VAT-Registered Trader – reclaiming VAT on building own dwelling
If you are a VAT-registered trader – a CCTV installer let’s say – and you start converting an old barn to live in yourself, you “know” that dwellings are not VATable and so you reclaim VAT on the costs in your normal trading VAT returns. Is this OK?
No. A VAT inspector is likely to point out that “You can normally reclaim input tax that relates to supplies you make” (Notice 700 para 10.2). More specifically, “the business needs to show a clear link between the expenditure and the actual sales carried out by the business. If this link does not exist then VAT cannot be recovered.” (HMRC Manuals VIT10600)
The expenses for the barn are not related to your sales as a CCTV installer. You may be asked to repay the VAT you have wrongly claimed.
DIY Housebuilder VAT Scheme
If you are not “in the business of constructing property”, HMRC can ask you to repay any VAT wrongly claimed through your VAT returns, and ask you to submit a claim via form 431C instead. Perhaps it comes to the same thing, but this is much more efficient for HMRC as they get the claim form, invoices and other information all packaged up and sent to them – no VAT inspection visit is needed, it’s all desk work. Besides this, HMRC already has the tax revenue should you fail to make the claim or if your claim is found ineligible.
If you intend to live in the converted barn therefore, you should use the DIY housebuilder scheme. You would submit this claim form, along with all your invoices, to reclaim VAT in one lump sum after the completion of the building. There are rules on when to make the claim, and what can and cannot be reclaimed, not dealt with here. See HMRC forms VAT431C and VAT431NB.
Change of mind – you decide to sell the converted property
Perhaps it cost more than you thought – you decide to sell the converted barn – you might notify HMRC that you are now trading as a developer. Where you are “in the business of constructing property for sale” and you build a house on your own land, you can recover the input VAT either through your VAT returns, or via the DIY Housebuilder’s scheme (HMRC Manuals, VCONST24350).
What if you had always intended to sell it, but instead you decide to live there? There is a trap here – you have ceased to be “in the business of constructing property for sale”, and some of your purchases no longer relate to supplies you make. These might be regarded as a “deemed supply” to yourself, on which you must pay VAT. (HMRC Manuals VATSC24000). Whether HMRC would consider it worthwhile pursuing this approach might depend on the circumstances.
Change of intention is covered in HMRC Manuals VCONST24350.
In the next brief article we shall discuss the VAT liability of work done on a “dwelling” and when it can or cannot be recovered.
This article is for interest only – if you are undertaking any project like that described above, the sums involved might be substantial, and you should do your own research and seek professional advice.