A new VAT case creates a potential opportunity if you have converted and sold a residential property from a building which has been previously used for both residential and non-residential purposes.
The classic example is a pub with living accommodation but it could include other types of buildings. Where a sale or long lease has been made HMRC has always stated that the sale of the house or apartments should be exempt and any VAT incurred on the conversion should not be recoverable. A recent tribunal has changed this and, although likely to be subject to further appeals by HMRC, there is an opportunity to submit a protective claim to recover VAT incurred on these conversion works.
If you believe that you have previously converted and sold dwellings from mixed use buildings and restricted the VAT incurred you could have a potential claim.
The construction and grant of a major interest in a new dwelling is zero rated, however the lines are often blurred where there is conversion from one type of building to another. The typical example which comes up regularly is the conversion of public houses (pubs) as these generally contain non-residential and residential parts. HMRC has always stated that zero rating (on sale) can only apply where the conversion of the non-residential part creates a dwelling in its own right; any dwelling which contains any of the existing residential part would not qualify.
This was confirmed in the case of Calam Vale Ltd where a public house was converted into 2 semi-detached dwellings. The tribunal in this case determined that no new residential part had been created as both dwellings contained part of the existing residential part of the pub. This issue was further addressed in the House of Lords in Lady Blom-Cooper where an individual converted a public house which contained a residential part on the upper floors, into one dwelling and sought to recover the VAT incurred under the DIY builder’s scheme. The House of Lords ultimately decided that as the new ‘dwelling’ contained a previously residential part it would not qualify as a new dwelling for the purposes of the DIY scheme.
The landscape changed in the Court of Appeal case of Ivor Jacobs. In this case the individual converted a pub with residential accommodation into a number of dwellings (4 in total) all of which used some of the existing residential accommodation. This was also a DIY builder’s claim but the Court of Appeal ruled that where the conversion created a different number of dwellings the conditions for a DIY claim were met. HMRC accepted this ruling and in a business brief (BB 22/05) confirmed that, for DIY claims only, the VAT incurred on the conversion could be recovered but only in relation to the costs of converting the non-residential part.
In the latest case, Alexandra Countryside Investments Ltd, the First Tier Tribunal (FTT) has ruled that the conversion of a public house into 2 semi-detached dwellings (with each dwelling containing part of the existing residential part of the building) would qualify as new dwellings for the purpose of zero rating the grant of a major interest. The FTT decided not to follow Calam Vale as the later judgement of Jacobs is more relevant. We expect HMRC to appeal this decision but if you have undertaken such conversions and restricted VAT recovery as a result now is the time to submit a protective claim.
For further information, please contact Colin Laidlaw (020 3201 8139) or Howard Freedman (020 3201 8623).