Whether you are a business or an individual involved in building a new property, the devil is always in the detail when it comes to VAT. A strong understanding of the relevant rules can result in significant savings, whereas simple errors or changes to planning permission can cost you dearly.

This is particularly the case when taking advantage of the DIY Housebuilders' Scheme, with a 2014 tribunal case providing clear evidence of this principle in action. By making yourself fully aware of how the law works regarding this scheme, you can make sure your project is fully compliant with the rules and take full advantage of the potential repayments on offer.

Ensuring your new build home qualifies for VAT relief

The DIY Housebuilders’ Scheme is a special refund programme established by the government to provide refunds on any VAT incurred on the cost of residential constructions, as well as property conversions, that are undertaken on a DIY basis.

If you or your business are constructing new dwellings, it is always worth checking that the conditions to allow the property to be treated as a new build are being met. If not, HM Revenue & Customs (HMRC) will reject any claim for VAT made under the DIY Housebuilders’ Scheme.

The scheme can be utilised by those who are building a new house, converting an existing building into a new dwelling, or bringing an existing home that has not been occupied for at least 10 years back into use. However, to be eligible, the project must create a new dwelling in its own right, meaning extensions, refurbishments and annexes are usually excluded.

This is also an important point for builders who are zero-rating their construction services, and for development businesses seeking to recover VAT on building materials. HMRC will assess for VAT, interest and penalties if the conditions for the property to be treated as new build are not met, as well as any zero-rated work or VAT claimed for building materials in error.

Appealing against HMRC errors

However, it is important to remember that HMRC is not always correct in its interpretation of the law relating to new build dwellings, as highlighted by the 2014 First-Tier Tribunal case taken up by Jack Wilson against HMRC.

Mr Wilson submitted a claim under the DIY Housebuilders’ Scheme for VAT incurred in the course of demolishing an existing building, with the exception of two walls, retained to meet the conditions of the local council that had granted planning permission. He subsequently built a new dwelling in the space occupied by the previous building.

However, HMRC rejected his VAT claim, on the basis that the planning permission was granted for a two-storey extension to an existing dwelling. Specifically, they took issue with the fact that the planning permission contained no requirement to retain the two and existing walls and incorporate them within the new dwelling. Furthermore, HMRC questioned if the appellant had in fact obtained planning permission that would support the level of work carried out to demolish the existing property.

A victory for common sense

The tribunal found that HMRC was correct that the planning permission Mr Wilson had obtained referred to an extension to an existing building, rather than its demolition and replacement with a new building. However, in the course of the work, Mr Wilson discovered that it would be necessary to demolish the majority of the property as it was unsound, and entered into meetings with the council to agree a revision to the planning permission.

The council subsequently issued a letter to Mr Wilson confirming the revised planning permission, and the subsequent completion certificate included all works relating to the rebuild of demolished parts and the two-storey extension.

As such, common sense was able to prevail, with the tribunal ruling that Mr Wilson had the necessary planning permission for the work, and that HMRC’s stance was not credible given the clear evidence of the discussions that had taken place with the council. It also found that the condition in law allowing a building to be classed as demolished - and therefore allowing a new building to be constructed in its place - had been fulfilled.

The legislation states that in order to be classed as demolished, the retained façade(s) must be a condition or requirement of statutory planning consent or similar. Mr Wilson clearly had obtained “similar permission” from the council, and was therefore entitled to repayment of the relevant VAT claim.

The lesson for new builders

Although the outcome of this case was favourable for the builder in question, the need to go through this complex appeal process underlines the importance of knowing your rights when it comes to making a claim under the DIY Housebuilders’ Scheme. If you or your clients are involved in a project to build a new house or apartments, it is therefore always worth seeking professional VAT advice to ensure that any potential exposures to VAT are mitigated. This is even more important if a dispute with HMRC concerning the VAT status of dwellings does arise.

To find out more about how the DIY Housebuilders’ scheme might apply to your new build project, call our free VAT helpline on 0161 477 6600.