VAT on self-builds and DIY conversions

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If you’re building a new home or converting an existing property into a dwelling, you can claim VAT on certain goods and/or services under the VAT DIY Housebuilders and Home-converters refund scheme.

This can be a very useful saving and make a significant difference to the project’s overall cost. Also, certain contractors’ services qualify for the zero-rate or reduced rate of VAT, so that’s another way of saving VAT.

But as with all things VAT related, the rules are complicated and I’ve seen many situations over the years where DIY builders have had claims rejected by HMRC, meaning that they end up having to find additional money to fund the project. If you’ve borrowed £215,000 including £15,000 to cover VAT costs, but HMRC refuse your claim for the £15,000 VAT, then you may find yourself having to borrow more money at a higher rate of interest. I’ve even seen situations where people have had to sell their newly built dream home because they can’t fund the additional VAT cost.

And, because most “DIY” builders/converters are private individuals, it’s often their first time they’ve dealt with VAT and they often don’t fully understand all of the rules.

These situations are bad enough if you’re running a business, but just think about the stress and disappointment you could face if it’s your family home and you’re currently living with relatives, or in rented accommodation with your children and you find that you can’t afford to move in


I’ll be discussing this subject over the next couple of months, but let’s start with the main principles of the reclaim scheme and the main problem areas.

How does the refund scheme work?

There are two separate schemes; one for new build and one for conversions. The principles are similar and the process is the same.

The main difference is that in the case of new build, you can only claim VAT on goods; whereas for conversions you can claim VAT on contractors’ services and related goods. The reason is quite logical: contractors’ services for new build are generally liable for the zero-rate of VAT, whilst the 5% reduced rate is charged for conversions.

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In either case, you have to submit your claim with invoices within three months of completion of the project.

HMRC guidance and forms

HMRC’s guidance is very helpful and explains the rules in everyday English, at least for the most part.

  • VAT claims for new build are made on VAT form 431B here
  • VAT claims for conversion are made on VAT form 431C here

You can also claim for other residential self-builds or conversions, such as a hospice, or certain charitable use.

Main problem areas

The scheme itself is simple enough in principle. But there are a few issues that cause problems on a regular basis. I’ve summarised the main ones below:

The type of property or construction/conversion doesn’t qualify

Among other rules, the property that is being built or converted must satisfy certain criteria to qualify.  For example, the new “dwelling” mustn’t be subject to any restrictions on disposal, in other words it can be bought or sold independently of any existing property. So building a guest house or “granny” annex in the grounds of your existing property probably won’t meet this criteria.

You can’t claim overpaid VAT

I explained above that you can only claim VAT on services if your project is a conversion, because new build services are generally zero-rated. However most conversion services are liable to the reduced rate of 5%. So if you’re doing a conversion, e.g. a barn conversion, you can only claim VAT on contractors’ invoices if it’s the right amount of VAT.

In other words, if your contractor charges 20% for work that is eligible for 5%, then you can’t claim ANY of the VAT on those services. You have to ask the contractor to charge the correct rate of VAT in the first place. This actually makes things a bit more difficult than you’d expect, because you have learn the rules about the VAT liability of construction work which is difficult in it’s own right.

Getting the paperwork right

Finally, HMRC won’t pay a claim unless you provide proper VAT invoices, so making sure that your contractor/supplier provides a proper VAT invoice. See HMRC’s VAT Notice 700; The VAT Guide; section 16.3 for information about VAT invoices.

I’ll be discussing these issues in more depth over the next couple of months, but let me know if you have any specific queries relating to the self-build or conversion reclaim scheme and I’ll do my best to help.

Marie
January, 2016