Lee Sharpe continues his look at reclaiming VAT on DIY housebuilding projects and highlights a potentially useful recent tribunal case.
In Property Tax Insider for April 2025, I covered the basics of the VAT DIY housebuilder claim process:
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A property developer should normally be able to reclaim most of the VAT on their materials costs when building a brand new home for re-sale, etc.
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Broadly, the VAT DIY housebuilder scheme is supposed to put someone who is building their own home on a similar footing to that property developer by allowing them to submit a special claim to recover the VAT on (most of) their construction materials expenditure.
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HMRC insists that the homeowner can make only one claim per property, so, practically speaking, it makes sense to take care to ensure that the claim includes all the VAT costs properly deductible – but still within the six-month window after construction is completed. (To expand a little, HMRC’s VAT on Construction Manual at VCONST24550 mentions the single claim, but allows that a supplementary payment may be made for things like retention payments, invoices issued late by contractors, and similar). However, see Ellis & Bromley v HMRC [2021] UKFTT 0343 (TC) as potential grounds for challenging HMRC’s strict ‘one claim’ policy.
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I also warned that HMRC would refuse to pay out on VAT that had been charged at the wrong rate – typically, where a builder had charged VAT at the standard 20% rate but should have charged only 5% or 0% on their supply. However, I also mentioned a possible challenge on European VAT (so-called ‘Reemstma’) principles that is understood to be making its way through the courts. The basic argument in that case is that a taxpayer should be able to seek redress from their tax authority, where trying to get the supplier business to fix an incorrectly charged VAT invoice would be excessively difficult (such as the supplier business having since gone into liquidation).
But there is another case that may assist here: Mort v HMRC [2023] UKFTT 387 (TC).
Mort v HMRC
In Mort, the taxpayer had constructed an eligible new dwelling in Bury and initially tried to claim around £140,000 in VAT on materials costs. HMRC reviewed the paperwork and refused to pay out almost half of the original claim. After some correspondence (including a supplementary claim – see above), the amount that Mr Mort pursued to tribunal had fallen to about £40,000.
HMRC’s two main arguments were:
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For some invoices, the taxpayer was trying to reclaim VAT paid at the wrong rate – 20%, where the invoice should have been charged at 0%. As noted, this goes against HMRC’s long-standing policy.
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A few invoices claimed were not really for goods that qualified as ‘construction materials’.
Wrong rate refusal
The tribunal was quite scathing of HMRC’s refusal to repay VAT actually paid, albeit at the wrong rate:
“We first note that it may have been preferable for HMRC to consider whether they could have resolved the matter without the need for Tribunal proceedings”; and
“The effect of HMRC’s approach to these proceedings is to seek to retain VAT to which HMRC has no ultimate entitlement. This is inherently unsatisfactory…HMRC choose to…appeal before this Tribunal as a means of retaining a windfall that they accept they ought not have received.”
Even so, the tribunal found that it was prevented from passing judgment on whether HMRC was abusing its powers in public law, thanks to Foulser et al v HMRC [2013] UKUT 038 (TCC).
Materials or services – Or both?
The VAT DIY housebuilder scheme is supposed to repay VAT charged on a given invoice solely for:
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construction materials, but not for either;
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supplies of services; or
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a combination of supplies (a supply of materials in conjunction with a supply of services)
– as (ii) and (iii) would generally be zero-rated invoices anyway, on a new-build. HMRC will tend to assume that an invoice narrative of ‘supply and fit’ or ‘supply and install’ will invoke (iii) so that it is not wholly a payment for construction materials, and VAT cannot be reclaimed by the DIY housebuilder.
But the tribunal in Mort said that the correct test would be to ask whether a typical consumer considers there to be a “predominant element” of construction materials, for which a supply might validly carry 20% VAT at the standard rate and that may in turn be reclaimed under the DIY Scheme. The tribunal went on to consider a number of supplies claimed in the appeal, including:
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Glass panels, roof system and internal shutters, including assembly so as broadly to make a new glass-walled external garden room; the cost of the goods versus the cost of installation was estimated to be about 4:1 in the goods – held to be a supply predominantly of materials, and the VAT was reclaimable.
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Supply and fitting of automated gates, where the cost of installation was less than 25% of the overall invoice – again, held to be a claimable standard-rated supply of (solely or predominantly) materials.
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HMRC had refused VAT on invoices for the “manufacture and supply” of skirting, likewise fire doors and architraves. The tribunal could, in fact, see no reference to costs of installation or “incorporating the materials into the building” on these invoices, so concluded these were “materials only” and claimable (to be clear, these items did have to be incorporated into the building at some point to be eligible at all; however, the DIY VAT claim is supposed to repay the VAT only on eligible materials, rather than installation services).
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As to the supply and installation of a staircase, the tribunal observed: “A staircase is a large physical item. We find that, in a qualitative sense, a customer would generally consider that what they were paying for would be that large physical item.” So, the VAT charged was reclaimable despite the inclusion of installation costs in the invoice.
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In a similar vein, for the supply and fit of a garage door and electrical opening mechanism: “The installation was not so significant as to constitute a separate supply [of installation services]”, so it was considered to be a single standard-rated supply of goods, and claimable.
However:
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Tarmac driveway and footpath – the tarmac material was secondary to the laying of the tarmac, so it was a supply of services and the claim was rejected.
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While steel beams might also be considered “large physical items” like the aforementioned staircase, several invoices for the supply and installation of steel roof beams were considered to include a combination of materials and services, so they were not claimable.
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Likewise, invoices for the supply and fit of wooden flooring: “Although the material costs were significant, the flooring material is an ‘off the shelf’ component and not qualitatively dominant.” In fact, the tribunal considered the installation service to be the predominant supply in such invoices, so ineligible for a claim for building materials under the DIY Scheme.
Finally, I noted last month that most furniture will not qualify as eligible construction materials, except where the construction is quite basic, such as wardrobes built out from alcoves in the walls. In this case, the taxpayer had tried to reclaim the VAT on their fitted wardrobes, but the tribunal decided that the overall cost of £80,000 was “a strong indicator that the furniture was more than ‘basic’”.
Conclusion
I think the taxpayer benefitted from a tribunal that was quite unhappy that HMRC should be allowed to keep VAT to which, logically, it was not entitled (even if the law ostensibly permitted it). This is not to criticise the tribunal’s approach, that was based on a Court of Appeal case on online matchmaking services – HMRC v Gray & Farrar International LLP [2023] EWCA Civ 121.
In last month’s article, I suggested that whether the materials element of an invoice exceeded the installation service was “largely irrelevant”; this article expands that the customer’s perception of what they were paying for was the main issue – simplistically, is this invoice I am paying mainly for the bricks – eligible materials – or for a wall made from bricks – likely ineligible because of the importance of the bricklaying service involved? The customer might perceive little difference between an invoice for the supply and installation of a staircase (held to be eligible) and one for the supply and installation of steel beams (ineligible).
This case should be considered carefully and with some caution, but also keeping in mind that the taxpayer was thus able to recover almost half of the VAT under appeal.
