A special VAT refund scheme puts “DIY” housebuilders and converters in a broadly similar VAT position to someone purchasing a zero rated new residential property. Under the scheme, DIY builders can reclaim VAT on materials incorporated into the building. There are a number of conditions including that the work is carried out lawfully and otherwise than in the course or furtherance of business.
The scheme can be used for the construction of dwellings, buildings for a relevant residential purpose or a relevant charitable purpose. It can also be used for the conversion of a non-residential building into a residential building. In this case, the property cannot have been occupied for residential purposes for the last 10 years.
It has become apparent from enquiries we have received and from recent Tribunal cases that HMRC are now taking a harder line with regard to the processing of such claims. Indeed there have been 3 recent First Tier Tribunal cases where the claimants have been assessed for penalties for careless inaccuracies.
In CJ Palau & RC Loughan, the appellants converted 2 properties for resale. As the project was undertaken as a business activity, they should in fact have registered for VAT and reclaimed VAT via a VAT return. In error however they initially submitted a DIY Housebuilders claim. They answered the questions on the form in a complete and honest manner which then flagged to HMRC that the DIY scheme was not appropriate. HMRC rejected the claim and in addition levied a 15% penalty. The Tribunal Judge allowed the taxpayers’ appeal commenting that “The (HMRC) argument produces the logical absurdity that the Appellants accuracy in the completion of a form designed to check eligibility under the Scheme gave rise to a penalty for inaccuracy”.
This case did have a happy ending in that the appellants then registered for VAT and were able to reclaim more VAT via that route than would have been allowable under the DIY scheme.
Mrs MM Howells and Mr DA Howells claimed for VAT incurred in converting an old property. They were unable however to provide evidence to the satisfaction of HMRC that the property had been unoccupied for 10 years and the claim was withdrawn. HMRC imposed a penalty for careless inaccuracy. Again the Tribunal found for the taxpayer, upheld the appeal and cancelled the penalty.
Mr Coates incorrectly claimed for VAT which should not have been charged in the first place so part of his claim was disallowed. Mr Coates had engaged an accountant to compile the claim so the Tribunal found that he had acted reasonably so the inaccuracy was not careless. In this case, HMRC also referred to the fact that Mr Coates had worked in the construction industry and HMRC therefore considered that he should have the right experience to have checked the claim.
In each of the 3 cases, the Tribunal has overturned the imposition of penalties for careless inaccuracies but clearly this has been a stressful and possibly expensive experience for the parties involved.
Here at Centurion, we are seeing increasing numbers of claims being challenged, in particular on whether works have been carried out “lawfully”. HMRC will routinely check the planning permission for the development and if there is any disparity in the wording of the permission will seek to disallow the claim. Claimants would need to ensure that they have the right permissions beforestarting work.
Problems also arise with “build to let” where the housebuilder does not intend that they themselves or their relatives will occupy the property. In such cases, it would be more VAT efficient to employ a VAT registered contractor to carry out the build and receive zero rated invoices as the DIY scheme does not apply. Indeed, given the recent challenges to claimants and the imposition of penalties, this might be a more straightforward route for all DIY housebuilders.
If you have any queries concerning the operation of the scheme or would like to discuss the alternatives, please contact your usual contact at Centurion or Julie Rawlinson-Smith on 07805 134091 or firstname.lastname@example.org