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Business Services  •  Business Tax

The true cost of poor VAT advice

By RJP LLP on 10 February, 2020

Expert VAT advice can be extremely valuable and create savings way beyond expectations. In contrast, a misunderstanding can lead to costly bills. This article illustrates how a second opinion from a VAT expert saved a taxpayer a lot of money.

This case relates to an individual who had decided to buy a plot of land and build his own house on it, then occupy the property as his main residence. He intended to purchase the land for £200,000 from a local farmer, who wanted to charge VAT on the sale (£40,000 of VAT) because he had an option to tax election in place. The buyer queried whether he could reclaim the VAT being charged by the farmer and was told that he could. His accountant’s reply was: “the VAT DIY scheme means you can claim VAT from HMRC on ‘goods’ that relate to the house you are building and land is classed as goods. But you can’t claim the VAT back from HMRC until the house has been finished and you’ve got a certificate of completion from an architect.”

Somehow, this advice didn’t feel quite right and the individual sought a second opinion. They went to an expert VAT specialist who clarified a few fundamental errors and demonstrated the value of speaking to an expert when it comes to VAT queries.

The specialist clarified that the DIY scheme allows VAT to be claimed on certain expenses linked to the construction of a new dwelling provided that 1) the person (or a relative) intends to live in the property themselves when it has been completed and it will not be used for business purposes; 2) a claim must be made within three months of the completion date of the property. There was a problem with the original advice provided to this taxpayer because “a DIY housebuilders claim only relates to VAT paid on ‘building materials’ purchased in the course of constructing a new dwelling and not ‘goods’ - land is not a building material.”

By getting a second opinion, the individual was able to clarify that although VAT cannot be claimed on the purchase of land with the DIY scheme, a buyer can ask the seller to override their option to tax election if the land will be used for the self-build of a new dwelling. The buyer must give written confirmation of his intention to the seller before a deal takes place. In this case, the land sale was exempt from VAT (£200,000 no VAT) rather than standard rated. The VAT problem melted away with the morning mist.

RJP operates a specialist, expert VAT advisory department and if you have any queries, please don’t hesitate to contact us by emailing partners@rjp.co.uk.

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Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.