The recent tribunal decision of Alan Johnson highlighted the issues that arise when a housebuilder expects common sense to have any application in interpreting the intricacies of the VAT legislation.

This decision relates to a VAT reclaim made to HMRC by a private individual in relation to the construction of a dwelling. Whilst construction services to construct the new dwelling are zero rated the separate supply of building materials and other items are VAT standard rated. Where the new dwelling is being commissioned by a person for private occupation the VAT on some of these standard rated items can be reclaimed by the self-builder by way of a DIY builder VAT reclaim application to HMRC at the conclusion of the project.

In this case VAT incurred on the separate purchase of building materials was allowed however HMRC rejected the reclaim of VAT on items that were hired by the self-builder including scaffolding hire, skip hire, digger hire stating that the DIY builders VAT scheme was only applicable to VAT on building materials and not the VAT on hire services.

HMRC made the point that where the hire of an item and its use on site were by two distinct legal entities then the hire on its own could not be treated as zero rated services nor could the VAT be reclaimed as being VAT incurred on ‘building materials’. HMRC stated that the hire of the digger with an operator could be zero rated as construction services and the claimant would need to ask the supplier to adjust their invoicing accordingly from the 20% VAT rate to the zero rate.

The claimant argues that ‘building materials’ often included an element of services. HMRC accepted that where the cost formed an inherent and inseparable part of the cost of the materials then the VAT on this part would be treated as part of the cost of the building materials (e.g. haulage costs of stone to site charged by the stone supplier) and this VAT would be capable of reclaim.

This case highlights the importance of considering project procurement at the outset of a scheme if VAT costs are to be minimised.