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HMRC internal manual

VAT Construction

DIY builders and converters VAT Refund Scheme - eligibility of claims: condition 5: were the works carried out otherwise than in the course or furtherance of any business?

 
 
 
 
 
 
 

What ‘in the course of furtherance of any business’ means

A claim can’t be entertained when the claimant carries out works ‘in the course or furtherance of any business’.

If the work is carried out by a contracted builder this doesn’t disqualify the claim from a refund - it is the claimant’s or occupant’s use of the building that is important.

The test isn’t whether the individual is in business but whether the construction or residential conversion is ‘otherwise than in the course or furtherance of any business’. For example, a director of a company may have a house built for himself or another member of his family or friend. He may purchase the building materials through his company but as long as the arrangement is legal and isn’t seen as a business activity (because the dwelling isn’t to be sold or leased to the person who will be living in it) a claim for a refund of VAT may be allowed.

The main guidance on what constitutes business is in VAT Business/Non-Business.

Please note, however, that in Paola Sassi (TC00224), the Tribunal found that the construction of a flat for letting purposes wasn’t in the course or furtherance of any business. The circumstances surrounding this case were most unusual. In the vast majority of cases, building for the sole purpose of letting or selling would be seen as a business activity and would disqualify the construction of a building from the Scheme.

VAT registered builders constructing their own homes

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.

Apportionment between business and non-business use

In general, no apportionment can be made where a building is put to both business and non-business use. For example, a bed and breakfast establishment that has both guest and private quarters with shared facilities can’t be claimed for.

However, apportionment can be made where a part of a building is put wholly to a non-business qualifying residential use or a relevant charitable purpose and a part is put wholly to a business use. However, you need to be aware that, where dwellings are concerned, if the dwelling can’t be used or disposed of separately from the non-dwelling part, the dwelling isn’t eligible for the Refund Scheme. VCONST14210 refers on live-work units.

Incidental economic activity that can be disregarded

For the purposes of the Refund Scheme, the following activities can be disregarded as use of the building in the course or furtherance of any business:

  • Working from home (either where the self-builder is self-employed or is an employee). In this category, you can include farmhouses but if the dwelling has been provided for an employee, it has been built or converted for business purposes and so falls outside the scope of the Scheme.
  • Selling or letting a dwelling soon after its completion as a result of a change in circumstances. For example, a relationship may have broken up requiring joint assets to be sold and the proceeds split or a change in job may mean the claimant having to sell up and move before he or she can occupy the dwelling.
  • ‘Rent-a-room’ lettings that conform to HMRC guidelines in PIM4001 (Web).
  • Bed and breakfast, unless it is of a scale and degree to suggest a guesthouse or similar establishment is being operated. This might be indicated by the planning consent (or in the application for it).

In Hugh William Flynn (VTD 16930), planning permission was granted for a ‘dwelling house incorporating bed and breakfast facilities’. The Tribunal decided that the intention of constructing the building was to ‘further the business’ of running a bed and breakfast establishment. Therefore, the Appellant wasn’t entitled to a refund under the DIY Scheme.

  • The temporary letting of a house by a self-builder who can demonstrate an intention to use it as their private residence at some stage. This situation can arise when people such as farm workers and others living in ‘tied’ accommodation build a house in their spare time so that they have a home when their present employment ends. They may not be in a position to occupy that house until that employment ends so in the interim they let the house out.

Charities and business use

In the same way as any other claimant, a charity can’t make a claim under the Refund Scheme if the works are made in the course or furtherance of any business. As a consequence, buildings intended to be used by charities as village halls or similar buildings cannot qualify for the Refund Scheme as such use is business use.

Change of intention - non-business to business

A person who changes his intention part way through a project so that he intends to use the property for business purposes isn’t entitled to a refund through the Scheme. If not already registered, that person can register as an intending trader. V1-28 Registration and VAT Input Tax refer.

Please note incidental economic activity can be disregarded ( refers)

Any tax incurred prior to the change in intention may be reclaimed through a VAT return subject to the normal rules.

Change of intention - business to non-business

A person who changes his intention part way through a project so that he intends to use the property for non-business purposes is entitled to use the Refund Scheme.

VAT incurred on eligible goods and services purchased after the change of intention can be recovered through the Scheme in the normal way.

The change of intention may result in a VAT registered trader being liable to account for VAT on deemed supplies in respect of those transactions where VAT had already been claimed as input tax by the VAT registered trader.

Further information can be found in VATSC - Supply and consideration (previously titled ‘V1-3 - Supply and consideration’) and VAT Business/Non-Business.