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VAT rulings on mixed-use conversions could have wider implications

10 Jul 2017

Recently, the Upper Tier Tax Tribunal heard conjoined appeals relating to two First Tier Tax Tribunal decisions concerning the conversion of mixed-use buildings into dwellings (Languard New Homes Ltd and DD & DM MacPherson).

In both cases HM Revenue & Customs (HMRC) argued that no VAT zero-rating was available on the sale of the ‘new’ residential units because part of an existing dwelling was incorporated in each of the new units. This has long been HMRC’s opinion and the interesting point for developers is that two different First Tier Tax Tribunals reached different conclusions – one finding for HMRC and the other against.

The MacPherson case involved the purchase of an old village shop premises with office and storage space as well as living accommodation. The property was converted into two semi-detached dwellings, formed of areas that had previously been part of the living accommodation as well as the non-residential areas

Similarly, the Languard case involved the purchase of a public house that consisted of both pub premises and manager’s accommodation. Following the purchase, Languard converted the existing pub premises into two maisonettes, combining the previous commercial and residential elements.

The Tribunal concluded in the Languard case that as the total housing stock in the building was increased – a single dwelling was converted into four – zero-rating could apply to the sale of the ground and first floor maisonettes which incorporated the pub. Conversely, the Tribunal ruled in the MacPherson case that zero rating did not apply. It argued that, viewed as a whole, the original building was not non-residential for VAT purposes. As residential accommodation was already present, the building was already designed for use as a dwelling; the conversion works therefore could not be correctly described as the zero-rated conversion of non-residential parts of the building. Rather, the works converted the entire property, some of which already entailed residential accommodation; this precluded VAT on costs from being recoverable.

Clearly, if the Upper Tier Tribunal follows the Languard reasoning, this will be good for taxpayers as it will mean that VAT recovery will be possible in these scenarios when new units are sold/long leases are granted. If the Upper Tier Tribunal finds for the taxpayer there will also be an opportunity to revisit any projects carried out over the last four years. If you have any historic or upcoming projects and you would like to discuss these developments further, please contact Sean McGinness on T: +44 (0)131 221 3217.


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