When you buy a house on the open market, you don’t have to pay VAT, whether it is new or has been previously occupied. So when you build your own home, the same principle applies: whether you’re starting from scratch with a new build or converting a property into a residential dwelling, labour is essentially zero rated, and you will be able to claim back some or all of the VAT on the materials element of the build.
However, there are exceptions to this rule, and you need to be clear about what can and cannot be claimed for. There are some common misconceptions about VAT reclaims, which can result in disappointment when expected savings don’t actually materialise.
I’m giving you the lowdown on how VAT applies to self-build projects, and how to go about claiming back the cash that you are entitled to.
VAT Notice 431 (NB) is the scheme that covers VAT reclaim on new build properties in the UK (this includes the Isle of Man, but not the Channel Islands). The premise of self-build VAT reclaim is that you are building your principle private residence − you can’t claim the VAT back if you plan to use the property for a business purpose.
So if you are building to sell for a profit, let it out or run a bed and breakfast, then you won’t be allowed to reclaim. Don’t worry if you intend to work from home, though: using one room as an office is considered acceptable by the taxman.
Conversions of non-residential properties − structures that have never been lived in or uninhabited for 10+ years − are covered by another scheme, VAT Notice 431(C). It’s basically the same process, but there are differences in the way VAT can be reclaimed against labour for a conversion (and the amount). For example, builders will charge you at 5% on labour-only or supply-and-fit contracts – but you can reclaim this, along with the 20% on materials, at the end of the project.
Interestingly, you can also make a claim if you buy the shell of a new property from a developer and then complete the fitting out yourself or through another builder; I suspect that this option will become more popular as the concept of custom building takes hold. It’s worth having a look at the HMRC website, which has links to the forms you will need as well as helpful supporting notes.
Any work you undertake on an already completed building (refurbishment, adding an extension, converting the loft or constructing a granny annex or new garage) will not be covered. So it will attract VAT at 20% on materials and labour − despite the fact that these are ‘new build’ additions to the property.
There are some exceptions, though. To make the refurbishment of properties in run-down areas more economically attractive, the government introduced a reduced rate of 5% VAT for houses that have been unoccupied for two or more years.
This rate applies to all labour and materials used on a renovation project, but it cannot be reclaimed – it is up to your builder to invoice you correctly. The best way of proving whether a house has been unoccupied is by checking council tax payments or utility bills.
The rules have changed for listed buildings, too. VAT on approved alterations used to be reclaimable, but as from October 2012, all repairs, alterations and extensions on listed buildings are liable to VAT at the full 20% rate.
However, there are exceptions here, too, in that if you obtain permission to demolish all but the facade or shell of a listed building, then the construction work could be classified as a new build and the VAT element might be eligible for reclaim. It’s a tricky area with some fairly strict definitions of what is and isn’t allowed, so it’s best to check with HMRC before you start work.
Labour on a new-build property is always zero rated, so it should never be charged, regardless of whether the builders or tradesmen you use are VAT registered or not. When it comes to the materials incorporated into the build, you need to claim the VAT back afterwards.
Conversions are slightly different and in some cases, VAT is charged on labour but at the reduced rate of 5%. This is the main reason for having different claim forms for new build (431NB) and conversions (431C).
A common misconception is that all VAT on a self-build project can be reclaimed. This is not so − the VAT due on professional or supervisory services (like surveys, design and planning, and tool and plant hire) is not exempted.
The HMRC website notes show what can and can’t be claimed for, but the list of exemptions is extensive and not entirely logical, so I’ve produced a list (found at the end of this article) showing what can and can’t be reclaimed.
This is not exhaustive, so if in doubt, either call HMRC’s VAT DIY helpline for advice, or just include it in your submission anyway. The worst that can happen is that someone puts a line through the item and it gets rejected.
Before you start the build, download the relevant pack from HMRC’s website and then collate all of the receipts and invoices for the materials you will be claiming for as you go along.
It is important that these are all original documents, have the supplier’s VAT registration number, plus list the quantity and description of the goods and the price of each item. If the value of an invoice is more than £100, then it must show your name and address.
Anyone who buys eligible goods for your project can make the claim. Your builders can do some or all of the reclaim for you and simply not pass the VAT charge on to you at all, which can really help your cash flow.
However, it is frequently the case that you will have bought considerable quantities of materials yourself and will therefore want to make your own submission. Claims are always made at the end of the project – usually after your building control officer has issued the completion certificate.
There are other documents that can be used to prove completion, such as a certificate of habitation. Another option is to obtain a letter from your bank or building society confirming that the last element of any finance package has been released because they consider the house complete.
You then have three months to submit your claim, which HMRC will acknowledge within 10 days and will usually settle within 30 working days.
If you have bought items from within the EU, you can claim at the rate paid converted into sterling. If you have imported building materials into the country from outside the EU, then you will need to provide evidence of the VAT paid together with the original shipping or transit documents.
If you find you have been charged VAT in error (by paying for VAT on labour on a new build project, for example) then you won’t be able to claim that erroneous payment back from HMRC, because the money will not have gone to them. As no VAT was due, it will have gone straight to your builder.
Your only recourse will be to go back to the builder and challenge the price he has charged. There will be a period of grace allowed with HMRC to allow for genuine mistakes to be adjusted against the builder’s VAT account, but this is time limited so if you suspect an error, act quickly.
Items that can be claimed for include:
Items that cannot be claimed for include: