UK VAT return;
  • If not registered for VAT in the UK – Under the Thirteenth VAT Directive (86/560/EEC) (if not registered for VAT in the UK). The time limit for making Thirteenth Directive claims is within 6 months of the ‘prescribed year’ in which the VAT was charged

HMRC have stated that there will be no retrospective action taken against the toll operators who acted in good faith with regards to the recovery of input VAT, but HMRC will be taking a more vigilant approach from 15 July 2019.

This highlights to businesses who are importing goods regularly into the UK that they need to have clarity over who is the registered owner of the goods in order to be able to fully recover the input VAT on the C79. Whilst HMRC is not prohibiting the overseas customer from reclaiming the input VAT as the owners of the goods, but with HMRC tightening their grip on the procedures in place, this might become more of a technical headache and involve additional procedures.

Reduced Rating for Energy Saving Materials including Solar Panels – VAT Update

In 2015 the European Commission challenged the UK’s treatment of the installation of energy saving materials. The UK treats the supply and installation of energy saving materials to residential properties as subject to 5% VAT. This includes all the costs under a contract assuming the materials meet the tests in the legislation. Energy saving materials currently include solar panels, wind turbines, biomass boilers and ground and air source heat pumps.

The European Commission challenged the UK’s position on the basis that its scope was too wide and recommended that the legislation should be changed. Perhaps due to other pending VAT issues at the time, such as Brexit and MTD, the law was never changed.

In April 2019, HMRC announced its intention to change the law with revised draft legislation. However, the restrictions within the change in the law are not as significant as were first thought when the European Commission became involved.

Associations which represent the renewable energy industry are concerned by the change suggesting that it will put further costs on to the consumer at a time where climate change seems to be high on the UK Government’s agenda.  Also, the EU appears to be more open to softening the rules on what services can benefit from reduced rates, although it was down to European Commission pressure that this change was brought it.

What are the new rules?

The changes proposed by HMRC will come into effect from 1 October 2019.

Installation services on their own will remain subject to 5% VAT so this will not change, however where these services are provided together with the materials under the one contract, the qualifying materials will only be subject to 5% VAT in one of three situations:

1.   The customer is over 60 or in receipt of certain benefits;
2.   The customer is a registered housing association;
3.   The building in question is a care home, hall of residence, or other ‘relevant residential purposes’ building.

If the customer or building does not qualify in any of the above situations, the goods and services can still be subject to 5% VAT provided that the goods make up no more than 60% of the total charge. If they do, then 5% VAT can only apply to the services element.

Wind and water turbines which were formerly on the list as energy saving materials will be removed but solar panels, ground and air source heat pumps, micro heat and power units and biomass boilers remain on the list.

Who will the changes affect?

Registered Social Landlords such as housing associations, care home operators and schools, colleges and Universities should not be affected by the changes. Previously, 5% VAT applied to installations of energy saving materials to charitable buildings, however the law was changed some years ago. Charities will have to pay 20% VAT on all costs associated with the installation of energy savings materials so current law will not change for charities.

Other property owners undertaking energy saving works such as insulation, draught stripping and upgrading heating controls should still incur 5% VAT as these works are labour-intensive.

What next?

Homeowners who no longer qualify for this relief under the new rules might want to consider bringing forward their projects to ensure that the obtain 5% VAT on the works and materials.

Heritage Projects: 5 expert tips on getting your project’s finances right from the outset

Recently we hosted a workshop on VAT at the Heritage Trust Network Conference, which brings together charities involved in restoration and heritage projects from across the UK. We work with many charities, from smaller local trusts dedicated to one building through to established charities planning capital projects, with accounting advice that helps them to keep their project running. With that in mind, here are some of our experts’ tips on getting your project’s finances right from the outset.

1. Pin down your plan from the start
Dave Roberts, Director of Accounts and Business Support
A business plan and its financial projections are critical tools. They will be reviewed at some point by funding bodies, banks, councils, charity regulators, HMRC, and more. It’s important, then, to get your business plan right to reflect the correct things about your project.

A business plan is a guiding tool that shows how your project will function, make money and spend money. So as well as being important for HMRC (to, for instance, check revenue plans and eligibility for VAT refunds – more on the next page), it is also a good management guiding tool for you. The more detailed and focused the plan, the more it will help you six, twelve, and twenty-four months down the line. My tip is to create a plan that will be practically useful as a reference to you both now and in the short/medium-term.

For help with projections and planning, contact Dave at dave.roberts@chiene.co.uk

2. Getting grants? Audit them for assurance and budget insight
Euan Morrison, Head of Charities and Director of Audit
Grants are one of the key sources of funding for charities and can be critical to a project’s viability. Grants are usually awarded for specific, and not routine, purposes: you will usually need to provide a breakdown of how you will spend the grant when you apply for it.

Some grants require that the resultant expenditure is audited to guarantee that the grant is spent correctly. This is something of an administrative extra, but is an important management tool in its own right: it details expenditure which gives you an opportunity to review project costs and identify savings.

If you’d like to understand more about grant audits, contact Euan at euan.morrison@chiene.co.uk

3. Get ongoing specialist support
Anne Paddock, Accounts and Business Support Senior Manager

Don’t be afraid to ask experts for help, or even secondment support – your finances are vital. It can be cheaper to rely on an external supplier with project expertise such as us than to hire a dedicated person or people.

We have useful tools that you can use: we can supply accounting software; our payroll team can administrate your wages and pension obligations; and, of course, we can help with everyday accounting support and compliance. My tip, therefore, is to investigate the expertise that is available to you because it may well save you money later on.

Contact Anne at anne.paddock@chiene.co.uk

4. Consider your VAT position
Iain Masterton, Director of VAT

VAT is a complicated area but it’s worth knowing your position – after all, this can be up to 20% of your total project budget. It’s very important to consider VAT from the outset because your position and your ability to recover VAT will be affected by the activities that go on in your building and the services you intend to deliver. For instance, if you don’t intend to charge for activities in your site once it’s open, then this may mean you can’t recover VAT on certain items in the future.

To recover VAT, you need to register for VAT. HMRC will want to look at your business plan to assess your activities and make sure you intend to trade. It’s usual for heritage trusts to have a mixture of activities, some of which are good and some of which are bad for the purposes of VAT recovery. The complication then is to calculate the right amount of VAT that’s recoverable, and that can rest on case law and tribunal decisions, as well as legislation.

My main tip is to get VAT input from as early a stage as possible – this will usually be cheaper than trying to retroactively work out your VAT position further down the line.

For VAT support, contact Iain at iain.masterton@chiene.co.uk

5. There are tax reliefs designed to help make these projects viable – use them
Catriona Finnie, Tax Manager

My tip is to identify the tax reliefs you can claim so that you can budget properly for your business plan.

There are a variety of reliefs available, though they do require you to be in the scope of corporation tax to claim them. If you’re a larger, pre-existing charity then you may already have a trading subsidiary that pays corporation tax. If not, you should seek our advice to see if you can benefit from having a subsidiary company. Trading subsidiaries may also be able to claim capital allowances on project expenditure. You should also consider how the project funding will be provided and whether this has any impact on the charity’s corporation or income tax exemptions.

Don’t forget too that there are ongoing reliefs available. If your project will host creative events, for instance, you might be able to benefit from Theatre Tax Relief or Orchestra Tax Relief. We will be able to help you identify the right reliefs for you.

Gift Aid can be a valuable source of additional income for charities and you should ensure you are maximising your income from this where possible; especially where projects will be funded in part or in full from donations.

Contact Catriona for tax and Gift Aid advice at catriona.finnie@chiene.co.uk

European Court VAT blow for not-for-profit cinemas

In what could be one of the last high profile UK VAT cases to be heard in a European Court, the Advocate General’s Opinion was published in the case of British Film Institute (C-592/15). The Court of Appeal referred this case to the European Court of Justice (“CJEU”) to consider whether the BFI’s main source of income (admission to films) can benefit from the VAT cultural services exemption and whether the European VAT Directive has direct effect in the UK. In the UK there is a cultural VAT exemption, though it is restricted to admissions to museums, galleries, art exhibitions, zoos and theatrical, musical or choreographic performances of a cultural nature.

HMRC’s current view is that admissions to films are not included.

The Advocate General’s (AG) opinion is that Member States do have discretion to decide which cultural services are exempt from VAT; however, CJEU will also consider whether excluding film admissions is contrary to the EU principle of equal treatment in relation to supplies by other operators. If the CJEU follows the AG’s decision, the BFI case will have to be referred back to the UK Court to decide whether the BFI is being denied equal treatment.

Many UK not-for-profit cinema operators have submitted claims to recover VAT previously accounted for on admissions so will be viewing this development closely. If you would like more information on this case or you think this case will have an impact on your organisation please do not hesitate to contact Iain Masterton, Senior VAT Manager iain.masterton@chiene.co.uk or telephone 0131 558 5800.

How to play the pension re-enrolment roundabout

As part of your ongoing auto enrolment duties, you are responsible for automatically re-enrolling all eligible job holders who are not active pension members back into your organisation’s pension scheme every three years following your initial auto enrolment staging date. This is known as statutory pension auto re-enrolment (sometimes named “cyclical re-enrolment”).

Planning ahead for this is essential to ensure that you are aware of your duties and obligations, and to know what actions you are required to take. Here are some hints and tips to help with this process.

Choose your re-enrolment date

There is a six month window to choose a suitable re-enrolment date, which extends. three months either side of the third anniversary of your staging date. For example, if your staging date was 1st June 2013 then your six month window would be between 1st April 2016 and 30 September 2016.

You cannot apply for a postponement period and you must use the same re-enrolment date within the three year period for all employees.

There is no requirement to inform The Pension Regulator of your chosen re-enrolment date until completing the re-declaration of compliance.

Assess your employees

You will need to carry out an assessment of any employees who have, more than twelve months prior to the chosen re-enrolment date:

• opted out of your automatic enrolment pension scheme;
• stopped paying pension contributions after the opt-out period ended; or
• reduced their contributions to below the minimum level set by the government.

You also have the option to re-enrol eligible jobholders who left the scheme or reduced their contributions within the 12 month period prior to your chosen re-enrolment date, however you are not obliged to do so.

Re-enrol your employees

After assessment, any eligible employees must be re-enrolled into a qualifying pension scheme within six weeks of the re-enrolment date. You should also write to all employees affected by re-enrolment within the same six week window.

Opt out

As with auto enrolment, a one-month window applies during which, re-enrolled eligible employees will have the opportunity to opt out or cease membership if they choose to. Opt out notices should be processed, refunds issued where necessary and records kept accordingly.

Re-declare

A re-declaration of compliance must be completed and submitted to The Pension Regulator, regardless of whether you have employees to re-enrol within five calendar months of the third anniversary of your staging date (or last re-enrolment date). If you do not complete the re-declaration on time you could face a fine from The Pension Regulator or even prosecution.

Once you have submitted your re-declaration to The Pensions Regulator, they will send an acknowledgement letter. This will complete your cyclical re-enrolment duties until your next re-enrolment window in three years time.

A link to the online re-declaration is provided below:

https://www.autoenrol.tpr.gov.uk/

If you have a question about pension auto-enrolment or re-enrolment, don’t hesitate to get in touch at payroll@chiene.co.uk.

Murky waters for VAT treatment of charitable buildings

An ongoing charity VAT case could have important implications regarding recent and future capital projects. The case of Longridge on the Thames [2014] UKUT 504 is currently with the Court of Appeal and we’re awaiting the (imminent) ruling.

In the current economic climate charities are feeling the pinch and funds are being stretched, particularly when it comes to capital projects. A positive saving grace available for charities comes in the form of the 0% VAT rate, which is available on the construction of a new charitable building. Needless to say, not having to worry about funding an additional 20% can be a huge bonus.

One of the conditions of this rate is that the building must be used “solely” for charitable purposes, which HMRC take to mean “otherwise in the course or furtherance of a business”. HMRC interpret this as a charity not raising any charges for activities within the building – the point that could have significant ramifications for Longridge and many other charities.

Longridge is a charity formed ‘for the advancement of education in water, outdoor and indoor activities for young people generally’. It arranged for the construction of a training centre on a site that it owns on the River Thames assuming zero rating would be available; however, HMRC issued a ruling that the construction of the centre was standard-rated, and the charity appealed.

Both the VAT Tribunal and Upper Tribunal agreed with Longridge and considered that, although charges were made for participation in activities at the centre, it was run by volunteers and access to activities was largely heavily subsidised so it was not run in the course of furtherance of a business. HMRC has appealed the case to the Court of Appeal.

In the current uncertain context, charities should consider carefully what activities will take place in their buildings to ensure that the 0% VAT rate can be obtained on works, particularly as HMRC can revisit this and apply VAT retrospectively if the building is not used for its original purpose and there are different activities taking place.

Some charities may have obtained zero rating on the basis of this case so should take note of the outcome, as it may have a significant impact on past and future projects.

Temp agency case muddies the VAT waters

Organisations using employment agencies to source their temporary workers will have to continue to pay VAT on agency charges, a recent VAT Tribunal found.

The case of ‘Adecco’ found that VAT remains payable on both the value of the wages and the agency’s commission.

The Tribunal found that, as there was no contract between the end business and the worker, the consideration paid had to be for the whole service provided. The agency considered that VAT was only chargeable on the commission element as the agency had no control over the workers’ duties or activities.

At first glance this case appears to directly contradict a decision from 2011 based on similar facts involving a different employment agency; however, rules have changed in the meantime, and this Tribunal came to a different conclusion. Perhaps unsurprisingly given the uncertainty and the large sums of money involved, the case is undergoing an appeal which should help to clarify the law to employment agencies and users of temporary workers.

The appeal was raised by an employment agency that made a claim for overpaid VAT on their services, so further developments in the case will principally be of interest to these types of business. However, any businesses that hire temporary workers from agencies and cannot fully recover their VAT might be affected by the ultimate outcome of the case.