Lee Sharpe points out that the First-tier Tribunal has said HMRC was wrong to insist that DIY Housebuilder VAT claims can be made only once per building and after the work has been completed.
There is a mechanism for private individuals to reclaim VAT when building their own homes (or directly paying a builder or similar to build the house for them). Where a property developer builds a new dwelling for sale or ‘long lease’, the supply is zero-rated, and the developer may register for VAT, reclaim the bulk of the VAT cost on construction (there are some restrictions), but then charge £0 VAT on the sale. The new homeowner incurs no actual VAT cost, but the developer is still able to reclaim most of the VAT they have incurred.
The DIY Housebuilder Scheme is intended to put people who want to build their own homes on a broadly similar footing.
HMRC has always insisted that only a single DIY housebuilder claim could be made, and only once the building was complete. The case of Ellis & Bromley v HMRC [2021] UKFTT 0343 (TC) may force HMRC to change its rules.
Brief overview of the DIY housebuilder scheme
The scheme applies to:
- building a new home to live in; or
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converting a non-residential property to live in (typically a barn, although a formerly residential property may also qualify if it has been empty for at least the last ten years running up to conversion.
Garages built at the same time as their corresponding dwellings may also qualify, but not when built afterwards. There are also provisions for communal residences such as hospices; likewise, buildings to be used by a charity.
VAT can be reclaimed on builders’ construction costs and materials ‘incorporated in a building’. So, for example:
- excluding most appliances, carpets and curtains; but
- including space and water-heating devices (such as range cookers that are so designed), and
- heating systems;
- fitted kitchen furniture; or
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burglar or fire alarms, lighting, showers, sanitary ware and other plumbing materials;
alongside the more obvious building materials that actually make up the fabric of the building.
While curtains do not qualify as building materials, manually operated window blinds and shutters may now be included in a claim (since October 2020, following Wickford Development Ltd v HMRC [2020] UKFTT 387 (TC)). HMRC is still holding out against electrically operated blinds etc., on the basis that they are excluded as they are ‘appliances’.
HMRC provides form VAT431NB for the claim (or claims) to be made.
Repeated claims: Long construction project
The case Ellis & Bromley v HMRC [2021] UKFTT 0343 (TC) involved a project spanning several years.
- The original property was bought in 2002.
- Application for a new home was granted and then extended in 2013.
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The construction phase itself had lasted more than five years – although the unfinished property was theoretically habitable by 2015 for council tax purpose s, the property had not yet been finished by the time of the hearing in 2021, and the taxpayers were living in a mobile home on the site.
These circumstances are not that unusual where the taxpayer has limited funds or time to devote to the project.
The taxpayers made a VAT claim in 2017 for around £5,000, which was duly repaid. However, when the taxpayers made a further claim in 2019, HMRC rejected it, stating that only one claim can be made for a particular building under the DIY Builder Scheme, and it must be made within three months of completion of the construction work.
HMRC relied in part on its guidance notes to the claim form VAT431NB, which explicitly states that only one claim can be made, etc. The tribunal said the guidance was not binding as it had no legal authority (unlike some other scenarios, where the legislation broadly gives HMRC quite wide powers to specify the form and nature of a claim).
HMRC turned to the VAT legislation: VATA 1994, s 35 refers only to ‘a claim’ or ‘the claim’, etc. The tribunal reminded HMRC that the Interpretation Act 1978, s 6 clearly states that in legislation, ‘…words in the singular include the plural’ (unless the legislation expressly provides to the contrary).
HMRC’s questionable approach
Quite strangely, HMRC did not argue that the 2017 claim was invalid and should never have been paid because the building was clearly incomplete, as one might assume would be consistent with its historical approach to permitting only one claim once the building work has finished. Instead, it argued that the 2015 revaluation of the part-finished property for council tax purposes proved that the building was actually completed in 2015 and that the second claim in 2019 was, therefore, way past the three-month claim window.
I think this is really quite objectionable, given that a Certificate of Completion is usually relied upon to prove the project is complete, and the taxpayers were (and maybe still are) some way off obtaining the certificate from their Building Control office, given how much work was still outstanding. However, it is not all that unusual an approach from HMRC.
The tribunal said that the council tax re-banding exercise undertaken in 2015 was not evidence of completion; it was not at all equivalent to a Completion Certificate issued by a Local Authority.
The tribunal, therefore, decided that:
- the legislation does not prevent more than a single claim;
- interim claims may be made before the building is complete; and
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the taxpayers are entitled to make several claims including a further claim once the building is complete.
A note of caution
The taxpayers in this case should be able to enjoy a well-deserved finding in their favour. But readers should note that capital gains tax (CGT) rules in relation to relieving any capital gain on the disposal of one’s main residence may not be so helpful.
In particular, taxpayers can come unstuck when they buy a property, demolish it and then live in a new building on the same plot; it may no longer count as the same dwelling for CGT relief purposes, with potentially expensive CGT consequences (see for example Gibson v HMRC [2013] UKFTT 636 (TC)).
Conclusion
Assuming HMRC does not rush through legislation to ‘clarify’ the regime so that it then works as HMRC insists, the case will be helpful for DIY housebuilders with a long-term project where an interim claim will help cashflow. This actually puts DIY housebuilders on a more equal footing with property developers, who will typically make several VAT repayment returns – usually on a monthly basis.
But it may be more difficult for HMRC to police. Opening the door to interim claims will probably mean a greater volume of claims, but also that fundamental eligibility for interim claims may be more difficult to prove, as there will not be a finished and certified dwelling to show in evidence.
Note that the DIY Housebuilder Scheme is still packed full of conditions and traps for the unwary – for example:
- Claims by a self-builder must be made before the expiration of three months of the completion of the building (regardless of how many claims have been made before that window closes).
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Deciding specifically when a building is complete therefore remains important and has itself been a thorny issue for tribunals.
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The correct rate of VAT must be charged on any invoice the subject of a claim – this is particularly difficult with residential conversions, as the builder should normally be charging only 5% in the first place, rather than the standard 20%.
It is therefore recommended that DIY housebuilders either delegate the VAT claims to a suitably qualified agent or at least take good advice early in the project (or both).
