Building homes – Beware of the VAT!

Key point summary

• It is possible to construct a new home without incurring significant VAT costs
• The VAT rules to achieving this are complicated and must be carefully considered
• Works must be carried out after planning consent has been obtained and must be carried in accordance with planning consent

Individuals carrying out construction works on new homes can often do this without significant VAT costs. This is however dependent on two keys points: (i) for VAT purposes, the works undertaken must be “construction works”; and (ii) the new home must be “designed as a dwelling”.

There is no general VAT definition of a “dwelling” but there is legislation on what “designed as a dwelling” means. Despite this, people building their own homes are often caught out and therefore incur unexpected VAT costs that they can ill afford. The VAT legislation is typically interpreted strictly by HM Revenue & Customs (HMRC) and the courts and this can often leave many feeling hard done by for what they consider to be minor technical defaults in compliance with the legislation.

‘Designed as a dwelling’

A building is designed as a dwelling if each of the following conditions are satisfied:

• the dwelling consists of self-contained living accommodation;
• there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
• the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and
• statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.

Each of the conditions in (a) – (c) above have and will continue to catch taxpayers out but it is condition (d) that this article is focuses.

Planning consent: minor deviations

Minor deviations will not typically cause a problem. HMRC has confirmed that “variations to the planning consent, resulting in a change in appearance, or to the composition or distribution of the accommodation, should be accepted. More radical departures resulting, for example, in a much larger dwelling being constructed, should be rejected as failing to satisfy the condition, unless there is evidence that the planning authorities have decided not to pursue the matter.”

Retrospective consent

It is this point that typically trips up taxpayers. Essentially what matters is the position when the works are undertaken and retrospective consent to works undertaken will usually not enable taxpayers to satisfy the condition in (d) above.

Part of the problem here is the interaction between the VAT legislation and the planning legislation. Planning authorities do have the power to grant retrospective consent under section 73A of the Town and Country Planning Act 1990 which provides that permission “may be granted so as to have effect from” an earlier date when the works were undertaken. Contrast this with condition (d), which requires planning consent to have been granted and the works to be carried out in accordance with that consent. The fact that planning consent may have “effect” retrospectively for planning purposes is not the same thing as having the consent in place when the works are done.

A case in point

In Williams v HMRC [2017]UKFTT 846 the Court determined that retrospective planning permission would not enable the taxpayer to satisfy condition (d). In this case, Mr Williams had obtained planning permission to extend his house in 2014. During the preparatory works, the building inspector noted that it would be inadvisable to build onto the existing structure and Mr Williams therefore decided to demolish the existing dwelling and construct a replacement home from scratch. A new planning application for the construction of Mr Williams’ new home was submitted in May 2015 and planning consent was granted by South Downs National Park Authority on 10 August 2015. The permission was granted with retrospective effect and covered a lot of the works to where the VAT liability was disputed. Despite this retrospective consent, HMRC refused to accept that the works undertaken prior to the granting of consent were not subject to VAT. Mr Williams therefore went to Court to dispute this.

The Court, although sympathetic to Mr Williams, confirmed that as the construction works were carried out before planning consent had been granted, VAT had to be charged to Mr Williams on such works. The fact that the planning legislation confirmed that the planning consent was “effective” from a retrospective date did not assist Mr Williams. The Court decided that as planning permission had not actually been granted when the works were undertaken this was fatal to Mr Williams’ claim and meant that he had not complied with condition (d) above.

Mr Williams is not alone in falling foul of condition (d) and there have been several other cases in which taxpayers who have undertaken works pursuant to retrospective planning consent have also fallen foul of this condition.

Play by the rules

As with virtually all VAT issues, the position is never straightforward and can catch out the unwary. The failure of the planning legislation and the VAT legislation to interact in tandem is unfortunate and will no doubt cost many house builders dearly. Williams demonstrates that despite the recognition by the court of the harsh implications of its decision, the VAT legislation leaves the court with no discretion when interpreting condition (d). For those out there looking to build their own home, make sure that this is always done after planning consent has been granted and that construction is in accordance with the relevant consent.