Building your own house – VAT helpsheet

If you are converting you can also claim the VAT on the construction services used in the conversion that has been charged at the reduced rate of the VAT, currently 5%.

You can also use the scheme where you buy a “shell” property from a developer to fit out yourself.

How the scheme works

You purchase materials for the construction or conversion in the normal way and will be charged VAT.  At the end of the project, you submit a claim to HMRC for the VAT you have paid on the materials and this should be repaid to you.  You do not have to physically carry out the work yourself; you can engage a builder, plumber, electrician, etc. to work on the house.  However, the scheme does not cover the VAT on all costs and some buildings may not qualify.

Who cannot use the scheme?

The new house must not be used for any business purpose.  Therefore, you cannot use the scheme if you intend to sell the house once completed, or if you wish to use it, for example, for bed and breakfast or holiday lets.  It may be possible to reclaim the VAT in these circumstances but this means registering for VAT and accounting for VAT on the income generated by the house.  However, you may be able to use the scheme if you build a holiday home if it is only for your own use.

Am I building a new house?

This is not as strange a question as it seems.  If there was a house on the site before, it must be demolished completely down to ground level before the new house is built.  One façade (or two facades on a corner site) may be kept if this is a condition of the planning permission. Party walls with other properties can also be kept.  If any other remaining part of a previous house, no matter how small, is incorporated into the new house, it will not be considered a new house and so is not eligible for the scheme.

The house must also be “designed as a dwelling”, which has a special meaning for VAT purposes.

• A “dwelling” must have all the expected facilities of a house, for example, a kitchen, bathroom, bedroom in addition to the living areas.  Therefore some bedsit type accommodation does not qualify.
• There must not be any internal access to any other dwelling.
• The house must have the necessary planning consents and have been constructed according to those consents.
• There must be no restriction imposed by planning consents or covenants on the separate use or disposal of the new house.

This last condition is often the most misunderstood and can lead to a nasty surprise for the self-builder.  It is not uncommon these days for someone to convert a stable yard or another group of redundant agricultural buildings into a house plus business unit. Usually, the planning authority wants to restrict further residential development on the site and so makes it a condition of granting planning permission that the house cannot be sold (or sometimes also used) separately from the business part of the property. The separate sale or use condition may be extended to land and other buildings around the house.  In VAT terms this means the house is not a “dwelling” and so is not eligible for the scheme.

Check the terms of your planning permission and consents carefully for any restriction on sale or use before you start work.

“Live-work” units

These are residential properties whereby the terms of the planning permission an area is set aside within the property for business use, usually as an office or workshop.  The planning consent usually stipulates that the business area cannot be sold separately from the residential part of the property and so in HMRC’s view live-work units are not usually “designed as dwellings”.  If the planning consent does allow the separate use or disposal then an apportionment could be made between the residential area, which could be treated as a “dwelling” if it met all the other conditions, and the non-residential area, but this is very rare and most live-work units are not eligible for the scheme.  However, a live-work unit where no separate areas are designated for residential or business use may qualify as a dwelling and so be eligible for the scheme.

What costs are covered by the scheme?

You can claim VAT on the cost of materials that are “ordinarily incorporated” into a new house.  However, this excludes fitted furniture (except fitted kitchen units), carpets, curtains, and appliances such as cookers, fridges, etc.  This is a complicated area and the list of building materials changes as the features normally expected in a new house change.  You should look at HMRC’s guidance or seek advice as to what is considered to be “ordinarily” incorporated into a new house.

The costs of constructing a garage, as long as it is built at the same time as the house, are included.

If you are converting a non-residential building, in addition to the materials, the construction services used in the conversion can also be claimed.  These should have been charged at the reduced rate of the VAT.  If the standard rate has been charged incorrectly HMRC will not repay the VAT.

The following costs are also excluded from a claim:

• Professional fees, for example, architect’s and surveyor’s fees
• Plant hire and other standard-rated services
• Costs relating to other structures, for example, workshops, stables, swimming pool, garden structures

If you are building a new house you should receive the services of builders, plumbers, electricians, etc. relating to the house itself without VAT.  If you are charged VAT incorrectly you must go back to the supplier for a credit note.  You cannot claim incorrectly charged VAT from HMRC.

How do I claim?

Keep a file and a schedule of the suppliers’ invoices and credit notes you want to include in the claim. Make sure you obtain full VAT invoices from your suppliers.  You must also have the full planning permission, the detailed approved plans and a Certificate of Completion.

You need to obtain either Form VAT 431NB if you are building a new house or Form VAT 431C if you are converting a non-residential building into a house.  You should also obtain the relevant guidance notes.  The forms and notes can be downloaded from HMRC’s website www.hmrc.gov.uk or you can order them by phone on 0845 010 9000.

The completed forms should be submitted to HMRC together with the original invoices and the other documents required within three months of completion of the house.

If you have any queries about the scheme or making the claim you can contact HMRC or speak to an accountant, surveyor or VAT adviser.  We can advise on whether a property will be eligible for a claim and or help in preparing or checking claims.