Building a new farmhouse or converting an old barn into residential property is generally not considered part of the farm trading activity, therefore VAT incurred on such projects cannot normally be reclaimed through the farm VAT registration.
However, HM Revenue & Customs (HMRC) operates a VAT refund scheme for DIY house builders or house convertors. This allows anyone acting in a private capacity to reclaim the VAT incurred on their costs, when building their own home or converting a commercial property into a residential property. The schemes are designed to put an individual in the same position as if they had purchased a new home from a property developer, which is a zero rated VAT supply.
If you are planning to submit a DIY claim, there are a number of pitfalls you will need to be aware of, including:
- Beware of planning restrictions that may prevent the property’s separate disposal from the surrounding agricultural land and buildings.
- Check the property qualifies as a ‘dwelling’ according to the VAT Act 1994.
- If using a builder or contractor, ensure they charge the correct rate of VAT, which may fall under the zero-rate [for new build] or the reduced rate of 5% [for conversions] rather than the standard rate of 20%. HMRC will reject any invoices charged at the wrong rate.
- The claim will require all original invoices, plans, planning permission and building regulation certificates. Make sure that all purchase invoices are made out to the party making the claim. Keeping detailed and accurate records is crucial to a successful claim.
- VAT on certain expenditure cannot be claimed, such as professional fees, machinery, tools, electrical/gas appliances, carpets, curtains etc. if an invoice contains a mix of allowable building costs and non-allowable costs, it is important to obtain an accurate apportionment.
- The claim cannot be submitted until the project has been completed and then there is a strict three month deadline to submit the application. Claims falling outside this time limit will almost certainly be rejected by HMRC.
HMRC could issue penalties for inaccurate claims and we would recommend that specialist advice is taken before the build commences.
If you would like any further information regarding the above, please do not hesitate to contact a member of our agricultural team.
