Self Build Tax

self build taxes For the self-builder, paying tax is thankfully not all doom and gloom. There is at least one distinct advantage, which is seldom reported in the press or promoted by government. It is a well-kept secret that professional developers have long exploited and sometimes at the expense of their novice counterparts. At completion of the project, self- builders are able to reclaim most of the VAT paid on materials purchased for construction.

This can be a significant saving and one all too easily forfeited by making a late or defective claim. It is for this reason that we intend dealing with it in full at this early stage, along with other taxation issues that may affect you and the new dwelling.

RECORDS AND RECEIPTS

The earlier you get into the habit of keeping adequate records and retaining receipts the better. You may ask, 'But which receipts should I keep?' The answer is simple: all of them! No matter how insignificant they may seem, every paid invoice has the potential of improving the return on your investment and contains valuable information about what, when and who you bought materials or services from. It should become a part of your normal routine to sit down at the end of each day and write notes about:

. what you have done and who you have contacted. . what you have ordered or paid for.
. how materials or services have been purchased (cash, cheque details, etc.). ,
. the supplier and their contact details. . how the items or services will be used. By keeping these records attached to the receipts in an organised and date-order manner, you will find it so much easier to identify them, when required, later into the project.

VALUE ADDED TAX (VAT)
VAT is charged as an additional percentage on most building materials (currently, 17.5 per cent). Receipts should clearly identify the VAT element, but some may not, for example if they have been handwritten or the goods paid for with cash. In such cases, ask for a VAT receipt and check that:

. VAT has been paid on the goods.
. the supplier's VAT registration number is visible. . the quantity and description of materials is given. the price for each item is on the receipt
. your name and address is shown if the receipt value is more than £100.
. the receipt details are legible (ask for a replacement receipt if the ink is faded). Receipts used for a VAT claim must be the originals. photocopies will not be accepted.

Forms needed for VAT refund

Obtain Notice 719 - VAT refunds for do-it-yourself builders and converters from HM
Customs and Excise (HMCE). This explains the procedure in much more detail than we are able to do here and is an essential precursor to completing the claim forms. The notice and forms (VAT 431 parts 1, 2A, 2B, 3 and 4) are included in a Self-Build
Claim Pack available from HMCE's National Advice Service. Telephone 0845 010 9000
or print the notice and forms direct from the website at www.hmce.gov.uk/forms

Can all self-builders make a claim?
No. The works must be carried out in the UK (including the Isle of Man, but not the ! Channel Islands), and the building must not be intended for business purpose use.

Examples of people who cannot use the VAT refund scheme include speculative developers, landlords, bed and breakfast operators, residential care home operators, and membership clubs and associations. However, if you generally work from home and use one of the rooms as an office, you can still make a claim.

You do not have to conduct all (or any) of the work yourself to be eligible for a claim. H you employ a builder, you can still claim for the materials you provide him with to incorporate into the dwelling. You can also claim for 'fitting out' a shell bought from a developer, but you cannot claim for extra work you might do to a 'completed building' bought from a developer (for example, by adding a garage or conservatory).

There are restrictions where an existing building is to be demolished or converted into residential use, or where an existing residential building is to be extended or altered. See Notice 719 for a full description of those who qualify.

Using a builder to supply goods and services?
Most builders' merchants and retailers charge VAT at the standard-rate on the mate- rials they sell. However, if you employ a builder to supply goods, it depends on his VAT rating whether or not a) you will be charged VAT and b) whether, in turn, you will be able to claim for them. If the builder is zero-rated or reduced-rated for his work, then so too will the 'building materials' that he supplies. If you are charged VAT by your builder in error or at an incorrect rate, you will not be able to reclaim it. In general, if you employ a builder in the construction of a new dwelling, his serv- ices should be zero-rated.

. They are not finished or prefabricated items of furniture (except kitchen furniture) or materials for the construction of fitted furniture. . They are not electrical or gas appliances. There are exceptions to this rule, including where the appliance is designed to heat space or water (including cookers with a duel purpose). Building materials bought in any European Union (EU) member state qualify for a VAT refund. You can also claim the VAT back on importing materials into the EU, provided you can supply adequate evidence of the importation, and that VAT has been paid.

What goods can I not claim VAT back on?
Essentially, anything that does not form part of the structure of the dwelling or items outside of the site of the building cannot be claimed. This includes:

. fitted furniture (except kitchen furniture).
. most electrical and gas appliances, including washing-machines, refrigerators, waste-disposal units, door bells.
. carpets, including underlay and carpet tiles but excluding fixed flooring such as vinyl, ceramic tiles, parquet flooring and other wooden systems.
. garden ornaments, ponds, sheds and greenhouses.
. tools and equipment, including soil-moving plant and machinery.
. consumables not incorporated into the dwelling, for example sandpaper and white spirit.
. the land itself

Can I claim VAT back on services received?
No. If you receive services from a builder, he should not charge you VAT.

You cannot claim VAT back on other professional and supervisory service fees, for example from architects, surveyors, designers, planners, managers and consultants. Neither can you claim for hiring or buying plant, tools and equipment (including scaffolding, skips and ladders).

When should I make my claim?
Ideally, when all the building work for your dwelling is completed (see Chapter 22). Bear in mind that you are only allowed to submit one claim so, if you decide to leave the construction of a driveway or paths or the landscaping of your garden until some later date, you will not be able to claim VAT back on the materials needed for these purposes. The construction is said to be complete when the dwelling is finished according to the original plans and, in cases of doubt, when the local planning authority issues a certificate of completion.

From the completion date, you have three months during which to submit a claim. If you anticipate a delay, it is essential you contact HM Customs and Excise to explain the reason because, if circumstances advocate leniency, they may provide you with extra time. Payment of the refund is usually made within 30 working days after submission of the completed forms and documentation, provided there are no additional enquiries made by HM Customs and Excise.

Council TAX
Council tax is a local tax set by local councils to help pay for local services. It is made up of two equal parts: the personal element and the property element. The personal element (50 per cent of the council tax) is based on the assumption that two people are occupying the property so, if you are the only qualifying person occupying it, you can apply for a single person discount. This is 50 per cent of the personal ele- ment, which is equal to 25 per cent of the whole bill.

It is important to be aware that, although the self-builder cannot evade paying council tax, his liability can be delayed or the amount reduced in certain circumstances. The concessions that are available to him are currently under scrutiny by the government and, if proposals become policy, the various discounts and exemptions presently permitted may be revoked. One such proposal is to remove the reduction entitlement to second-home owners, and provide local authorities with discretion to apply it or not in the region for which they are responsible. It may therefore be pru- dent in the future for self-builders to examine more closely which local authorities offer council tax allowances, before deciding on the location to build.

In addition, every local authority imposes different council tax charges. These are assessed according to the needs of the local population, the efficiency of the authority and the cost of services provided. You can find out what different local authorities are charging by visiting www.local.dtlr.gov.uk on the Internet (follow the 'council tax' link). Bear in mind that the amount of council tax may not just be of concern to you but also to any future buyers of your self-build home.

The question 'When will my new dwelling become liable for the council tax charge?' is a difficult one to answer. In theory, a chargeable dwelling will not exist until the building is capable of occupation, but that may occur before final completion. For example:

. A dwelling that is constructed with all the basic facilities in place but lacks deco- ration, a stair balustrade or some internal doors, is likely to be deemed 'capable of occupation' by a listing officer. He will therefore take action to enter it in a council tax band on the valuation list, even though it may not yet be occupied.

. A dwelling that is lacking basic facilities such as foul water drainage or is open to the elements or cannot be secured against intruders because external doors and windows have yet to be installed, will be considered unfit for occupation and will not therefore be council tax banded.

The most likely scenario is that liability will begin as soon as a 'completion notice' is issued for the property. The notice will specify a date when the building is deemed to be complete and, on receipt of a request from the billing authority to enter a band on the list, the valuation-listing officer must comply. The effective date for commence- ment of the liability will therefore be the date specified in the completion notice.

It is worth pointing out that a completion notice can be issued by the billing authority even though a formal inspection has not been requested, for example due to the construction taking longer than what the authority considers reasonable. There is a right of appeal if the self-builder believes the property remains unfit for occupation after a compulsory notice has been issued.

The variety of discounts and exemptions that are available depend largely on the living arrangements of the self-builder:

Caravans and mobile homes are not exempt from council tax so living in on-site accommodation will not help you to avoid the payment. However, if you are living in the family home as your main residence and using the caravan only whilst working at the site, you can apply for it to be 'empty rated' (generally a six-month exemption is allowed even if the caravan is furnished) - the grant of this allowance will depend on how the local authority classifies your occupation. Provided the construction work is not prolonged, the local authority may exempt the caravan by classifying it as 'temporary accommodation'.

. Council tax on the newly completed dwelling can be minimised by keeping it unoccupied and unfurnished. It will be exempt for six months and liable to a 50 per cent 'empty' charge thereafter. This is helpful if your intention is to sell it rather than live in it yourself. Bear in mind that these concessions are not automatic - you must apply for them.

. Students in full-time or a qualifying course of education are in the best position of all because they are completely exempt from council tax liability. So, if you have the time and energy to study and self-build, do it now!

CAPITAL GAINS TAX (CGT)
CGT is a tax on capital gains. For self-builders, this means the increase in value realised when the newly constructed dwelling is disposed of. It is at the point f disposal, that is when you no longer own the asset, that CGT payment normally becomes due. In some cases, the payment can be deferred - so whilst the tax cannot be evaded, it can sometimes be delayed. The most important concession is that CGT is not usually payable on an individual's own home. However, it does apply to second homes and therefore any self-builder who retains the family dwelling, whilst building a second one that he later intends to sell, needs to be aware of how CGT will affect him. Remember that, if you opt to live in the new dwelling, your old home could become a chargeable asset under certain circumstances.

The Inland Revenue provides self-builders with a concession not to occupy the new dwelling for up to 12 months whilst it is being built, or to remain in the family home whilst trying to sell it. After that, if you decide to occupy the new dwelling, you can make a principal residence election in respect of the new home. This provides exemption from CGT on the old home for a period up to 36 months. Once the con- cession periods have expired, you will become liable for CGT on any gains made from selling either the family home or the newly built dwelling, depending upon which you consider to be, and have nominated as, your private residence.

The rules are complex and the amount payable depends on many factors, including personal status, financial circumstances, others involved in ownership of the property, whether the property has non-business asset qualification, the period of ownership and, not least, the generosity of the Chancellor during any particular tax year. In an effort to minimise CGT liability, self-builders should consider the merits of obtaining professional tax advice before starting their project, during the construction phase, and at completion.

STAMP DUlY
Stamp duty is payable on certain documents. It is a charge levied in the UK for the transfer of ownership and the liability for payment falls on the buyer. Most self- builders are affected because they need to purchase a building plot and it is at this stage that good negotiating skills can save them a small fortune. For example, a plot advertised at £60,100 in February 2003 would attract a liability for stamp duty of £601. By negotiating to pay £60,000 Gust £100 less), the self-builder would save him- self the entire stamp-duty charge. The reason for this is that the threshold for stamp-duty is currently £60,001 and, beyond this, it is calculated at an increasing percentage for the entire sum (not just the amount beyond the threshold). So, any land purchase up to £60,000 is exempt. from £60,001 to £250,000 it is one per cent. £250,001 to £500,000 it is three per cent. and four per cent for more than £500,000 (accurate at time of writing).

Self-builders with a keen eye for development can escape stamp-duty liability by (purchasing land (beyond £60,000 and up to £150,000) in certain designated 'disadvantaged areas' identified under the Valuation of Stamp Duties Regulations 2001. Visit the Inland Revenue's own website for full details: www.iniandrevenue.gov.uk or contact the Stamp Taxes Helpline on 0845 603 0135.

TAX ADVISORS
A competent tax advisor should be able to save you much more than the fee charged for their services. Their knowledge and expertise should guide you into making the best arrangements for the acquisition and disposal of assets. The timing of your self- build can also be of significance and they will suggest the best starting and most advantageous completion and/or disposal dates to legally minimise your exposure to taxation. When employing an advisor, it is important you provide them with full details of your employment particulars, financial resources and personal or jointly- owned assets, because they need to be able to see the big picture and not just the self-build part, so they can provide you with dependable good advice.

If you consult an advisor for help, make sure they are suitably qualified and a member of a recognised and regulated professional body. Orle such body is the Chartered Institute of Taxation, which can be contacted at 12 Upper Belgrave Street, London, SW1X 8BB or by telephoning 020 7253 9381. Use them to identify a local advisor or to check that the designatory initials CTA, Fill and Am are genuine. The Institute also has a website at: www.tax.org.uk

SUMMARY
Keep receipts in a safe place and record the full details of all purchases for future reference.

Obtain the necessary forms required for your VAT refund and complete as you progress through construction.

Consider the physical and financial practicalities of completing all relevant work before submitting your VAT claim. Remember that you can only claim once so, if work remains outstanding after submitting the forms, you will not be able to claim the VAT back on any additional materials you buy.

Be aware that council tax is payable on most dwellings once they become habitable, but simple arrangements can remove, reduce or delay this liability when self-building. The liability to capital gains tax can be avoided or reduced providing you observe the time-sensitive limits imposed by the Inland Revenue and apply for 'principal private residence' status appropriately.

Although stamp duty applies to land plot purchases, it can be avoided by buying land below the threshold or in designated disadvantaged areas.

The merits of consulting a professional and suitably qualified tax advisor, prior to starting your self-build project, should not be underestimated

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