Building your own home, converting a barn and some renovation projects are zero-rated for VAT purposes. So how do you claim your money — and maximise your savings? David Snell, who has carried out dozens of returns, explains.
NB: The old VAT Notice 719 that you might find referred to in archive material was replaced in 2010 with 431NB (431C for Conversions)
Those buying a new home from a builder or developer don’t have to pay VAT on top of the purchase price, because such dwellings are exempt from VAT. It would, therefore, be singularly unfair if those building their own home had to pay this tax. In recognition of this fact, HM Revenue & Customs (HMRC) has put in place certain arrangements for the private individual building their own home, or converting a non-residential building into a home, to reclaim most of the VAT paid out.
The arrangements for reclaiming the VAT are set out in VAT Notice 431NB, which has the simple title, VAT refunds for ‘do-it-yourself’ builders and converters. You can obtain a copy of the explanatory leaflet from your local Tax Office or download it from hmrc.gov.uk. The scheme is only applicable to those building or converting for their own domestic use and occupation, and is not available for those who develop property as a business, where entirely separate arrangements are in place.
There are very different rules and arrangements covering new build, conversions, renovations and extensions. For our VAT guide to conversions and renovations click here.
Examples of What You Can and Can’t Claim
Fitted kitchen units
Fitted bedroom furniture
Free-standing kitchen units
Products such as white spirit etc..
New build is zero-rated, which means that a VAT registered builder or subcontractor must zero-rate their work and not charge VAT on any labour-only or supply-and-fix contracts.
Although the builder or subcontractor will have to pay VAT when they purchase materials, they will be able to claim that back at the end of each month, or whatever period they have agreed with HMRC, and they must not seek to pass it on.
A self builder will have to pay VAT at full rate for the purchase of any materials that they make on their own account, but this VAT is – in large part – recoverable at the end of the project under the scheme.
What You’ll Pay
How to Make the Claim
The process of recovery is quite simple but it does have to be carried out quite thoroughly, and it is important that the self builder or converter keeps a complete record of all payments made, together with copies of all invoices. Those who are not good at accounting may choose to use one of the VAT recovery specialists found in the Homebuilding Directory.
To make the claim you must fill in:
- VAT 431 Part 1 – Claim form.
- VAT 431 Part 2A – Description of building and quantities of goods and materials used.
- VAT 431 Part 2B – Description of services (labour) for DIY conversions.
- VAT 431 Part 3 – Goods, materials and services where the invoices show the VAT separately.
- VAT 431 Part 4 – Goods, materials and services where the invoices do not show the VAT separately.
Other points to note:
- You need to understand the difference between a renovation and a conversion. A renovation is where one makes an existing dwelling bigger or better. A conversion is where one takes a non-residential building and turns it into a home.
- VAT and tax are now dealt with within the single body of HM Revenue & Customs (HMRC).
- Although planning, Building Regulations and property laws differ throughout the UK, the issues of VAT are universal.
- You can reclaim VAT paid out on soft and hard landscaping as well as fencing or walling if they were included in or a requirement of the planning permission.
- VAT paid out on goods purchased within the EU is recoverable at the rate paid in the country of purchase, at the sterling exchange rate on the day of purchase.
- The claim is made in one go at the end of the project. If a claim is made before everything is finished, there is no second bite of the cherry.
These completed forms must be accompanied by:
- Originals of all invoices.
- Your claim calculations.
- Evidence that the building is completed in the form of the Completion Certificate from Building Control.
- Copies of the planning permission.
- Full plans of the building and associated works.
- You should get an acknowledgement of your claim within ten days, outlining its progress and any queries.
- Claims may take at least 12 weeks for the refund to be sent.
Copies of the claim forms can be obtained from your local office of HMRC, by phoning 0845 010 9000, or alternatively they can be downloaded from hmrc.gov.uk. You can also find out much more information on reclaiming VAT at the dedicated website hmrc.gov.uk/vat/sectors/consumers/new-home.htm.
Be very careful to pay out only the correct VAT. If you pay VAT out incorrectly, HMRC will not refund it and your only recourse will be to try to recover it from the builders or individuals to who it was originally paid. This is particularly important for those converting where builders and subcontractors may not be aware of the reduced rates for labour-only or supply-and-fix contracts, and may seek to charge full rate on their invoices. (SEE BELOW)
Watch out for unscrupulous contractors, who may not even be registered for VAT, adding it to their invoices.
“My VAT Nightmare”
Cambridge self builder Chris Walls explains his tangle…
“I am a living lesson in why you should never pay VAT for labour on new dwellings (it’s zero-rated, and your contractor shouldn’t charge it, but they are often unaware of the scheme and its procedures).
A well-drilling company was the first service on my site and knew no way of billing me except by charging me VAT. I accepted the advice of the company telling me that I could get a refund on completion. This part of my subsequent claim – £1,130 – was rejected by HMRC. I then battled to get a refund from the welldrilling company but it couldn’t figure out how to get its own refund to pass onto me, and then went into liquidation.
As a result, I’ve registered as a creditor of the company, but I’m told it’s unlikely I’ll get my money back. It’s particularly galling that the money is not actually locked into the company but is rather with HMRC, but it tells me it won’t repay VAT paid in error.
The lesson? Make sure your contractors see the 708 certificate which explains to them what VAT to charge (or not) and how to claim it back through their own returns. And don’t pay VAT in error.”
Check out Chris’ self build project at greenlow.co.uk.