Not checking your VAT position when building or renovating could be an expensive mistake
For VAT purposes, HMRC will not allow zero rating for projects which involve property extensions or enlargements. Therefore, if you don’t plan correctly you could potentially be subject to an unnecessary VAT charge of 20% on the whole build cost.
Recently, we acted on behalf of an individual where, by considering the VAT position at the outset of the build, saved them a significant VAT liability.
In this case, they originally planned to almost demolish the house and rebuild. However, the ‘almost’ would’ve been the issue. They intended to leave an existing garage in situ, and build the new dwelling attached to the garage.
Whilst this would’ve saved them approximately £10,000 on not having to demolish and rebuild the garage – it would’ve led to the total build cost being VAT chargeable. Therefore, if the build cost was say £400,000 – the VAT liability would be £80,000 – a particularly expensive garage you’d say.
We recommend seeking the advice of a VAT advisor before you commence work/ cost discussions. In our experience, it’s an easier conversation once a client is confident of their VAT position (or has an advisor alongside them) rather than retrospectively. We tend to work alongside the project manager discussing all costs beforehand to ensure they’re not unnecessarily charged.
When dealing with property, there are many weird and wonderful ways in which VAT is chargeable, with twists and turns and exemptions – it is well worth investing in a VAT expert to advise you during the process. In our opinion, any fees incurred are often recouped in the VAT saved (often multiple times over).
It’s your responsibility to understand your VAT position from the outset. In our experience, we’ve seen builders charge the standard rate VAT of 20% as the default position to be on the safe side. Similarly, it’s much easier to agree the VAT position at the start of the project, than having to chase your builder for your VAT back.
The VAT health checks we conduct are available pre, and post-building work/ completion – if you’ve completed a project, and the builder has charged VAT or an individual has incurred VAT where VAT should not have been charged (and it is within the last four years), we may be able to correct this and reclaim it – meaning a welcome refund of any VAT overcharged. NB: Don’t worry – your builder will just reclaim the money from HMRC on their next VAT return so won’t be out of pocket permanently.
In many instances we’ve been approached by individuals who weren’t correctly advised/ advised at all, therefore we’re putting retrospective claims in – many of which are particularly significant reclaim values.
The basic position for those in the buy-to-let sector can sometimes be considered disadvantageous from a VAT perspective.
Many ‘DIY’ housebuilders and converters are currently unaware of a refund scheme which could potentially enable them to reclaim thousands of pounds of VAT.
HMRC has altered the policy in relation to the VAT treatment of dwellings formed from more than one building.