19 Jun 2024

Unlock Cost savings on Self-build Projects with New VAT Checklist

Henderson Loggie’s tax experts have developed a comprehensive VAT checklist tailored specifically for home improvers. If you’re undertaking a self-build and certain conversion projects, which can include home office facilities, then it’s for you.

Designed to help you shave thousands of pounds off the costs of construction, the newly-released guide offers step-by-step guidance for each stage of the process. Alan Davis, VAT Partner at Henderson Loggie, explains further.

It’s crucial for individuals embarking on self-build projects to understand the intricacies of VAT regulations. How you plan your project could have an implication on VAT, so it’s important to choose an approach that minimises irrecoverable VAT cost.

Contractual arrangements with suppliers and contractors should clearly outline the VAT treatment of goods and services, because if VAT is incorrectly charged by contractors, HMRC will not repay it under the DIY refund scheme. Our checklist equips self-builders with the knowledge and tools necessary to navigate VAT regulations effectively.

A roadmap for reclaiming VAT

The new guide provides a detailed roadmap for each stage of the construction process, offering step-by-step guidance on essential aspects. This includes researching current VAT regulations and identifying VAT-free supplies like contractor supplies of construction services and related building materials – including energy-efficient items like heat pumps, budgeting for irrecoverable VAT liabilities and maintaining accurate records to support VAT claims.

There are strict rules on what can and can’t be claimed. For example, VAT cannot be reclaimed on professional services such as architects’ fees and structural engineers’ services. Ensuring compliance with VAT regulations and keeping meticulous records can enhance the chances of optimised and successful VAT reclaims. Self-builders only have one opportunity to make a DIY claim, so it’s important that any claim is clean to give it the best prospect of early and full settlement by avoiding HMRC queries.

How to avoid common pitfalls

A close examination of the most frequent mistakes can help avoid costly slip ups and ensure you claim only what you are entitled to.

One common error involves misunderstanding the applicable VAT rates. Contractors sometimes wrongly charge DIY housebuilders the standard VAT rate of 20% or the reduced rate of 5% when, in fact, new builds should be taxed at 0%, and some services or materials might correctly attract only the 5% rate. Such errors lead to inflated claims, complicating the financial management of a project.

Another critical area of confusion lies in what qualifies for VAT claims regarding building materials. To be eligible, materials must be incorporated into the building and be ‘ordinarily’ used in such constructions. This excludes a variety of items that builders might assume are claimable. For example, luxury fittings such as Aga cookers, audio equipment, CCTV systems, bedroom furniture and certain appliances are disallowed. A telling case was when a VAT claim, including a vehicle turntable, was dismissed because it was not considered ordinarily incorporated into a building.

Time constraints also pose significant challenges. Initially, builders had a three-month window post the issue of a ‘Certificate of Practical Completion’ to submit their VAT claims. However, as of December 2023, this has been extended to six months. The lack of a completion certificate is a stumbling block; although alternative evidence of completion can sometimes be used, the absence of a formal certificate often complicates or invalidates claims. Delays in obtaining necessary documentation from local authorities often push builders to appeal, and many of them are successful because of these administrative issues.

There are stringent rules defining what counts as a dwelling for VAT purposes. A building qualifies only if it offers self-contained living accommodation without internal access to any other dwelling, is not restricted from separate use or sale by any legal terms and has received and been built in accordance with statutory planning consent. Issues arise, for example, when converted structures like barns cannot be sold separately from the main property, consequently failing the criteria.

When it comes to documentation, missing plans, receipts or invoices, crucial for substantiating the specifics of a claim, can lead to refusal. Planning permission issues also cause headaches; builders sometimes discover that their construction is classified not as a ‘new’ house but as an extension or modification, which drastically alters VAT liabilities.

HMRC 2023 statistics show that the average claim paid is around £15,000, but historically, that has been reduced by 20 to 30% from the original claim. It is worth seeking help from professional advisors to avoid losing out, particularly as HMRC can issue penalties where VAT claims are overstated or incorrect.

In reviewing recent VAT appeals for self-build construction projects, we’ve observed that penalties were successfully challenged at tribunal due to the lack of deliberate intent or negligence in the overclaims. It’s crucial to understand that while these appeals were upheld, many taxpayers may not pursue this route due to the complexities and costs involved. HMRC tends to apply penalties quite rigorously, which underscores the importance of meticulous compliance to avoid potential overclaims. Engaging in an appeal can be both costly and time consuming, so it’s advisable to ensure absolute accuracy in VAT claims and seek expert help, if needed, to prevent such situations.

To access Henderson Loggie’s VAT checklist for self-builders, download your copy here.

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