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The government’s DIY Housebuilders Scheme has helped to incentivise DIY property construction by providing VAT refunds for those building a new home, or converting a non-residential building into a home. However, the scheme operates under strict rules, and builders need to be aware of them in order to avoid falling foul of the regulations.

A recent case heard by the First-tier Tribunal has demonstrated how planning permission issues can affect eligibility for a VAT refund under the DIY Housebuilders Scheme, further underlining how important it is to get this right.

How confusion over planning permission led to a rejected refund

The First-tier Tribunal was called to hear an appeal by Scott Kernohan in relation to HM Revenue & Customs’ decision to reject a claim for a VAT refund under the DIY Housebuilders Scheme for work he had carried out on a residential property. HMRC stated that valid planning permission was not held for this development, and therefore the refund could not be granted.

The appellant had obtained planning permission for proposed works at the site that were described as “alterations to an existing bungalow”, including the addition of a rear extension. However, on discussing these plans with the local council, it was agreed that it would be better for the stability of the house to clear the existing structure and rebuild a replacement chalet dwelling and new double garage in its place.

Unaware that the existing planning permission did not cover the replacement of a dwelling with a new build, the appellant proceeded with the project. HMRC queried this, and retrospective permission was subsequently obtained; however, VAT legislation states that in order for the appellant to submit a valid claim for a refund, the work needed to have legally valid planning permission at the time the works were carried out.

As a result of this interpretation of the law, the appeal was dismissed, and no refund of VAT incurred on the construction was provided.

The lesson for businesses

This case demonstrates that the requirements to qualify for the DIY Housebuilders Scheme are strict and precise, and cannot be waived or modified retrospectively. To avoid encountering similar issues, it is therefore necessary to determine what criteria needs to be satisfied at each stage of the building works, and follow these to the letter.

For more information and guidance, speak to one of our VAT consultants on our free helpline at 0333 3638 012, or read our guide to VAT for residential property developers.

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