The most expensive tax breaks - battle lines on DIY self-build refunds
By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)
28 February 2020
Philip McNeill looks at VAT refunds for self-build as an example of the battle lines on tax relief, and why attention to detail is everything.
An expensive tax relief
A recent National Audit Office report on the costs of tax reliefs, highlighted that zero-rating for VAT on new dwellings is in the top five most expensive tax breaks from the Treasury. It cost the Exchequer £14.8 billion in 2018-19.
Little wonder then that DIY VAT refunds on new dwellings can be a contentious issue. A string of cases have arrived at Tribunal over the last few months. From the demolished mobile home to the change of plan holiday let. They bring new meaning to the making fine distinctions.
What can we learn from HMRC and the Tribunal’s approach to these tax reliefs?
Out of time claims
The top challenge on DIY VAT refund claims must be out of date claims. The regulations (regulation 201 Value Added Tax Regulations 1995) say that claims must be made ‘no later than 3 months after the completion of the building’.
But what this means can cause confusion. Regulation 201 para 1 (b) (i) elaborates on what proof should be submitted saying ‘a certificate of completion obtained from a local authority or such other documentary evidence of completion of the building as is satisfactory to the Commissioners’.
This has led some people to incorrectly assume that the certificate of completion is the essential and only acceptable proof.
So, what has been recent experience at the Tribunal?
Contrary decisions
It will depend on specific circumstances, but there is a broad warning. Problems are likely to occur when claims are made after a property has been occupied; or where there is a long delay after the work has been substantially completed.
As only one claim can be made, the dilemma is that a claim too soon means no refunds on later supplies; but a claim too late means no refund at all.
When is it safe to rely on a council issued completion certificate and are there other hazards? A review of the cases holds the answer.
Remedial work
Sometimes issue of a completion certificate is delayed due to the need for remedial work. The Tribunal found, in Stewart Fraser (Stewart Fraser TC07367 [2019]UKFTT 0573(TC)), that building work may have been completed, even if it is later discovered that it would need ‘rectification’.
Even substantial rectification, would not, in the Tribunal’s view, alter the original date of completion.
The taxpayer argued that the building was not ‘completed’ until the remedial work had been done, and application could not be made to HMRC for a VAT refund until the local authority completion certificate was issued. But this overlooked the fact the taxpayer had been living in the property for a considerable period of time.
HMRC argued that the property was completed by the time the taxpayer moved in. This was just over two and a half years before HMRC received the VAT refund application, though within 3 months of the issue of the completion certificate.
The Tribunal concluded that the building was completed when final work was done, before rectification work, and within six months of the taxpayer moving in.
Completed on paper only
A bizarre turn of events in Stuart Farquharson (Stuart Farquharson TC07240 [2019] UKFTT 425 (TC)), finds HMRC arguing for an earlier ‘completion date’ than that shown on the completion certificate issued by the council in respect of a property which was significantly uncompleted.
This is particularly surprising given HMRC’s usual approach of expecting claims within three months of the council’s completion certificate.
A contra, the taxpayer argued that the building was uncompleted, despite the completion certificate having been issued by the local authority.
Fortunately, the Tribunal, having reviewed photographs and other evidence, was able to make a common sense judgement and, in the specific circumstances, accepted three months from the issue of the council completion certificate as the appropriate deadline.
Council completion certificate as primary evidence of completion
In Liam Dunbar (Liam Dunbar TC07504 [2019] UKFTT 747 (TC)), the Tribunal honed in on the phraseology of paragraph 2 01 (b) (i) of the Value Added Tax Regulations 1995. This states:
‘a certificate of completion obtained from a local authority or such other documentary evidence of completion of the building as is satisfactory to the Commissioners’
In the Tribunal’s view this indicates that the local authority completion certificate is the primary, and default evidence of completion.
‘It must in our view be assumed that the regulations have been framed in a way which is intended to make it relatively straightforward for both the taxpayer and for HMRC to determine when completion of the building has taken place’.
If, as HMRC contended in this case ‘the date of completion depends on all of the facts and circumstances, it would be almost impossible to be sure when completion had taken place’.
In this case there was doubt as to the date of completion due to a delay in connecting a permanent water supply. The taxpayer had phoned HMRC for advice, and in an unrecorded call, said they were advised to await a completion certificate from the council.
Extended timescale
In Satish Chander Arora (Satish Chander Arora and Another TC07489[2019] UKFTT 731 (TC)), there was another twist to reliance on the issue of a council completion certificate.
Here, the property was fit for habitation by the end of June 2015, liable to council tax from July 2015 and occupied from August 2015.
But the VAT refund claim was not made until July 2018 – almost three years later. Despite the fact that the completion certificate from the council was only issued in April 2018, the Tribunal took the view that there was sufficient evidence of earlier completion date.
In the Tribunal’s view ‘to determine when a building is complete, it is important to weigh all the evidence available. In essence, a building is deemed completed when the construction has been completed in accordance with the original plans, and as per HMRC’s guidance in VCONST02530, “when all main elements for it to function for its intended purpose are in place”.’
Scottish outcome
In Simon and Joanne Cotton (Simon and Joanne Cotton TC07553 [2020] UKFTT 0057(TC)), the story had an unusual Scottish twist, with the Tribunal using council certificate date, while saying that this would not have applied in England. See Tax and location - when it pays to be Scottish.
New build versus extension
Even clearing the hurdles of completion dates, there are other hurdles. DIY Zero rating applies to new build, not to extensions. In John Watson (John Watson and Another TC07513 [2020] UKFTT 5 (TC)) a new building had been created by the novel route of creating brick walls around a mobile home and then removing the mobile home from within.
HMRC argued that the work amounted to an extension and no refund was due. The Tribunal decided, contrary to HMRC’s view, that the building work undertaken on their home amounted to a new build, rather than an extension.
But just as victory was within sight, the taxpayers’ hopes were dashed by s35 (1) (b) VATA 1994. The Tribunal pointed out that, contrary to what that section requires, the taxpayers’ building was illegal. Planning permission was only for an extension to a mobile home.
Interestingly the same hurdle of incorrect planning permission caused another claim to fail. David Stewart’s planning permission did not match what had been built (David Stewart TC07561 [2020]UKFTT 0065(TC)).
HMRC guidance
The principle source if information are Gov UK Building a new home and VAT; the VAT Construction Manual and the claim form – such as VAT431NB.
Conclusion
Whatever the tax break, attention is needed to the detail of the rules. While HMRC guidance may be informative, it is no substitute for reading the legislation.