If a property is designed as a dwelling, the sale by the person constructing it is zero-rated for VAT purposes. However, the VAT Notes (Note 13 to Group 5) contain wording which (in simplified form) acts to exclude zero-rating when residence on a year-round basis is prevented by local planning law or a covenant or if the interest granted in the property is such that the purchaser cannot reside in it throughout the year.
What, however, would be the position for a DIY builder (who could ordinarily reclaim the VAT on the construction of a dwelling) who builds a dwelling to use as a holiday home and who cannot reside permanently in it? This was the issue in a case that recently came before the Tribunal.
According to HM Revenue and Customs (HMRC), the VAT element of the construction costs could not be recovered because the VAT regulations applicable state that the Notes relating to Group 5 apply.
The Tribunal rejected HMRC’s contentions. When a DIY builder builds a dwelling, there is no onward sale, so the VAT point on the tax treatment on sale does not arise. The reference in the regulations to the Notes relating to Group 5 was merely to aid in the interpretation of various sections.
HMRC have now retired hurt from this particular fight and issued a notice stating that they accept that claims may be made to recover input VAT incurred on building materials ‘for holiday homes that meet the necessary criteria’ – which are that the construction is for the claimant’s own occupation and not in the furtherance of a business.
Partner Note
Irene Susan Jennings TC363.
HMRC Brief 29/10. See Indirect Tax Voice, October 2010.