Mr Smith, the Appellant in this instance, converted a barn adjoining his property into living accommodation for which planning permission was obtained. In 2007, when 60% of the work had been completed, Mr Smith became aware that he may be able to recover the VAT element of the costs incurred in the course of converting the barn by way of the DIY builder's scheme and a claim was subsequently submitted. In September 2006, Mr Smith was advised that if a steel framework were to be included in the plans, a further two stories could be included enabling the building to become a free-standing residential property.

Mr Smith's claim was originally rejected in its entirety as HMRC considered the barn to be “ancillary†to the existing dwelling, although this decision was subsequently overturned. HMRC then repaid part of the claim, equating to 5- VAT on supplies considered eligible for the scheme, as they considered the works undertaken equated to a residential conversion and therefore were liable to the reduced rate of VAT. Therefore, it would be Mr Smith's responsibility to recover incorrectly charged VAT from suppliers.The First-Tier Tribunal concluded that invoices issued prior to September 2006 were correctly charged at the standard rate of VAT as it was only after this date the building was intended to be a stand-alone conversion and not an extension of an existing property. Therefore, full VAT recovery was permitted on invoices up to this date, whereas VAT recovery at the 5- rate was only allowed on invoices issued after this date (meaning that the client could not recover 15- of the VAT that had been charged, in error at the standard rate, by the supplier).

This case is further authority for the view that VAT is only recoverable with reference to rate that should have been charged by the supplier, even if a higher rate has actually been invoiced by the supplier.  It demonstrates the importance of identifying the correct VAT rate on construction-conversion services to be supplied to you.  If you are a D-I-Y builder or converter and require confirmation regarding the application of this scheme, or if you or one of your clients are undertaking work relating to land and property, please call our free VAT helpline to determine the correct VAT liability of these supplies and ensure that VAT is being correctly accounted for.