How do DIY builders reclaim VAT? Reply

You can apply for a VAT refund on building materials and services if you’re:

  • building a new home
  • converting a property into a home
  • building a non-profit communal residence – eg a hospice
  • building a property for a charity

The building work and materials have to qualify and you must apply to HM Revenue and Customs (HMRC) within 3 months of completing the work.

But its important to note..

https://www.gov.uk/hmrc-internal-manuals/vat-construction/vconst24350

When a sole proprietor or partnership is in the business of constructing property for sale and builds a house on his own land for his own occupation, or by a connected person, he can either:

  • recover the VAT through his VAT return in the normal way

or

  • claim the VAT through the Refund Scheme.

Until 1 January 2011, a sole proprietor or partnership (in the business of constructing property for sale) who built a house on his own land for his own occupation, or by a connected person, could either:

  • recover the VAT through his VAT return in the normal way

or

  • claim the VAT through the DIY Refund Scheme.

After 1 January 2011, however, this choice is no longer available to him and it will only be possible to recover VAT through his return to the extent that the services and materials will be used for taxable business purposes. Where the house has not been constructed for a business purpose it will not be possible to claim back the VAT through his return. The only option that will now be available to him will be to make a claim through the Refund Scheme.

Companies and other corporate bodies who build dwellings for their staff or officers of the company can’t make a Refund Scheme claim because the tax is incurred in the course or furtherance of their business.

VAT incurred in relation to staff accommodation is input tax and can be recovered through the company’s VAT return, subject to the normal rules.

As such the only way to recover the VAT is by making a DIY claim for the cost of materials and this should be made as one claim within 3 months of completion.

steve@bicknells.net

How do you account for Construction Retentions? 1

Home Office

It’s a very common question, the client pays you and keeps a retention of 5% reducing to 2.5% on completion  to be released after the end of the defects period.

You do the same with your sub-contractors.

The retentions need to be held in balance sheet accounts as they can’t be invoiced to client and aren’t due to the sub-contractors. But they should be included within sales and sub-contract costs.

HMRC’s guidance is in BIM51520

In the construction industry it is a common feature of construction contracts for the customer to retain part of the contract fee over a maintenance period pending the satisfactory completion of any remedial work required by the contractor. Typically this may be for a 12-month period between a Certificate of Completion being given and the issue of a Maintenance Certificate.

In their accounts, builders will generally deal with retentions in one of the following ways:

  • include retentions within turnover, provide for the estimated cost of remedial work, and make provision for any debt impairment (see BIM42700 onwards), or
  • defer recognition of retentions until their receipt becomes virtually certain.

Each of the above accords with generally accepted accounting practice and should be followed for tax purposes unless an unrealistically conservative view has been taken.

In recent years, construction industry customers have become increasingly reluctant to pay retention monies, irrespective of whether there are defects to be made good. It is now common for such monies never to get paid. Consequently, it will often be the case that, whichever of the above approaches is adopted, there will be little or no difference in the figure of net profit.

A challenge will only be appropriate in worthwhile cases. For example, where retentions are only recognised on receipt but, in practice, a large proportion is in fact consistently paid over to the builder and there is a significant tax effect (compared with the alternative provisions method).

There is guidance on VAT in VATTOS5170

……the tax point for retentions is delayed until either a VAT invoice is issued or payment of the retention is received, whichever is the earlier. It must be stressed that this only applies to the retained element of the contract price. The rest of the supply is subject to the normal tax point rules.

steve@bicknells.net