A saga where less (detail) means more (VAT)

Lady Henrietta Pearson must have thought the day would never arrive when HMRC refunded her the £40,000 or so of VAT she incurred in converting a disused barn into a home for her and her husband. Yet after three Tribunal hearings and two VAT tribunal decisions the day has finally arrived.  

Works started on the conversion in 2000 when there was a 1997 consent for the creation of holiday accommodation. By 2007 a revised consent had been granted for the creation of a live work unit. In 2011 Lady Pearson submitted a DIY converters claim for the VAT she has incurred in creating the live work unit.

HMRC rejected the claim on the basis the conditions to the 2007 consent meant the  definition for a qualifying dwelling for VAT purposes could not be satisfied – in particular the requirement that a dwelling for VAT purposes must not be prohibited from separate use or disposal in the terms of the planning consent.  HMRC said the conditions to the 2007 planning prevented the work element from being used or disposed of separately from the live element of the conversion.

In allowing the first appeal the Tribunal said that due to the lack of detail in the planning documentation and associated plans it was impossible to identify any work area and therefore impossible to see what the work area (where ever it was) might be separate to.  

Another condition of a qualifying dwelling for VAT purposes is the need for the dwelling to be built in accordance with the planning permission granted. In this case there were differences between the plans submitted and the actual works carried out however the Tribunal did not see this as a  blatant disregard of the planning consent and did not think the planning authority considered the development unlawful in this respect.

No doubt Lady Pearson thought this was the end of the matter however HMRC had different ideas. Whilst HMRC accepted the principle a DIY claim was possible they then reduced the claim by £30,000 or so on the basis that many of the contractor VAT invoices should have been correctly 5% rated at source. It is a requirement of the DIY scheme that invocies are charged at the correct VAT rate for instance 5% in the case of a qualifying conversion.  Lady Pearson was required to recoup this VAT from the suppliers by why of credit notes. However this was not possible as many of the invoices where over 4 years old and therefore not capable of amendment.

As a result Lady Pearson submitted a new Tribunal appeal where it was held that the first tribunal clearly allowed a VAT refund of £40,000 and therefore irrespective of the 5% rate requirement which HMRC picked up at a later date subsequent HMRC  must repay to Lady Pearson the full amount of VAT set out in the  first Tribunal decision.