Landowners who are erecting or converting buildings for residential or commercial use must be careful to reclaim the maximum amount of VAT back.
VAT claims for private dwellings can be made under the DIY VAT scheme. New dwellings are generally zero-rated, but building contractors may charge an incorrect level of VAT, potentially invalidating the landowner’s claim.
HMRC sees DIY claims in the same way as it sees VAT returns – if you make a mistake or raise an erroneous claim you could incur a financial penalty. In addition, once a claim is rejected you cannot resubmit it, meaning you could lose £10,000’s.
To qualify for the scheme, a new build must not be for business purposes, and must be classed under VAT law as a dwelling. Any labour must be zero-rated at source, as must any building materials provided and installed through the contractor. Any eligible materials bought separately will be charged at 20% VAT, which the landowner can then reclaim.
Professional fees and equipment hire are not eligible for the scheme, nor are white goods – although fitted kitchen units do qualify.
When it comes to eligible converted buildings, VAT should be charged at 5% by the contractor for the supply and installation of building materials (unless materials are purchased separately). The main pitfall is if the supplier charges the wrong amount – say, 20% VAT not 5% – if that happens HMRC will reject the DIY VAT claim.
There are other areas to be aware of: HMRC gives house builders and converters only three months to lodge a claim, yet they cannot be submitted until the building inspector has signed off the finished works. Additionally, HMRC may consider certain prior occupation of a self-build to constitute completion, meaning they may seek to treat a claim as out of time.
Landowners who are building or converting commercial buildings or properties for let will incur VAT at the usual 20%, and then claim that back through the business’s VAT registration. But if renting out, you need to apply an option to tax, so you can charge VAT on the rent and reclaim VAT on the building works.
Opting to tax means landowners must minute their decision to tax, and then notify HMRC in writing of that decision within 30 days. Anyone buying a commercial building to let must also submit the option to tax paperwork if they want to charge and reclaim VAT.
An option to tax is not required if you develop a new commercial building to sell – if the sale is within three years of completion or occupation (whichever happens first) VAT is automatically chargeable to the buyer on the sale price. It is also not required if the building is leased out for storage – storage is automatically subject to VAT at 20%.
For property lettings or for sales once the building is over three years old, an option to tax is needed to retain VAT recovery.
Every situation is different, and the legislation complex, so it’s vital to take specialist advice to avoid costly mistakes. VAT is extremely expensive, and you could lose up to 100% of reclaimable tax if you get it wrong. So plan ahead and make sure everything is correct before proceeding with your project. It’s better to pay for professional advice now than to pay for mistakes later.