A tax relief for all concerned

VAT exemptions can often help self-builders make the most of a tight budget

Tax is unpopular with most people but the scheme for reclaiming VAT on many goods and services is a bonus for self-builders and those converting non-residential buildings into private homes.

Tax is unpopular with most people but the scheme for reclaiming VAT on many goods and services is a bonus for self-builders and those converting non-residential buildings into private homes.

There are plenty of eccentricities when it comes to what materials and services are eligible, or not, for VAT relief - and remember that in most cases you cannot claim at all if you are merely renovating an existing house. But self-build tax relief is now in its 10th year and widely recognised as a successful incentive. However, you have to know the ins and outs.

Self-builders can claim the VAT back on turf laid to the edge of the newly-built or converted building but not on trees, shrubs or flowers; they can claim back VAT on kitchen stoves but not gas or electric cookers unless they are plumbed in to provide hot water; the VAT can be reclaimed on saunas and pools, too, if they are installed inside the main building, but not on washing machines, refrigerators or freezers.

The total list of exclusions is long and includes professional fees unless included as part of a design and build contract; VAT paid out on the hire of plant, scaffold and machinery also cannot be reclaimed; VAT on delivery costs and carry-pallets is lost, as is any VAT wrongly charged on labour or materials.

But eccentricities and exclusions apart, there are clearly substantial savings to be made. "It tends to be at least £8,000 for any self-built property, often a lot more," says a spokesman for HM Revenue and Customs (the new name for the old HM Customs and Excise, now merged with the Inland Revenue).

Even so, the method of claiming it back can be frustrating for two reasons. First, you must wait until the very end of the project to reclaim the VAT. HM R&C will accept only one claim for the entirety of your expenditure, so you need to wait until the project is finished and all outstanding costs incurred. But do not wait for too long - you only have until three months after completion to file your claim.

Second, some suppliers who should charge you only 5 per cent VAT on materials or labour will attempt to charge the full 17.5 per cent because their own administrative and bookkeeping systems cannot cope with exceptions to the standard rate. Unless you know the full list of goods and services at 0 per cent, 5 per cent and 17.5 per cent, you may find yourself paying over the odds.

"We found most suppliers of materials just couldn't handle a 5 per cent figure - it was more hassle for them so they chose not to do it," says self-builder Fraser Duffin, who with his wife Kate and three young daughters has been working on converting an old barn into a family home at Aslacton on the outskirts of Diss in Norfolk.

"I don't think it's going to be much hassle reclaiming the VAT but I gather the authorities want to see the full receipts, probably going back to day one. The total we'll be claiming will probably be around the £25,000 mark," he explains.

He will be moving into his new five-bedroom property in late June and he expects the final work will take much of the summer. His project was a large one - the barn was part of a pig farm and the property it has now become is in five acres of grounds, has two lounges, a dining room, two galleries, a garage and will shortly have a swimming pool as well. It will have taken 18 months of paying bills before he can reclaim the VAT.

Adopting a canny approach to this final stage of the work is important. Make sure that you undertake all work that qualifies for VAT refunds before the main property is completed and you lodge your claim.

For example, labour and materials for hard landscaping for the driveway, the construction of main paths to and from your new home, and the building of retaining walls and patios are all eligible for VAT relief but only if completed during the construction of the main dwelling - so don't wait until the following summer to do the work.

VAT is not the only tax benefit that falls the way of self-builders. There is no capital gains tax on a self-built property when it is sold, and income tax relief is given to self-builders who buy land for their project but have not yet sold their existing home.

But what is so appealing about a VAT reclaim is that it happens at the end of a project, usually coming in time to help equip that dream property just as you add the final brick.

How to reclaim your tax

Can I claim?

HM Revenue and Customs says you can claim in three cases:

* If you have constructed a new residential or charity building

* If you have converted a non-residential building to form a new dwelling or other residential accommodation

* If your new building was not constructed or converted in the course or furtherance of any business.

Private owner-occupiers cannot claim VAT relief if they construct or convert a building with the intention of selling or letting it for profit. If an owner-occupier is already VAT-registered because of their business, and they want to modify their home to help in the running of their business, there may be ways of seeking VAT relief. Consult your local VAT office or an accountant.

What building work is included?

HM Revenue and Customs says that claims can be made for completely new buildings designed as or intended for use as private homes, communal residential buildings shared by friends but not run as a business, and charity-run buildings.

Self-builders can also claim VAT refunds if they convert non-residential buildings or older homes that need refurbishment and have not been used as homes since April 1973. Common examples of conversions are barns and oast houses turned into family homes, or offices and commercial buildings converted into flats.

Quirkier examples such as converting a disused railway station into a home also counts, providing you do not create self-contained dwellings to sell or rent separately.

How do I claim?

When you file your VAT Claim Pack (VAT 431, from www.hmrc.gov.uk/library.htm) it must also include:

* the written planning permission and plans of the building constructed or converted

* all invoices and bills, including credit notes for returned goods

* proof that you have completed construction or conversion of your building, in the form of a certificate of completion or habitation from the local authority buildings regulations team, a council tax assessment or a certificate from your bank or building society

You must have a VAT invoice for all eligible goods and services. Each invoice must show:

* the supplier's VAT registration number

* the quantity and description of the goods and/or services

* your name and address if the value is more than £100

* the price of each item

Useful websites

www.hmrc.gov.uk

www.selfbuildabc.co.uk/building/self-build-finance-vat.htm

If you need general advice or copies of HM R&C guidance notes on VAT reclaim, contact the National Advice Service on 0845 010 9000.