I’m currently working on the final draft of my new book for residential property developers and contractors. It includes a FAQ chapter which is primarily devoted to “building materials”; from identifying whether goods fall into the category and when developers can claim VAT on the goods and/or the services of installation. This article: Building materials: 5 important issues for developers and contractors is sort of an introduction to that chapter, but contains standalone information.
We all know this is a complicated, messy area of VAT, although to be fair I think that HMRC has done a pretty good job of explaining the rules clearly in Notice 708; Buildings and construction, section 13 http://tinyurl.com/n6gttof, with lots of examples showing when goods fall into the category of “building materials”.
The frequently asked questions…
But however much information, HMRC can’t possibly deal with every possible question about building materials – nor can I, even after decades working in VAT.
One aspect of “building materials” that causes confusion is the context. Not whether the proverbial vanity unit meets the “building materials” criteria, but other issues. For example, if you sell a converted pub as a dwelling, do you have to pay VAT at 20% or 5% on the installation of building materials? Can you claim VAT on the cost and installation of goods that AREN’T building materials even if you make a zero-rated sale?
It’s the context that matters….
So when people ask “what do I think about vanity units”, I have to know whether we’re looking at the issue from the perspective of a contractor and whether to charge VAT on the goods/installation; or the developer and whether they can claim VAT charged on the goods/installation; or even a DIY builder doing a self-build for family use.
The most practical way of dealing with the subject is to categorise the 5 distinct issues that you need to clarify to deal with the VAT issues from all aspects.
The issues are as follows:
- whether the goods ARE building materials;
- the VAT liability of goods supplied and installed by contractors;
- the VAT liability of the services of installation by those contractors;
- whether the developer can claim VAT charged on the goods; and
- whether the developer can claim VAT charged on the services of installation.
Also, the VAT treatment for zero-rated new construction and reduced rated conversions and renovations may be different so you have to factor that into the answers.
How to start?
Of course it’s obvious to say that you start at the beginning. But that’s part of the problem, because people ofteb get stuck on the first of these issues; i.e. whether or not the goods/materials concerned actually qualify as “building materials”. And this isn’t an easy task: the VAT law includes certain specific criteria that each item must meet before it qualifies as “building materials”.
Let’s consider one example: the supply and installation of a boiler, the function of which is to heat water and provide heating for a dwelling. Following the guidance in VAT Notices 708, section 13, the boiler falls within the definition of “building materials”.
But after this, you have to work out the next 4 steps according to whether the property is a newbuild or a conversion. So the results for the boiler could be summarized as follows:
What rate of VAT should the contractor charge?
- New construction: The supply and installation of the boiler would qualify for zero-rating as part of new construction. However if the boiler is bought from a separate supplier who doesn’t install the boiler; e.g. a retailer, then the purchase would be liable to 20% VAT.
- Qualifying conversions and renovations : the supply and installation of the boiler would qualify for the reduced rate. However if the boiler is bought from a separate supplier; e.g. a retailer, then the purchase would be liable to 20% VAT.
Can VAT registered developers claim this VAT?
- VAT registered developers selling new construction: VAT can be claimed on the purchase of the boiler in new constructions. The supply and installation services in the course of construction of a new dwelling should qualify for zero-rating as part of new construction so the developer can’t claim any VAT charged. However, the developer can claim 20% VAT on the purchase of a boiler if not installed.
- VAT registered developers selling non-residential conversion : yes, the VAT at 5% can be claimed on both the boiler and any charge for installation in conversions. The developer can also claim 20% VAT on the purchase of a boiler if not installed.*
You might think that this is relatively straightforward,and of course, in most cases the answers will be quite obvious: the bricks and mortar, wooden frames, plaster, wiring, plumbing, are clearly “building materials”. If you follow the guidance in Notice 708, section 13, chances are that it covers most of your costs. Otherwise, you can contact HMRC’s VAT helpline for advice.
But remember that in practice, you have to follow this process for all other goods and materials that aren’t “building materials”, which explains why it’s not always easy to give quick and succinct answers to questions about this subject.
Marie, May 2017
See more in my new ebook: “Introduction to VAT for residential property developers”; published May 2017.