Before embarking on your self-build project, it’s important to understand the VAT implications, avoiding some very common – and potentially very serious – pitfalls.
The rules around VAT are complex and vary from project to project, so it’s advisable to speak with an accountant or tax adviser before starting your build.
There are several points to consider, the first being the applicable rate of VAT. New builds are typically eligible for 0% VAT, while commercial to residential conversion is 5%. Refurbishment of existing ‘dwellings’ is usually 20%, although there are potential reductions to 5% or even 0% depending on how long the property has been unoccupied – two years for the former and 10 years for the latter
Making sure that the correct VAT rate is being charged is very important – both for the health of your budget and to avoid any issues further down the line.
Builders’ merchants will always charge 20% VAT on building materials, which is eligible for reclaim – however, there are certain costs which will always incur a 20% rate of VAT which you cannot recoup.
VAT can be claimed for building materials that are incorporated into the building and are an integral part of it such that they cannot be removed without tools or without damaging the building – so, if you turned the building upside down and shook it, anything that fell out would not be eligible.
These include non ‘building materials’ such as furniture, cookers (space and water heaters are allowed), fridges and other electrical appliances, carpets and CCTV systems.
Services such as architects, surveyors, design and planning advice, and the hire of plant and equipment (including generators, skips and scaffolding) will be charged at 20% and is non-reclaimable under the DIY Builders Scheme.
What is the DIY Builders Scheme?
Once you’re clear on the VAT rate of the project, you’ll need to consider whether you’re eligible for the DIY Builders Scheme – introduced to level the playing field between buyers who purchase a new build from a developer, on which no VAT would be charged, and those completing a self-build.
It’s important to note that self-builders can only reclaim VAT which has been charged at the correct rate. For example, if a builder charges you 20% VAT when it should have been 0% and you later make a reclaim, HMRC can disallow the full 20% on that particular element. The onus is on the self-builder to make sure that all VAT payments are correct at the time the invoice is issued and paid.
What are the rules for reclaiming VAT on a self-build?
In order for VAT to be reclaimed, the home or building must be separate and self-contained, intended as a home for the individual or their family, constructed lawfully and under the terms of the planning permission and mustn’t be for business purposes.
Projects to convert non-residential buildings into homes are also eligible, as well as residential buildings that haven’t been occupied for at least 10 years.
Extensions and self-contained accommodation, such as a granny annex, and the refurbishment of existing homes (unless empty for 10 years) aren’t eligible. However, VAT can be reclaimed on a garage provided it has been built at the same time as the dwelling on which VAT is being reclaimed.
How can I reclaim VAT under the DIY Builders Scheme?
In order to claim a VAT refund, form 431NB (for new builds) or form 431C (for conversions) must be filled in and sent to HMRC within three months of the building work being completed.
In addition, for every self-build home HMRC will request to see a valid planning permission, including detailed plans, as well as evidence of completion; a completion certificate, a valuation office listing letter or a Council Tax assessment. Planning permission must be followed to the letter – any deviation could result in HMRC denying the claim.
According to HMRC’s standard practice, a reply should be expected within 6 weeks from the date of the application.
It’s crucial to keep all invoices for goods supplied on which VAT is to be reclaimed – they should be provided to HMRC as evidence of the total VAT amount.
What are the common pitfalls and opportunities for self-build and VAT?
Make sure builders and contractors invoice you at the correct rate of VAT – if the wrong VAT is charged, HMRC will deny the claim and it will be difficult to get it back from the builder, denting your budget and potentially damaging your rapport.
Employing a ‘friendly’ VAT registered builder can mean that your VAT exposure is minimal – they can purchase all materials at 20% but only invoice you at 0%. However, in reality most builders will charge a mark-up on material purchases which may erode any benefit.
A reclaim under the DIY Builders Scheme must be made within three months of completion, although an extension can be requested from HMRC – also before the three-month deadline elapses.
VAT reclaim is a huge help for those building their own home – make sure you take advice from an accountant or tax advisor to ensure you maximise your budget and avoid potentially costly slip-ups.
Partner at Williamson & Croft LLP