0% vs 5%

[sameulepapi]

Hello,

 

Just getting started on our planning and having a few expenses coming through for various bits and pieces. I am trying to understand how well I need to track invoices etc.

 

Ours in a conversion from a barn to a house (albeit is it just a frame) but still counts as conversion. It has been empty 10 years or more as it is a barn.

 

So am I correct in assuming we should be paying 5% VAT to main contractor rand then we can claim back the 5% after with the invoices? It also suggests we can claim 20% back on materials? I have seem contradictions which say you can't claim it back at all?

 

I also read that you can claim back for providing water, heat or access, drainage and security etc - Does this mean I should be asking fencing people for 5% rate?

 

Thanks

Edited January 15, 2023 by sameulepapi
More detail

[Drellingore]

The short answer is: you will need to track invoices well.

 

I'm currently going through all this myself, having been incorrect a number of times on this forum. The thing you want to read (in tedious, tedious detail) is VAT Notice 708. I can save you some time by saying that you can probably disregard sections 4, 5, 6, 8, 9 and 10.

 

I'll chip in with what I think might be useful opinion, aside from directly answering your question.

 

My understanding is that your main contractor should be charging you 5% VAT. You will not be able to reclaim this 5% if your works are covered under section 7 of notice 708, which covers conversions to residential use (and explicitly gives the example of a barn conversion). 5% is what you are supposed to pay.

 

My shakier understanding with regards to materials is that if your main contractor buys materials and incorporates them into the building, then they should be charging you 5% VAT and reclaiming any difference themselves. If you buy the materials and incorporate them into the building, then you should expect to pay 20% VAT and then reclaim the difference at the end of the build.

 

If you can demolish the existing barn to ground level, without breaking planning consent, before constructing the new building then you may be eligible for zero-rating VAT. This is covered in section 3, and section 3.2.1 specifically calls out the case of a previous building existing. Seek professional advice before going down this route.

 

Providing water, power, heat, access, drainage, security or waste disposal to a site that is being converted to a residential use is covered in section 7.6, and those will be reduced-rated (5%). Either people should be charging you 5% VAT or you should be reclaiming the difference - I'm not sure on this point, and so far I've found notice 708 to be slightly contradictory on this point.

The fact that the barn has been empty for 10 years isn't relevant as it wasn't a dwelling to start with - this would only be relevant if it was a dwelling or used for a residential purpose previously (which is what section 8 is all about). So that's a red herring that you can disregard. Your eligibility here is covered in a table in section 7.2.

 

As ever fine folks, please call out any lies I've told

[Temp]

On 15/01/2023 at 23:11, sameulepapi said:

So am I correct in assuming we should be paying 5% VAT to main contractor rand then we can claim back the 5% after with the invoices? It also suggests we can claim 20% back on materials? I have seem contradictions which say you can't claim it back at all?

 

Barn conversion qualify for the reduced rate of 5% and this CAN be reclaimed by a self builder. A main contractor will normally quote to do a job and that quote will take into account all the labour, materials, tool hire, profit etc. He must charge you 5% VAT on the lot and you can reclaim it using form VAT431C.

 

Any problems with the contractor cite..

VAT708 Section 2.1 Exceptions

..which covers conversions of non residential buildings like barns to dwellings...

 

Quote

conversion (other than for housing associations) of a non-residential building into a qualifying dwelling or communal residential building and conversions of residential buildings to a different residential use ― rate of VAT 5% (read section 7)

 

Section 7 says

Quote

 

7.3 Conversions into single household dwellings

A qualifying conversion is carried out when the premises being converted is a building, or part of a building, and after the conversion the premises contains a greater or lower number (but not less than one) of ‘single household dwellings’ (read paragraph 14.4), but not where the number of ‘single household dwellings’ in part of the premises is unchanged (read paragraph 7.3.1).

A qualifying conversion includes the conversion of:

a property that has never been lived in, such as an office block or a barn

 

 

In addition, if you buy any materials and give them to the contractor to fit (for example floor tiles) you will pay 20% VAT on the tiles and you can reclaim that on the same form. You should ask the supplier for a VAT Reciept and it should have your address or the site address on it. Your contractor may charge you labour to fit the tiles if not already included in the contract. That labour must be at 5% and you can reclaim it as above.

 

 

 

 

 

 

[Temp]

1 hour ago, Drellingore said:

My understanding is that your main contractor should be charging you 5% VAT. You will not be able to reclaim this 5% if your works are covered under section 7 of notice 708, which covers conversions to residential use (and explicitly gives the example of a barn conversion). 5% is what you are supposed to pay.

 

No you can reclaim it using VAT 431C. See above.

[Drellingore]

3 minutes ago, Temp said:

Barn conversion qualify for the reduced rate of 5% and this CAN be reclaimed by a self builder

 

As is evident from my prior posts, I'm very confused and must be being rather thick 

Where is the point in the reduced-rate scheme, if the developer charges 5% VAT, which goes to HMRC, and then HMRC give it back to the client? Surely then HRMC have gained nothing and it might as well have been zero-rated?

[Temp]

1 minute ago, Drellingore said:

 

As is evident from my prior posts, I'm very confused and must be being rather thick 

Where is the point in the reduced-rate scheme, if the developer charges 5% VAT, which goes to HMRC, and then HMRC give it back to the client? Surely then HRMC have gained nothing and it might as well have been zero-rated?

 

Indeed. I've no idea why they are treated differently. It does seem daft. 

[Drellingore]

7 minutes ago, Temp said:

Indeed. I've no idea why they are treated differently. It does seem daft. 

 

*rocks back and forth in the corner, gently sobbing*

[Temp]

On 15/01/2023 at 23:11, sameulepapi said:

I also read that you can claim back for providing water, heat or access, drainage and security etc - Does this mean I should be asking fencing people for 5% rate?

 

Possibly....

 

The hire of temporary fencing (or any tools) is standard 20% rated and cannot be reclaimed.

 

"Supply and fit% of fencing should be 5% rated to you on both. It can be a problem persuading some contractors that 5% is correct. Sometimes it helps to give them a certificate which is essentially a letter confirming that the work is on a qualifying conversion and citing any planning reference numbers etc. You can reclaim the 5%.

 

If you just buy fencing panels and posts to install yourself these will be 20% rated and that is also reclaimable.

Edited January 19, 2023 by Temp

[Kelvin]

I’ve tracked every single invoice/cost directly involved with the build and indirectly such as storage, moving, selling the previous place, rent in the current place I have two folders one with everything I can’t claim back and one with everything I can. I’m tracking this in my main spreadsheet. 

[Drellingore]

7 minutes ago, Temp said:

give them a certificate

 

Section 18 says certificates are only for buildings that are a "relevant residential purpose" (ie not a dwelling, but a care home/halls of residence) or "relevant charitable purposes" (which I'm fairly sure doesn't apply here). I just downloaded the certificate template, and it seems that it only caters for those two cases, and not for a regular dwelling.

[andyscotland]

3 hours ago, Drellingore said:

Where is the point in the reduced-rate scheme, if the developer charges 5% VAT, which goes to HMRC, and then HMRC give it back to the client? Surely then HRMC have gained nothing and it might as well have been zero-rated?

 

It is to do with the flow of input & output tax along a chain.

 

In most cases as you say, the 5% charged by the contractor can be reclaimed, either by a VAT registered business that is converting the builder for sale (through the normal VAT return process), or by a private individual that is self-building (through the self-build reclaim scheme).

 

In similar vein, you could ask what's the point in my business charging 20% VAT on my services when I know all our clients are VAT registered and will be claiming it back.

 

However there are a whole range of cases where the client cannot reclaim- they may not be a UK VAT-registered entity, they may have onward plans for the building that prevent recovering input tax (e.g. they are not planning to use it in a way that creates/supports any VATable revenue). There is also a host of complication about the difference between supplies that are 0% rated (you can recover the input tax) and supplies that are exempt or out of scope (you cannot recover input tax).

 

So basically as a rule of thumb, output tax (VAT you charge your customer) is based entirely on what you are supplying.

 

And input tax (VAT you can reclaim) is based on who you are and what you're doing with the thing you bought.

 

Those figures may balance, or they may not.

 

This is why VAT is possibly one of the most complex & technical taxes!

 

The self-build scheme is an anomaly, it's I think the only time where a UK consumer can reclaim the VAT they have paid on goods and services. I believe it was introduced to "level the playing field" because it was felt unfair that a self-builder should have to pay VAT when they wouldn't if they bought a house from a developer.

[Drellingore]

Thanks for taking the time for a detailed reply @andyscotland. That all makes sense. I received another more cynical take in that it's good for HMRC's cashflow. In a simplistic view where everything is standard-rated, HMRC basically get to hold onto 20% of all money changing hands between businesses for three months.

[andyscotland]

3 hours ago, Drellingore said:

 

Section 18 says certificates are only for buildings that are a "relevant residential purpose" (ie not a dwelling, but a care home/halls of residence) or "relevant charitable purposes" (which I'm fairly sure doesn't apply here). I just downloaded the certificate template, and it seems that it only caters for those two cases, and not for a regular dwelling.

 

This is correct.

 

However some people have found that contractors/suppliers don't understand the rules and want a piece of "evidence" to justify zero/reduced-rating their supply.

 

Some are happy with a letter, others know enough to know that there's a more official looking HMRC "certificate" but not enough to know it's completely inappropriate to use it in this scenario!

 

But in practice if it gets the supplier to apply the tax treatment they should have been applying anyway, HMRC are not going to challenge the fact that the certificate was issued incorrectly because they can only raise an assessment if the actual amount of VAT charged/reported is incorrect.

[andyscotland]

1 minute ago, Drellingore said:

Thanks for taking the time for a detailed reply @andyscotland. That all makes sense. I received another more cynical take in that it's good for HMRC's cashflow. In a simplistic view where everything is standard-rated, HMRC basically get to hold onto 20% of all money changing hands between businesses for three months.

 

To a point but I'm pretty sure that all comes out in the wash.

 

In normal trade I invoice on 19th Jan, HMRC don't know anything about it till I send my quarterly VAT return in April and I pay them a month later. However my client's input tax recovery will be reported around the same time, and that will reduce their HMRC bill by the same amount. There is a bit of cashflow timing because you can pick your VAT quarters, but that can work both ways. Eg my client might actually reclaim it in March, before I've even reported the sale.

 

Not to mention that there isn't really any concept of "cashflow" in government funds in the same way as for normal people, and any marginal gain from VAT will be eclipsed by the fact Corporation & self-employed income tax is paid anywhere from 9 to 20 months after the income that is being taxed.

 

[sameulepapi]

Really amazing help thank you @Drellingore and @andyscotland

 

Seems I better get good at keeping the invoices! 

 

 @andyscotlandwhere does one get the HMRC official looking certificate?

[sameulepapi]

Oh I found it Section 18

[sameulepapi]

@andyscotland on the certificate there is a section that I have pasted below. 

 

I am confused as to how to delete.

 

I can see point 2 relates to me as someone converting. It then says tick as appropriate. I am just using this for a residential dwelling, it all seems to be very charity focussed which is confusing me. 

 

 

4: I have read the relevant parts of Buildings and construction (VAT Notice 708) and certify: (read statements 1 and 2 and strike through the one that does not apply).

 

 

1.    That, as the recipient of construction and conversion services, this organisation (in conjunction with any other organisation where applicable) will use the building, or the part of the building, for which zero rating or reduced rating is being sought solely for (tick as appropriate):

 

 

2.    That, as the recipient of services of residential renovations and alterations, this building, or the part of a building, will be used by an organisation for which reduced rating is being solely sought for (tick as appropriate):

 

·      New builds only. A relevant charitable purpose, namely by a charity in either or both of the following ways:

 

·      other than in the course or furtherance of business

 

·      as a village hall (or similar) in providing social or recreational facilities for a local community

 

·      New Builds and conversions. A relevant residential purpose, namely as:

 

(a) a home or other institution providing residential   accommodation for children

 

(b) a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder

 

·      a hospice

 

·      residential accommodation for students or school pupils

 

·      residential accommodation for members of any of the armed forces

 

·      a monastery, nunnery or similar establishment

 

·      an institution which is the sole or main residence of at least 90 per cent of its residents and will not be used as a hospital, prison or similar institution or an hotel, inn or similar establishment

 

 

 

 

[Temp]

@sameulepapi Officially you only need to issue certificates if the building is being converted to a charity building or similar.

 

However they can help convince a contractor to zero or 5% rate if they haven't done it before. For a dwelling I suggest something like this..

 

 

I have read the relevant parts of Buildings and construction (VAT Notice 708) and certify:

 

That, as the recipient of construction and conversion services, the development is a conversion from a non-residential building/barn to a residential building/new dwelling, and therefore qualifies for reduced rate VAT (5%). 

 

Planning Reference Number: 12345678/FUL

Planning Title: 

Site Address:

Contact Address:

Telephone:

 

Yours sincerely etc

 

Edited January 20, 2023 by Temp

[sameulepapi]

OK great - yes this is the approach I took in the end. 

 

Thanks

Sam