The UK VAT rules include a special VAT refund scheme for people who build or commission the construction of a new dwelling or convert a non-residential building to form a dwelling for their private occupation. The scheme puts DIY builders in a broadly similar position to a developer selling a zero-rated property. If claimed, HMRC must refund any VAT chargeable on the supply, acquisition or importation of goods used by the self-builder in connection with the construction of a new, qualifying, dwelling as well as the 5% VAT in relation to conversions.
Historically HMRC have not issued penalties to DIY builders in cases where they perceive a claimant has been careless or has completed the claim form inaccurately. However at some stage in 2014 there was a change in HMRC policy and HMRC started to issue penalties based on a percentage of the Potential Loss Revenue (PLR). Three instances where penalties were raised made their way to the First-tier Tax Tribunal and three times HMRC were held to have incorrectly raised the penalties.
In the first case the claimant built some flats for resale and tried to use the DIY scheme to reclaim the VAT incurred in building them. The claimant filled in the form and answered all questions on the form truthfully and correctly including advising HMRC that the flats were intended for sale. HMRC took the view that the inaccuracy was in submitting the form at all. In dismissing HMRC’s case the Tribunal commented as follows:
‘HMRC's argument produces the logical absurdity that the [claimant’s] accuracy in the completion of a form designed to check eligibility under the Scheme gives rise to a penalty for inaccuracy.’
The claimants subsequently registered for VAT and reclaimed the VAT through the normal VAT accounting system.
In the second case a similar situation arose where a couple submitted a DIY claim for VAT incurred in the renovation of a farmhouse that had not been lived in for ten years. Unfortunately the claimants after submitting the claim form and dealing with HMRC queries could not prove to a sufficient degree that that property had been unoccupied so the claim was withdrawn by the couple. HMRC raised a penalty on the basis that the lack of evidence was an inaccuracy. Once again the Tribunal held the penalty was invalid on the basis that HMRC’s reason for the penalty (i.e. the lack of evidence) did not amount to an inaccuracy and so no penalty should have been raised.
In the third case the accountants of a DIY builder sent in error an overstated claim to HMRC. The tribunal held that the DIY builder had not been careless as he had employed professional accountants to prepare his claim and as such it was reasonable to assume that the claim would be accurate and therefore the HMRC penalty was not valid.