VAT reclaim if we live onsite during the build?

[LnP]

We’ve bought a house which has an outbuilding in the garden. The outbuilding is currently not habitable and has never been lived in as far as I know. We plan to refurbish the outbuilding to be habitable, demolish the existing house, and live in the outbuilding while the new house is being built. The outbuilding would then be suitable as a home office, gym or guest accommodation. Somebody has told me that if we do that, we could jeopardise getting the VAT back on the new build.

I would be grateful for any advice.

Thanks

 

[Temp]

Yes I believe that's correct. I'm sure this has come up before but couldn't find it when I looked. See...

 

 https://www.gov.uk/vat-builders/new-homes

 

What counts as new

For work to be zero-rated for VAT, it must qualify as a genuinely new, self-contained house or flat. This means:

• it’s self-contained - there are not any internal doors or connections to other houses or flats
• it can be used independently of any other property, including businesses
• it can be sold on its own
• it has proper planning permission
• any existing buildings on the site have been demolished completely to ground level (unless you’re extending an existing building to create a new house or flat)

 

It might be possible to find a VAT tribunal decision that rules the other way but that seems to be the official position.

 

Living on site in mobile home is possible.

 

[Temp]

One possibility might be to apply for planning permission to use/convert the outbuilding to a separate dwelling. Split the title so you have two plots (with shared driveway if necessary). Then you wouldn't have a VAT problem with the new house because you would be demolishing everything on that plot. Once the new house is complete and you have the vat reclaim done then you could merge the titles back into one plot. I don't think planning permission would be needed for that but check.

 

I see two possible issues...

 

Getting planning permission for separate occupation might be difficult. However the same trick should work even if you only get temporary planning permission for separate occupation during construction. That might be a lot easier to get. 

 

The land registry don't like splitting land if the same person will continue to own both parts. Its something to do with not being able to enforce covenants on yourself. Anyway it might delay the splitting process. It might smooth/speed things if you own one and your spouse/partner/children own the other. However self building can be stressful and you should think about the consequences of a split or even a death. Ditto taxes.

 

Edit: If you go this route I think I would recommend getting two separate planning permission. One for separate occupation of the outbuilding and another for the new house. I think it could cause vat issues if it was all on one planning grant. This might not be possible it the seperate occupation one is temporary. 

 

 

Edited August 14, 2021 by Temp

[LnP]

Hi Temp,

Thanks for your reply. The quote from the HMRC web site begs the question, what is a building and which building? What if there was an existing garage on site which you planned to retain. Would you have to demolish the garage to qualify for 0% VAT? It's possible that one liner is just a high level "heads up".

 

There's more detail here https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708#section3. I haven't found anything in there which says that outbuildings have to be demolished, but the wording is quite convoluted so It's possible I missed it!

[newhome]

I would ask that question to the HMRC forum. 
 

https://community.hmrc.gov.uk/customerforums/vat

 

I wouldn’t mention anything about turning it into guest accommodation and anyway if you do that and include living accommodation, a kitchen and a bathroom separate from the main house the accommodation will be liable for separate council tax so you may wish to rethink that. I would just say that it has an outbuilding that you intend to use as a garden room. You can’t reclaim VAT on garden rooms anyway so personally I don’t see how that will affect the VAT claim. 
 

I think I would buy a cheap touring caravan and say that you are living there, even if you do convert the outbuilding to live in. There is nothing to stop you using a touring caravan as a temporary home. If you don’t want to use the caravan it might work as builders’ facilities for refreshments and a loo.  
 

 

[LnP]

11 hours ago, Temp said:

One possibility might be to apply for planning permission to use/convert the outbuilding to a separate dwelling.

That's an interesting idea. I think the planners might object though. But I'll discuss it with my planning consultant.

[LnP]

6 minutes ago, newhome said:

I would ask that question to the HMRC forum. 
 

https://community.hmrc.gov.uk/customerforums/vat

 

I wouldn’t mention anything about turning it into guest accommodation and anyway if you do that and include living accommodation, a kitchen and a bathroom separate from the main house the accommodation will be liable for separate council tax so you may wish to rethink that. I would just say that it has an outbuilding that you intend to use as a garden room. You can’t reclaim VAT on garden rooms anyway so personally I don’t see how that will affect the VAT claim. 
 

I think I would buy a cheap touring caravan and say that you are living there, even if you do convert the outbuilding to live in. There is nothing to stop you using a touring caravan as a temporary home. If you don’t want to use the caravan it might work as as builders’ facilities for refreshments and a loo.  
 

 

Thanks for the HMRC forum suggestion.

The outbuilding is in poor shape with a leaky roof so we will anyway need to fix that. As well as living in it temporarily, we plan to store personal effects in it during the build. There's nothing in the form VAT431NB which I can see which would bring the outbuilding into consideration. HMRC don't seem to be asking for any information about out buildings.

Interestingly, the person who brought this to my attention also suggested putting a caravan on site which we could claim to be sleeping in. 

[Temp]

53 minutes ago, LnP said:

That's an interesting idea. I think the planners might object though. But I'll discuss it with my planning consultant.

 

Just to be clear.. its the splitting of the title that solves the VAT issue  not getting PP for seperate occupation. 

[joe90]

I used a caravan for “builders facilities “ and slept in it myself part of the year. I was never asked about outbuildings so if you don’t mention them they don’t come to site ?‍♂️

[Temp]

"Not mentioning them" would need to include not mentioning them in the planning application or on site plans for same. You have to send copies with the reclaim. 

[LnP]

10 hours ago, newhome said:

I would ask that question to the HMRC forum. 
 

https://community.hmrc.gov.uk/customerforums/vat

Somebody already posted a question on the forum, where they planned to build a new house but retain an existing garage. They were asking if the new build would qualify for zero rated VAT.

HMRC forum question

HMRC did not give a direct answer, but provided links to guidance. One of the links give the conditions which have to be met for the building to qualify. One of them is:

    it’s built from scratch, and, before construction starts, any pre-existing building is demolished completely to ground level (cellars, basements and the ‘slab’ at ground level may be retained)

I think it's this text which is causing confusion.  It doesn't say "every pre-existing building", and I think it means any part of the pre-existing building you're replacing.

 

I haven't found anything in the guidance about living on site during the build.

 

So it's looking to me so far that we're OK to do what we want to do, but I'm going to look into getting professional advice. Can anybody recommend a self build VAT specialist?

 

Thanks

[LnP]

I've spoken to two accountants who specialise in VAT reclaim for new builds. One of them advertises in the back of Build It magazine, and the other was referred to me by a well known timber frame company. Neither of them could see any reason why living on site in an existing outbuilding during the demolition of an existing dwelling and its replacement, would jeopardise the zero rating of the new build.

 

Both of them advised that the requirement that "any pre-existing building is demolished completely to ground level" is intended to mean that you can't use parts of the existing building in the new build. It does not mean that every building on the site has to be demolished. As I mentioned previously, if that were the case, if there was an existing detached garage on the site, you'd have to demolish it. It seems unlikely that that's what HMRC mean.

 

 

[Temp]

Think I would still try and call HMRC. Record the call. Tell them you know the existing building must be demolished but "what about outbuildings like a shed or garage, does that have to be demolished as well?"

 

 

[LnP]

2 hours ago, Temp said:

Think I would still try and call HMRC. Record the call. Tell them you know the existing building must be demolished but "what about outbuildings like a shed or garage, does that have to be demolished as well?"

 

 

Good idea.

 

Here's a fairly lengthy quote from the sales brochure of one of the accountants I talked to. It's a reminder to be vigilant about the reclaim process and keep good records including photos, but I think it's further confirmation that my new build will be zero rated, despite us living temporarily in the outbuilding.

 

"HMRC will go to great lengths in an attempt to reduce or totally refuse your reclaim and it’s down to you or us to evidence to them that we are correct. This specific claim comes to mind because it has  only just been resolved so it’s fresh in my memory. It has taken a whole year almost to the day to get  resolved, but yes, the client did get paid. The client built a new house, an annexe, and some barns. Neither the annexe nor the barns qualify for VAT reclaim or zero rating. The client built the annexe first and moved into the annexe to live while the main house was being built. Then moved into the main house and then completed the project by building the barns. We presented a completion certificate to HMRC with the reclaim that was 7 days after the date on the completion certificate, so that’s 10 weeks inside the 3 month deadline for submitting the reclaim. HMRC investigated the claim, valued around £40k and advised they had evidence that the house had been lived in for many years longer than the date we had put as a moving in date and therefore HMRC felt this claim could and should have been submitted before the time it was. HMRC had viewed the voting register and the council tax banding list and as the family were living in the annexe, it proved they were living on site but not in the house. By total chance the client found a photo showing them at the annexe with no house in the background and took another photo of the site as it stands today, showing the house was in the background now, evidencing that the annexe was built first. We now thought and hoped this would allow the claim to proceed, it did not. HMRC came back with a claim that the 
reclaim included material for the annexe and the barns, neither of which qualify for VAT exemption or refund, which they did not. HMRC offered an olive branch by requesting the client make an offer of a reduction of the claim value and begrudgingly the client offered £2k. HMRC then hired a drone to take photos of the site from above and highlighted the square meterage of the barn and annexe against the square meterage of the house in order to try and get the client to increase the reduction further. This was now 9 months and 6 letters from HMRC into the claim, the client advised they would accept a £5k discount, HMRC accepted this. A year to the day of submission I had a discussion with a senior officer at HMRC and voiced my displeasure at their tactics in this reclaim and that person went away and looked at the claim. Three days later the claim was refunded in full, with no discount taken from the original submission. That was a result."

[joe90]

This is the VAT specialist who did my VAT claim for me, he was very accommodating and knowledgable, have a chat with him.

 

https://www.vat431.co.uk

[LnP]

36 minutes ago, joe90 said:

This is the VAT specialist who did my VAT claim for me, he was very accommodating and knowledgable, have a chat with him.

 

https://www.vat431.co.uk

Thanks joe90. He was one of the accountants I spoke to, and the long quote is out of his booklet ?

[Deejay_2]

We are in a similar situation regarding your VAT reclaim question.

Did you manage to get your question answered by HMRC.  

Our intention was to demolish our bungalow and detached garage and replace with new detached house and separate triple garage with granny flat over.  However, with current financial uncertainty we are not sure whether we would be able to do all of this in one go.  I contacted the local authority CIL officer and his advice was to submit an initial application for the triple garage/granny flat and claim CIL exemption and if we later want to demolish the  bungalow and replace with house, submit a further application and claim again for CIL exemption.  

Good idea we thought.  Build the garage/flat and then we could live there if we decide to demolish the bungalow etc.  However, we are now concerned that doing it this way may somehow exclude us from the VAT reclaim on the new house.  

We read the HMRC advice much as you have in that it doesn't mean all buildings on the site have to be demolished - just the complete demolition of the building to be replaced.  Will building the garage/flat first impede our VAT reclaim.

Do you have any further information that might help - it would be much appreciated.

[LnP]

Hi @Deejay_2

I never followed up with a call to HMRC. But, in addition to the two I mentioned above, I spoke to another accountant who specialises in VAT reclaim and she confirmed that what we are doing (refurbishing an outbuilding to live in during demolition and rebuild of the main house), will not jeopardise the VAT reclaim on the new build of the main house.

Your situation is slightly different, so I'd recommend talking to some accountants. I suppose that if you did the project in a single phase you'd get the VAT back on the garage. Splitting it in two might mean you'll only get the VAT back on the house. I'll be interested to hear how you get on.

 

[Deejay_2]

Hi - thank you for responding.  Just to say that we realise we would forgo the VAT reclaim if we build the garage/flat first on a separate application and felt this was worth doing to avoid getting bogged down with the CIL exemption legislation on the whole development. 

However, we are not sure whether doing it this way will mean we can't reclaim the VAT if and when we submit a further application to demolish and replace the bungalow.  Do you have contact details of the further accountant you spoke to.  I'd like to try all avenues first before contacting HMRC.  Many thanks again.

[Deejay_2]

I have put an update on my original post CIL IMPLICATIONS regarding phoning HMRC.  If you would like to follow that thread you will be able to see the eventual outcome!!

[LnP]

Hi @Deejay_2, I spoke to Andrew Jones, the person Joe90 recommended. I also spoke to Claim it Back, www.vatclaim.co.uk 01427 839333, who advertise in the back of Build It magazine. I also spoke to somebody at a Build It show at Bicester. They were all confident I didn’t have a problem. 
I read your post following your conversation with HMRC. it’s a pity you didn’t get clearer guidance. 

[Deejay_2]

Hi LNP - I've written to HMRC Enquiries so will post their response (if I get one).  I'll also phone the Claim it Back people - thank you for their number.  I've spoken to another Vat reclaim company who were 100% certain we would be OK.  Strange the employee who I spoke to in the HMRC office that receives the tax reclaim forms didn't know, but that's often the case - she could have been a temp or something - who knows.  I do need to make sure we get this right though as it could be a costly mistake for us if we decide to build at a later date but it's all so time consuming!!!

 

 

[LnP]

Hi Deejay_2,

I’m wondering if you nights be stirring up a bit of a rats’ nest by asking HMRC for a written response. It’s possible that they don’t have a written policy on this, but that if they have to write one it might not be the one we want. Given that the VAT accountants have advised that HMRC’s practice is to allow the reclaim in these cases, I’m wondering if it might be best just to rely on precedent in the unlikely event of a challenge. That might be a question to put to one of the VAT reclaim accountants.