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Housing - New Build: VAT on Green 'garden room'

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    I have put this in the housing category, but part of the problem is that it isn't considered as such.

    I am about to build an architect-designed highly-spec'd timber-framed Garden Room for a client. It's only 15+ sq m, and to all intents and purposes it is another room to the house - it just happens to be 3m away. HMRC advise me as follows:

    "....from the details provided, I can advise you that the relevant
    information can be found in public notice 708 which deals with various
    aspects for VAT purposes of building and construction. Therefore, see
    comprehensive guidance at section 3 for the basic conditions when a new
    building is being constructed.

    Furthermore, you will note that although this will be a new build, it
    does not meet any of the specific criteria at paragraph 3.2.1 to qualify
    for the zero rate. In fact, because it is designed to be a separate
    building from the main dwelling, despite increasing the living area, it
    falls under the examples at paragraph 3.2.2 of the same notice.
    Therefore, if this project does not meet any other criteria, all labour
    and materials will be liable to VAT at the relevant rate. Additionally,
    VAT would only be recoverable under the DIY builders and converters
    scheme as per public notice 719..." (....which states that as it's not a relevant domestic building - a house - it's not eligible for the scheme! So my client has to pay VAT on the lot.

    Any thoughts, comments, experience, anecdotal evidence?

    Thanks,

    Nick
    •  
      CommentAuthornigel
    • CommentTimeSep 12th 2007
     
    If it was an extension to the house it would be vatable as well. I am not sure what the issue is, are hoping for some it reason it should be zero rated?
    •  
      CommentAuthorfostertom
    • CommentTimeSep 12th 2007
     
    Aren't I right in thinking that, even if attached, it wd be an extension to an extg dwelling, and VAT's only zero-rated for first-build of a newbuild?
  4.  
    'If it was an extension to the house it would be vatable as well. I am not sure what the issue is, are hoping for some it reason it should be zero rated? '

    No the reference to it being 'to all intents and purposes it is another room to the house - it just happens to be 3m away' was just to show that we are talking about a 'domestic grade' bldg, not a shed! It would have been nice if it could have been treated for VATas a new domestic bldg.

    Fostertom - you're right.

    Just had a vain hope that I had mis-read something and that someone knew some good news that I didn't.
    • CommentAuthortony
    • CommentTimeSep 12th 2007
     
    What about if the land was sold to a different owner then it was built as a new building with no VAT?
    •  
      CommentAuthornigel
    • CommentTimeSep 12th 2007
     
    It would have to have planning permission to be an independent dwelling for you to get the VAT back.
  7.  
    Yeah, that's the rub - it's not 'dwelling' enough to be regarded as one!

    Thanks for the thoughts.

    Nick
  8.  
    I had always assumed that the logic behind zero VAT on new build was that you don't charge VAT when you sell house... but of course you don't charge VAT on the extended part when you sell... go figure.

    I think that perhaps home extensions, improvements, buildings-ancilliary-to-the-use-of-etc etc are considered a consumer product bought by the homeowner (and so VAT rated). Construction contract law would support this as contracts between homeowner and builder and /or architect for example are subject to Consumer protection legislation, ie cooling off periods, simple contract terms etc.

    Perhaps not specifically applicable but worth a thought is the fact that reduced VAT is payable on work relating to splitting a house into separate dwellings and I think for works relating to improving accessibility although I'm not sure on that one.

    Have often thought that Gordan might lose the VAT on extensions et al the next time there's a dip in the construction industry.

    J
  9.  
    Why are your clients trying to dodge tax? Over here, new builds are not zero rated for VAT - some can be recovered, but there is a formula which essentially gives less back once a certain threshold has been reached. And then, the rebate is only if the house is a primary residence. One can't build, say, a holiday home and expect to get any tax back at all. Also many (if not most) plots of land that are zoned for residential building can't be subdivided further - so selling off the garden to build a glorified shed and claiming it's a new build would fall at the first hurdle as the land would not be divisible.

    Paul in Montreal
    • CommentAuthortony
    • CommentTimeSep 13th 2007
     
    James, it is more likely VAT will be put on new build.
  11.  
    VAT on new build would destroy the construction if applied over night at at 17.5%, I don't think GB would want to do that...

    However what about levelling out the tax on new build and extensions at a much lower rate perhaps phased and rather than VAT a 'green tax' (whatever that means...) which could be reduced according to energy and impact performance....
  12.  
    Paul, I had not thought of it as trying to 'dodge tax', ratyher as an attempt to get a sustainable, super-insulated building at a sensible price, but I take your point. What I knew is that they had a fixed sum in mind as a budget. By diluting some, but not all of the Green elements, we 'reduced' the cost, but it was still way over budget. Then we have to add 17.5% on top of that budget-breaking figure.
  13.  
    I think we should have VAT on new build, renovation and conversion work all at 17.5% to level the playing field. All these exemptions and reduced rates only serve to complicate the tax system and confuse people. I'm a Chartered Accountant and I can't work out the VAT treatment for the flat conversion projects I'm doing at the moment. I don't think the people who answer the phones at the HMRC helpline understand it either as I get a different answer every time I call them.

    I don't think putting VAT on new build would kill the construction industry James. They wouldn't like it because it would reduce the profitability of the sites in their land banks but they would adjust downwards the price they pay for new sites so ultimately it will be landowners that will suffer and they generally have done little to earn the value in their sites, it has been gifted to them by planners zoning decisions.
  14.  
    Chris, very good point, one of the very real problems of the VAT system for buildings is the level of confusion even at HMRC. Small self builders for example and Nicks clients don't really stand a chance.

    Perhaps I exaggerate the effect on the industry but would still maintain that gradual implementation of a simpler 'green building tax' is the way to go... of course gradual implementation would lead to more complexity in the short term... (doh.)

    I also agree that the current value of land creates a distortion of the development costs / housing market and that the planning system is implicated in this state of affairs... although I would suggest that there's more too it than USA style 'zoning'... but don't get me started on planners...

    One area I am not clear on is: VAT reclaimed on self build materials in relation to self build mortgages; as the VAT is claimed back at a later date (end of the, end of the year..?) and I presume the mortgage covers a build cost based on no VAT, does that mean that the self builder has to finance the VAT (and gamble on HMRC judgements) from savings...?
  15.  
    'does that mean that the self builder has to finance the VAT (and gamble on HMRC judgements) from savings...? '

    As I understand it, from the Public Notices that HMRC have cited, yes.
    • CommentAuthortony
    • CommentTimeSep 15th 2007
     
    It is not a gamble the law is clear about it. Self build you get the VAT back so long as is not built as a house to rent out etc.
  17.  
    Tony, I agree the ultimate recovery is not a gamble, but the fact that you have to fund the VAT until recovery (and effectively stretch your budget or temporarily curtail your build to do so) is true, I think.
  18.  
    Why should it make a difference if it is a house to rent out? Housebuilders sell thousands of homes directly into the buy-yo-let market yet they are allowed to reclaim the VAT. Is it fair that an investor who buys a piece of land himself and builds to rent out thenselves has to pay the VAT? Yet another inconsistency that cannot be justified on any rational basis.

    I'm converting the upper parts of some commercial properties to flats which would attract a reduced rate of VAT if I was selling them. However, because I'm renting them out when they are finished, I've got to pay full rate. When you ask HMRC to justify this, they have no answer for you.
    •  
      CommentAuthornigel
    • CommentTimeSep 15th 2007 edited
     
    Posted By: Chris WardleI'm converting the upper parts of some commercial properties to flats which would attract a reduced rate of VAT if I was selling them. However, because I'm renting them out when they are finished, I've got to pay full rate.


    Thats not actually correct. If you are having conversion work done it is charged at 5%. If you are a VAT registered business and you sell the flats you can reclaim all the input tax.
    If you choose to rent them out then you cannot reclaim the 5%" You should not be paying 17.5%, make sure the builder only charges you 5%.
  20.  
    I need to look into this again then Nigel. Thanks for that tip.
    • CommentAuthortony
    • CommentTimeSep 17th 2007
     
    There is also the whole complex minefield of partial exemption. Bottom line is if you are a net VAT payier then you can reclaim it on properties that you do up but only if you are in that business area of operations and own the property and etc etc ......
    •  
      CommentAuthornigel
    • CommentTimeSep 17th 2007
     
    To claim partial exemption you would need to have a business making standard rated and or zero rated supplies and the maximum you can claim is limited to 50% of the input tax you reclaim on these supplies up to the de minimus limit.

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