As VAT advisers, we often get questions relating to the construction of new houses. In most cases new houses are purchased directly from a house builder and are zero rated for VAT. However, in some instances individuals can build houses themselves or with the help of friends and colleagues. In these circumstances, the individual will have to purchase building materials such as bricks, beams, bathrooms and concrete from a building supplier and most of these items will be subject to VAT.
The DIY VAT Scheme was established to allow DIY house builders and house converters to reclaim VAT incurred on building materials and some qualifying services. This will put house builders in the same position as homeowners buying new homes from a house builder (which are zero rated for VAT purposes).
The DIY Scheme can also be used if you plan on commissioning the building work to be completed by a contractor, but buy the materials yourself.
Basics of Scheme
The Scheme can be used where an individual is building a new dwelling or converting a non residential property into a dwelling, or refurbishing a dwelling that has been empty for more than 10 years.
In most cases, VAT will be incurred on building materials which can be reclaimed through the Scheme.
HMRC will refund any VAT chargeable on the acquisition of any goods used in connection with the construction or conversion work, building services and other qualifying services. VAT on professional fees, such as architects and surveyors are not recoverable.
What are the conditions of the DIY Scheme?
In addition to providing a quick refresher on the rules of the DIY Scheme, a further reason for this article is to highlight that there have been several VAT Tribunals in this area recently which have highlighted the importance of knowing the conditions and timescales involved. So let’s talk about the conditions:
- The property being built/converted must not be used for business purposes;
- A claim is only relevant when the claimant (or family members) intend to live in the dwelling when construction is completed;
- The VAT which is to be refunded needs to have been correctly charged in the first place, therefore it is vital to determine the correct VAT treatment for the supply. Building services by contractors and subcontractors can be charged at 0% for new builds and 5% for conversions/refurbishments;
- When the claim is submitted, claimants must send all VAT invoices included in the claim showing the correct rate of VAT. Claimants should ensure they keep every invoice and receipt in connection with the building work, even if only a small amount of the invoices can be included in the claim;
- VAT refunds must be submitted to HMRC within 3 months of the issue of the Building Regulation Completion Certificate. This condition is strictly enforced and many claims are rejected for failing to meet this condition.
What can go wrong?
Our VAT team assists clients in submitting DIY claims on a regular basis and have encountered various issues that should be borne in mind when considering this Scheme:
- Claims can be submitted too late. The 3 month timescale is tight and is strictly followed by HMRC;
- If correct invoices are not submitted with the claim, HMRC will not make any refunds;
- If VAT is charged incorrectly on your invoice, HMRC will only refund the correct amount of VAT. HMRC may also raise a penalty if they consider VAT was over-claimed. This happened recently where an accountant submitted a claim on behalf of a client. Of the £20,000 claim, £9,000 of the invoiced VAT was incorrectly charged. The balance of the claim was paid out but HMRC applied a penalty of £1,300 (15% of the error)!
This latter case has led to calls for HMRC to change their policy where errors are made within the Scheme which we understand may be adopted in due course, however where a claimant has used an accountant they are unlikely to receive any sympathy or concessions for not knowing the rules.
If you have a query about the DIY Scheme or would like assistance with submitting a claim please get in touch with Iain Masterton, Chiene + Tait Senior VAT Manager at email@example.com or call 0131 558 5800.