VAT on new house building: Are there any special rules that apply?



Are you a new house builder and are unsure about the rules & restrictions for VAT?

In this short video Alan Davis, VAT Partner here at MHA Henderson Loggie, shares some insight into the Value Added Tax rules for new house builders.

Covered in this video:

✅ Common misconceptions about VAT for new house builders
✅ What are the VAT restrictions?

If you have any questions about VAT for new house builders, please contact Alan directly at alan.davis@hlca.co.uk


Edited video transcript


VAT for new house builders

Generally speaking, when I’m advising builders who make new houses, they’re typically aware that there are VAT restrictions on input tax on the costs of building those new builds, but I find very often that the people who are dealing with these points quite often change. You’ll have somebody who’s changed jobs, and the next person will either not be aware that there are restrictions or will forget over time. One of the things I do when I’m talking to them is ensure that they’ve got good systems in place to ensure that everyone’s aware of the implications of VAT and new house building.


Common misconceptions

It’s a common misconception that VAT becomes part of the financial annual audit and that accountants are looking at the treatment of VAT as part of their audit. Historically, I would have thought that was the case as well when I was in HMRC, and that’s not the case. It’s a common misconception. It’s really down to you to focus on VAT and know the rules about what you can recover VAT on and what you can’t. The information in this video is quite general, and so we would always recommend that you take specific professional advice of your own to ensure that you get the VAT position correct.


What are the rules applying to house building?

Well, the main one is the treatment of white goods. You’re restricted from recovering VAT on things like refrigerators, washing machines, dishwashers, and so on. In addition, the treatment of flooring is quite important. You’re not entitled to recover VAT on carpets, but if you lay down a hardwood floor, that VAT is recoverable. Similarly, most new house builders have sales and incentive schemes, for example, part exchange and the extra furnishings, curtains and so on. Each of those have VAT implications and specific VAT treatment. You’d really need to keep an eye on those.


Any questions about VAT for new house builders?

If you’re involved in the construction of new houses or the VAT treatment of the costs of doing so, or if you’ve got questions or comments, please feel free to contact Alan directly at alan.davis@hlca.co.uk

The information is this video is of a general nature and seeks to highlight some of the issues which could be affecting you and/or your business, including changes to financial regulation and legislation. Viewers should not rely on this information without seeking professional advice on its application in their circumstances.

VAT – Domestic Reverse Charge

In order to tackle VAT fraud in the construction industry HMRC will introduce a domestic reverse charge with effect from 1 October 2019. This means a person supplying certain construction industry services to a VAT-registered customer will no longer be required to account for VAT.  (The change will only apply if VAT at 20% or 5% applies to the works carried out, not zero-rated works).  Instead the business customer will account for VAT under the Construction Services Domestic Reverse Charge (“CSDRC”) or “reverse charge” arrangement. The new rules will cover construction services reported under the CIS and associated materials supplied as part of the contract (but not architects or surveyor services or similar).  This will include:

  • construction work to permanent or temporary buildings or structures and civil engineering work (e.g. roads or bridges):
  • Groundworks and other preparatory works
  • Demolition
  • Construction, alteration and repair
  • Installation of systems for heat, light, power, water and ventilation
  • Painting and decorating

The impact on the construction industry is potentially significant, not only in terms of cash flow, but construction firms will also have to make changes to their systems to account for the reverse charge and put in processes to monitor the supplies. In addition, the new rules will mean that the customer will be responsible for the correct treatment of VAT and they will also be required to identify if they are the end user of the supply chain, information which could be commercially sensitive. There is no change for supplies to end-users / consumers, who will continue to be charged VAT in the normal way.

In advance of 1 October 2019, construction firms need to consider the following:

  • the potential impact on cash flow from not charging or receiving VAT payment
  • changes that need to be made to accounting and invoicing systems to identify and take account of reverse charging and the ongoing monitoring of payments
  • potential interaction with self billing
  • customer status, to determine where reverse charges will be required to be made post October 2019
  • Staff training
  • Whether contracts need to be amended, particularly standard contracts

The government has estimated that between 100,000 and 150,000 companies will be affected by the new rules which have been introduced as part of their mission to clamp down on ‘missing trader fraud’. Although the number of criminals carrying out this kind of scam in construction is low, they are believed to be making a significant amount of money and unfortunately the whole of the construction industry will now have to pay the price.

As with all new rules, it’s important to plan as early as possible for the change over, as cash flow for some businesses in particular is likely to be significantly impacted by this change.

Alan Davis, VAT Partner & Chairman, MHA Henderson Loggie

Alan Davis

Alan is Chairman of Henderson Loggie, he is also Head of Tax for the Firm and leads our award winning VAT team. He covers all four offices providing specialist advice on technical VAT compliance and advisory, training and development.

Having spent 16 years with HM Revenue & Customs carrying out VAT assurance visits for a wide range of businesses – from small retailers to local authorities, Alan has gained considerable experience of HM Revenue & Customs inspections. He can help with planning opportunities for VAT efficiency, and can advise our clients on retrospective reclaim opportunities, securing significant VAT repayments.

Alan can also advise on other indirect taxes e.g. landfill tax, aggregates levy, climate change levy, and also offers in-house technical updates to the legal profession.

In addition to his tax specialism, Alan leads our Education Sector Group, ensuring that that team meets all the needs of the sector – from audit, to advisory and across all the services the firm provides.

Barbara McQuillan

Barbara has worked in taxation and specialised in the owner-managed business sector for over 30 years. During that time she has dealt with a wide range of clients in a variety of sectors ranging from the initial establishment of new businesses, through the growth years and then to retirement or sale. Throughout the life cycle of any business, a great variety of tax challenges arise and Barbara has provided pro-active and practical tax advice at every stage.

Barbara is a member of the firm’s Life Sciences Sector Group and with the team provide a wide range of skills and experience to service an important and substantial sector in the Scottish economy. Barbara is involved in running Corporate and Tax Clinics for one of our major Universities, assisting early-stage companies.

Barbara was for a number of years a Director of MHA Henderson Loggie Financial Planning.

Barbara Walton

Barbara is a corporate tax specialist with over 20 years of experience of advising clients on domestic and international tax, R&D and entrepreneurial tax issues and leads the firm’s R&D and Patent Box group.

She is experienced in corporation tax compliance for private and publicly listed companies, and tax planning for large groups of companies. Her industry experience includes technology, biotechnology and pharmaceuticals, software development, manufacturing and the food industry. Barbara is a member of the firm’s Healthcare and Life Science Sector teams.

Hazel Pratt

Hazel has over 25 years of experience working in tax in the accountancy profession and in industry for a FTSE 100 group of companies.

Hazel is Head of our Tourism & Hospitality Sector Group. She is also a Trustee of Dundee Heritage Trust and is a member of Dundee & Angus Visitor Accommodation Association.

She deals with corporate tax compliance for over 600 companies varying in size from large international group companies to small owner managed businesses, ranging in sectors from charities to manufacturers to video games companies.

She has assisted and advised clients on Research and Development Tax Credits, Patent Box and Video Games Tax Relief, which has resulted in numerous repayment claims.

She advises on tax planning, employment tax issues, the Construction Industry Scheme and provides PAYE healthchecks and reviews. She was recently involved in a Construction Industry case that was taken to the First Tier Tax Tribunal (FTT) where she demonstrated to the FTT that the client took reasonable care and the appeal against HMRC’s claim was successful.

Diane Wright

Diane Wright is a corporate tax specialist with over twenty years’ experience, covering everything from small owner-managed start-ups to multinationals, and everything in between.

She has spent over a decade working in various tax roles for Big Four accountancy firms, and is experienced in a wide range of corporation tax compliance and advisory issues.  Her work with Henderson Loggie includes a particular focus on tax-efficient fundraising for growing companies and groups, as well as share-based remuneration of key employees, and exit issues such as entrepeneurs’ reliefs.

In addition, her extensive experience in industry working for an upstream oil & gas group has given her a good idea of the practicalities posed by the UK and international tax issues which companies face.

VAT: What you need to know when running a small business

We’re all used to seeing Value Added Tax (VAT) as a common item on many bills and receipts. But is VAT relevant for small businesses? Is VAT something that every business needs to charge? What are the pros and cons of VAT registration?

These are the common questions our clients ask us every day.

In this article, we’re going to look at what VAT is, why it’s important to your business and whether you need to be VAT registered.

Armed with that information, you’ll be able to make the right decisions to help your business grow.


What is VAT?

The term VAT – short for Value Added Tax – is generally understood throughout the European Union as a percentage charge paid by consumers when purchasing certain types of goods and services.

Other countries have different names for the same general concept. For example, Australians have the Australian Goods and Services Tax (GST). As we provide accountancy services to UK businesses, we’ll stick with talking about VAT.

Since January 2011, the VAT rate in the UK has been 20% for most goods and services. There are some exceptions – for example, children’s clothing and footwear attracts a zero rate for VAT.

Rather than focusing on the details of how VAT is charged, we’re going to look at the broad pros and cons about being VAT registered, so that you can understand what really matters for your small business.

It’s commonly assumed that charging VAT is something that all businesses do, so it’s no surprise that many people who speak to us about starting their own business assume that they need to be VAT registered with HMRC.

In fact, that’s not true.

Many small businesses do not need to be VAT registered.


VAT fact

Businesses in the UK need to register for VAT only if their annual taxable turnover in the last 12 months or next 30 days is greater than the VAT threshold. This figure is set and reviewed by the government, with any changes announced in the Chancellor’s regular budget statements.

The current VAT threshold is £85,000 and will be unchanged until 1 April 2020 at the earliest. (As last reviewed on 26/04/2018)

Source: https://www.gov.uk/government/publications/vat-maintain-thresholds-for-2-years-from-1-april-2018/vat-maintain-thresholds-for-2-years-from-1-april-2018

If your annual turnover is below the threshold, you can still voluntarily register for VAT. The decision is totally up to you.


Why would I register for VAT if I don’t have to?

You might wonder why you’d want to register for VAT if you’re not legally obliged to.

Registering means you have to regularly send VAT returns to HMRC as well as increasing the amounts you charge to your customers. Wouldn’t it be better to sidestep that hassle if you could?

Well, yes and no.

It makes sense that as business owners we want to keep our paperwork to a minimum. And we certainly don’t want to charge our customers more than we need to – it’s a competitive world out there and pricing matters.

On the other hand, being VAT registered can add an air of authority and permanence to your business.

And if most or all of your customers are VAT-registered businesses, the VAT they pay you for goods and services is often reclaimable. That means they might not be too worried about the VAT component of what they pay you, because they’re able to claw back some or all of it.

Here’s another reason why voluntarily registering for VAT can make sense. Registering means that your clients and competitors won’t necessarily know what your annual turnover is. But if you don’t register for VAT, you’re effectively announcing to the world that your annual turnover is less than the VAT threshold.

In many cases, this won’t matter. But there may be some prospective clients who will feel more comfortable dealing with a VAT-registered business, especially if they’re likely to spend a lot of money buying from you.

One of the most common reasons to register for VAT voluntarily (i.e. before turnover creates an obligation to register) is to recover VAT incurred in start-up costs. For example, a new coffee shop may spend significant sums on creating a café and buying equipment. The VAT element of those costs can be reclaimed and return that cash flow to the business sooner than waiting until turnover exceeds £85,000.

We’ve already hinted at the drawbacks of registering for VAT. You’ll need to submit VAT returns to HMRC four times per year and you’ll need to account for VAT on taxable income regardless of who the client is.

If your turnover exceeds the VAT threshold, there’s no decision to be made – you’re legally required to register for VAT.


Do I have to register for VAT even if I’m a sole trader?

If your annual turnover is above the VAT threshold then the answer is yes. There are no special exemptions from VAT registration just for sole traders or partnerships.

As with limited companies, sole traders have to register for VAT if their annual turnover exceeds the VAT threshold.

If your annual turnover falls below the VAT threshold, you don’t need to register for VAT – but you can register voluntarily if you wish.


How do I register for VAT?

You can register for VAT via Gov.uk’s VAT registration pages.

This applies whether you decide to register voluntarily or whether registration is compulsory (because your annual turnover exceeds the VAT threshold).


How does VAT work once my business is VAT registered?

Once your business is registered for VAT, you’ll gain access to the part of the Gov.uk website that will let you complete your VAT returns. From the VAT point of view, the year is generally split into quarters, meaning that you’ll need to log in to the website four times per year to submit an online VAT return.

You’ll be given a VAT number. You’ll need to include this on all sales invoices you issue from that point onwards. You won’t need to worry about changing or re-issuing any invoices you issued from before the time you were VAT registered. For this reason, it’s important to keep note of your effective date of VAT registration.

As well as quoting your VAT number on your invoices, you’ll need to add the relevant VAT charges to your invoices. In most cases, this means adding 20% (the current VAT rate) to the net charge.

At the end of each quarter, you’ll need to log in to the Gov.uk site to complete your VAT return – that’s the point where the VAT you’ve charged is declared to HMRC.

The VAT return is a summary of your earnings (which includes the VAT you’ve charged for your goods and services) plus your expenses (which includes the VAT you’ve paid for goods and services). The difference between these amounts will determine how much you need to pay or claim in your quarterly VAT return.

The summary above covers the most common way of registering for and running your VAT account. There are other methods of handling VAT, including the cash-accounting method and the Flat Rate Scheme. These have their own pros and cons, and discussing them in detail goes beyond the scope of this article. However, if you need advice on which method may be best suited for your small business, that’s something we can discuss during a consultation call.


Do VAT rules differ across the UK?

No. Whether you’re in Dundee or Dorset, the VAT rules are the same across the UK. Thresholds, percentages, forms – it’s all identical.

That’s good because we know that our VAT advisory service can offer you the same even-handed advice regardless of where in the UK your business is based.


What if I have questions about VAT?

HMRC publishes plenty of guidance about VAT and VAT registration via the government’s website. Specific questions are often best directed to HMRC’s telephone helpline. Be prepared to wait for your call to be answered and don’t expect an expert personal consultation that deals with every possible financial question.

Though we can’t make specific recommendations here, we do have many years of experience in helping new business owners get up and running. If you book a consultation call with us, we can take the time to walk you through the facts, showing you how VAT may be relevant to your business. To find out more, get in touch with Alan below.

Like all important decisions, you have to choose the path that you feel is right for you. Our job here is to present the facts in a clear way so that you have the best possible chance of making the best choice for you and your business.

You can find out more about our corporate tax and VAT advisory services on our Corporate Tax & VAT page.


Next steps

OK, we’ve taken a look at VAT registration and have hopefully given you some useful points to consider.

While we can’t say what’s best for your business, we can invite you to talk to us so that we can understand more about where you are and where you want to go.

We’ve got just the right person for you – Alan Davis, our Chairman. Alan worked for HMRC for 16 years and is one of our VAT specialists.