Reclaiming VAT on self build projects doesn’t need to be confusing.
However, it’s very important that you do your homework and understand the basics regarding the VAT reclaim process before you proceed with your self-build project. Get it right and you can save yourself tens of thousands of pounds, get it wrong and you will struggle to reclaim your money!
CLPM are not tax experts, but we work with self-builders and property developers on new build projects every day so have access to the best advice in the construction industry. Here industry expert, Gerry Myton, Indirect Taxation Partner at Harwood Hutton explains the basics.
Reclaiming vat on self build projects – in Summary
You can apply for a VAT refund on building materials and services if you’re:-
Building a new home
Converting an existing property into a home
Building a non-profit communal residence – eg a hospice
Building a property for a charity
The building work and materials have to qualify and you must apply to HM Revenue and Customs (HMRC) within 3 months of completing the work.
1. Reclaiming vat on self build projects : New Dwellings
It is imperative to understand what rates of VAT apply to the construction of a new dwelling and how VAT can be recovered. This is true, irrespective of whether you operate a property development business, or are merely planning to build a home to live in.
The first aspect to grasp, is whether the property being constructed qualifies as a ‘new’ dwelling. When it comes to VAT reclaim, ‘new’ means it does not incorporate any part of an existing building, other than the foundations or a basement.
If planning consent includes a condition that a facade must be retained, – or two facades if a corner property – this still qualifies as ‘new’.
HMRC advise that from a VAT reclaim point of view a new home must:-
Be separate and self-contained
Be for you or your family to live or holiday in
Not be for business purposes (you can however use one room as a work from home office)
Builders working on new buildings should be zero-rated anyway and so you won’t pay any VAT on their services.
2. Reclaiming vat on self build projects : Construction Costs
Main contractors and subcontractors can zero rate their services in the course of the construction of new buildings designed as dwellings. This applies to the supply, of services, (other than those of an architect/surveyor or any person acting as a consultant or in a supervisory capacity such as CLPM) and materials which are “ordinarily incorporated” in a building supplied by a person supplying zero-rated services in connection with those services.
VAT Notice 708 available on the HMRC website gives examples at paragraph 13.8 of items ordinarily installed and the contrary position at paragraph 13.
What this means in practice is that you may claim a VAT refund for building materials that are incorporated into the building and can’t be removed without tools or damaging the building. But you can’t get a VAT refund from professional or supervisory fees, hiring machinery or equipment, building materials that aren’t permanently attached to or part of the building itself, fitted furniture, some electrical and gas appliances, carpets or garden ornaments.
Works undertaken in preparing the site (demolition) prior to the commencement of construction can be zero-rated if supplied in the course of construction, i.e. if you clear the site and then commence the new build.
N.B Materials purchased directly from a builder’s merchant will always be subject to VAT at the standard rate and so the VAT will need to be reclaimed. However, if you always try to route the materials via the builder this can, as a minimum, generate a cash-flow saving!
3. Reclaiming vat on self build projects : Recovery of VAT
Claiming back VAT paid depends on what you intend to do with the new dwelling.
The first sale of the freehold or grant of a major lease (terms exceeding 21 years) is a zero rated supply for VAT. As a property developer this means you are eligible to register for VAT and reclaim on your quarterly VAT returns. Take care to ensure VAT on costs incurred have the correct rate of VAT charged. VAT incorrectly charged by a contractor is not “VAT’ and hence, not recoverable.
If you plan to rent out the property this is an exempt supply, which means you are unable to recover any VAT you have incurred. You could sell or grant a long lease to an associated business which allows you to VAT register and recover VAT on costs. That business then undertakes the activity of generating rental income.
If you are a self-builder you should fill in form 431NB to claim a VAT refund on a new build. Send your claim form to HM Revenue and Customs ( HMRC ). You must claim within 3 months of the building work being completed.
4. Reclaiming vat on self build projects : Design and Build
If you merely intend to live in the dwelling once constructed, you could also consider a design and build contract where professional costs (architects/surveyors) are routed through the builder.
This type of build route will come as a premium, compared to sourcing and procuring the builder and materials yourself, but will save you the 20% on these professional costs as the builder can recover this VAT and wraps this cost within the zero rated supply of construction services. Your preferred build route is a matter of your attitude and approach to risk – financial and otherwise, however it is probably worth carrying out a cost benefit analysis of both approaches.
Are you interested in carrying out a self build project? If so we’d love to hear from you. Call 01923 896550, email firstname.lastname@example.org or complete a contact form.