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June 16, 2016

DIY Housebuilders' Scheme for VAT

An individual who buys a new home does not have to pay VAT on top of the purchase price because dwellings are exempt from VAT.

In light of this, the DIY Housebuilders’ Scheme was introduced so that where an individual builds their new home, they can apply for a VAT refund on expenditure incurred on building materials and services.

The scheme also applies to expenditure incurred on building a non-profit communal residence (e.g. a hospice), a property for a charity, or converting a non-residential building into a home.

New Build

As noted above, where a non-residential property is converted into a home, a claim for a VAT refund can be made.

However, where the build relates to an existing residential property, it is important that the property ‘ceases to be an existing building’ before the new build takes place.

The law states that a property will cease to be an existing building where

a)      It is demolished completely to ground level, or

b)      The part remaining above the ground level consists of no more than a single façade, the retention of which is a requirement of planning consent.

In A D Reeves v HMRC, the First-Tier Tribunal considered whether a wall retained by the taxpayers was a condition of planning permission and whether it met the definition of a ‘façade’

The facts of the case were that Reeves obtained planning permission for the “extension and alteration” of a 2 bedroom bungalow into a 4 or 5 bedroom house. The planning permission was on the condition that they retained three exterior walls, a small part of one gable end (the “gable wall”), and an interior wall which ran lengthways through the middle of the bungalow.

Due to unforeseen circumstances he demolished over 90% of the property, leaving only the gable wall standing.  The planning authority gave their consent to this alteration without changing the original permission.

Reeves made a claim for a refund of VAT on the basis that the bungalow had ceased to be an existing building before building the new property.

HMRC refused the claim for the refund on the basis that:

a)      There was no requirement that the gable wall be retained; and

b)      The gable wall was not a façade.

The courts noted that a condition of the original planning permission was the retention of the gable wall. The subsequent agreement with the planning authority meant that Reeves would not require new consent to permit the demolition of the other walls, provided that the gable wall remained standing. Therefore the courts disagreed with HMRC as there was a requirement that the gable wall must be retained.

With respect to point b) in order to arrive at a decision the First-Tier Tribunal had to consider the definition of a ‘façade’. The courts referred to the Oxford English Dictionary and held that the ordinary meaning of ‘façade’ is the face or front of a building and not simply a wall of a building.

The gable wall was therefore not a façade and the bungalow had not ceased to be an existing building prior to the development. On this basis, HMRC were correct to reject the claim.

Lawful Build

In addition to a “new build” meeting the above conditions, the building works must have been carried out lawfully in order for a claim for a refund of VAT to be successful.

As illustrated by the case of Scott Kernohan v HMRC it is crucial that planning permission is obtained prior to the build and that sufficient documentary evidence of this is provided to HMRC.

In this case Kernohan obtained planning permission for the alteration to an existing bungalow. Subsequent discussions with the local Council Building Control Services led to the agreement that the existing bungalow could be demolished and a new property rebuilt.

The taxpayer did not realise that planning permission was required for the altered plans. When he realised that planning permission was required (nearly a year after the work was completed), he obtained it retrospectively.

HMRC rejected the claim for a refund of VAT and argued that the original planning permission did not cover the complete demolition of the bungalow and that new planning permission was required.

The taxpayer contended that he did not realise that the original planning permission had ceased to apply when the plans for the building work had changed and that others involved in the building work (e.g. Council’s Building Control Service) did not alert him to the need for new planning permission.

The courts referred to the Upper Tribunal decision in Asim Patel which had similar facts and held that while they had sympathy for the appellant, Kernohan did not meet the requirements at the time of making their application and therefore a claim for a refund of VAT was not due.


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