You live on a farm and have decided to convert a barn on part of the land into a self-contained dwelling and live there when it is completed. Building work will be carried out by external contractors. What are the VAT issues that you should be aware of? Tax expert John Craig explains further.
The good news is that builders will only charge 5% VAT on their services, and this reduced rate will also extend to materials they supply as part of their work, as the building work involves the conversion of a non-residential building into a dwelling. However, there is an important hurdle to overcome, you must give proof to the builders that the newly created home will meet all conditions of being a new dwelling.
If the converted barn can only be sold jointly with the other house on the farm, it fails one of the conditions of a new dwelling. It will then be classed as an extension to the existing house and not a dwelling in its own right. Building work will then be subject to 20% VAT.
If building materials are directly bought from a builder’s merchant or other supplier, i.e., without labour, the supplies will always be subject to 20% VAT. So, they should not ask the merchant to only charge 5% VAT, that would be incorrect.
Even if you are registered for VAT, this is irrelevant. There is no scope to claim input tax because the project is not directly linked to any business activity. There will be no taxable sales because it will be the private home of the owners. No entries will be made in any boxes of the VAT returns.
If you sold the new dwelling when completed, this would be a zero-rated sale made in the course of business, so there would be no problem in registering for VAT, if not already registered, and claiming input tax on the project costs. However, renting out the dwelling when it is finished would be exempt income, so input tax claims would be blocked with partial exemption. The exception is for short term/holiday lettings, where the income is taxable.
You could instead claim VAT paid for builder services and materials through HMRC’s DIY scheme. Although the scheme is mainly relevant to new dwellings that are built on bare land, a claim can also be made on costs linked to residential conversions. A DIY claim must be submitted to HMRC within three months of the project being completed. It must be submitted with original invoices, along with the building regulation completion certificate and evidence of planning permission. The completion date is usually the date when an architect or surveyor issues a completion certificate.
If you think that the three-month submission deadline is unrealistic, you can write to HMRC and ask for an extension, explaining the reasons why this is needed.
But please note, only builder services and building materials can be claimed with the DIY scheme. Fees for professional services are blocked, for example architect and surveyor costs.
You must check that the converted building meets all the conditions of a dwelling. If so, builders will charge 5% on their materials and services. VAT can be claimed through HMRC’s DIY scheme but not on professional fees. There is a three-month deadline for making the claim.