15 May 2019

When is a house not a house? When HMRC say it's a shed

MHA-Monahans-Blog-HMRC

A person building their own home is permitted to reclaim the VAT suffered on materials via a “DIY housebuilders claim.” The relief therefore contributes in a relatively small way, to the construction of new housing.

The Courts have repeatedly held that “reliefs from VAT should be interpreted strictly.” Either a claim meets the conditions required by law, or it fails. Unfortunately, in a recent case, HMRC seem to have decided that a claim should fail even though it appeared to meet the strict conditions.

Mr Swales, a retired Architect, built himself a new home in the garden of his son’s house and after consulting HMRC on the rules, submitted a DIY claim for the VAT he suffered on materials. There was an existing shed on site, and Mr Swales obtained planning permission for the “Erection of extension to outbuilding and conversion to residential annexe.”

Since the relief is for the construction of brand new housing, given the terms of the planning consent, it is unsurprising that HMRC would want to be satisfied on three points in particular:-

  1. the works undertaken received planning permission, and were constructed in accordance with that planning permission;
  2. no covenant, statutory planning consent or similar provision prohibited the new house from being used, or disposed of, separately from his son’s house; and
  3. that the new house didn’t incorporate any existing building.

After some delay, HMRC rejected the claim and put Mr Swales on notice that he may be liable to a penalty for making an “ineligible claim.” The grounds for rejection were not explicitly stated, but appeared to assume that his new house incorporated the existing shed (point 3, above.)

Mr Swales produced evidence that the shed had in fact been demolished, and asked for his claim to be paid. HMRC dug in, however, and protracted correspondence followed, from several different Officers.

One Officer maintained that use of the term annexe in the planning permission meant point 2 wasn’t met, suggesting that although there was no express prohibition on separate use or disposal in the planning permission, it should be implied. Another officer took the position that as the shed had been demolished, not extended and converted, the work was unlawful and had not been in accordance with the planning permission.

At the Tax Tribunal, HMRC focussed on the planning permission referring to extension/conversion, whereas this was new construction. HMRC suggested that either the planning authority hadn’t spotted that the walls were demolished; or had spotted this and should have taken enforcement action.

There was argument over whether the plans submitted to the Council showed the retention of the walls, or whether these simply indicated where the existing walls stood, for comparison. However, Mr Swales pointed out that:-

  • retention of the 3 walls was not a specific restrictive condition of the planning approval
  • the existing shed wasn’t compliant with building regs, it was a fire risk, had no footings, wasn’t treated against damp or vermin, and the ceilings were too low. No Planning Officer would have expected its retention
  • to put in new footings required the removal of the existing walls, and the planning authority had approved the use of different materials for the new walls
  • the planners were aware that only the slab of the shed would be retained as part of the footprint of the new building

The Judge rejected HMRC’s arguments. It was for the planning authority to decide whether the construction was in accordance with the planning permission, not HMRC.

The Judge was also critical of HMRC’s approach in not clarifying which grounds it wished to contest before the day of the hearing; and for threatening to levy a penalty before it was settled that the claim was invalid. In particular because the original rejection was based on HMRC’s misunderstanding that the walls of the shed were retained.

To discuss this or anything VAT related further please contact Steve Chamberlain.