In Languard New Homes Ltd v HMRC  TC04917 the First Tier Tribunal (FTT) allowed the sale of a converted mixed-use property to be zero rated, contrary to HMRC’s longstanding interpretation of the legislation. Stop press: HMRC is appealing this decision.
The company converted a public house which had been made up of residential and non-residential parts into four maisonettes.
- Prior to conversion the property consisted of three floors:
- The ground floor was entirely non-residential
- The first two floors were wholly residential
- After the conversion the property consisted of four floors:
- The ground and first floor consisted of two two-storey maisonettes, each comprising half of the original non-residential and residential parts of those floors.
- The second and third floors also consisted of two two-storey maisonettes.
After conversion, the company issued zero-rated grants of the four maisonettes and reclaimed all of the input VAT incurred.
HMRC disallowed the claim.
The company accepted that the supply of the second and third floor maisonettes should be exempt but appealed HMRC’s decision with regard to the ground and first floor maisonettes.
- VATA 1994 Group 5 Item 1(b) makes the following supply zero-rated:
The first grant by a person converting a non-residential building, or a non-residential part of a building, into a building designed as a dwelling or a number of dwellings, of a major interest in, or in any part of, the building, dwelling or its site.
- Group 5 Item 9 says the following:
The conversion of a non-residential part of a building which already contains a residential part is not included within item 1(b) unless the result of that conversion is to create an additional dwelling or dwellings.
- HMRC interpret this to mean that the conversion of mixed-use properties into a residence or a number of residences cannot be zero-rated.
- Conversion of a mixed-use property by definition involves the conversion of a residential and a non-residential part; items 5 and 9 require there to be a conversion only of a non-residential part.
- The FTT disagreed with HMRC’s interpretation, not least because the HMRC representative was unable to think of a single example where item 9 would be applicable if the legislation was to be interpreted in this way.
- The FTT considered that the correct interpretation would be to look at what the non-residential part of a building had been converted into.
- If the new property was designed as a dwelling or dwellings, then as long as the total number of dwellings has increased the first grant of a major interest in the new property would be zero-rated.
- A mixed-use property containing a single dwelling which is converted into one big dwelling would not qualify for zero-rating; it would qualify for zero-rating if it was converted into two or more dwellings.
- The grants of the ground and first-floor maisonettes should therefore be zero rated.
- The Tribunal also considered that this interpretation made sense in terms of the original intent of the legislation which was to encourage housing development.
HMRC's guidance in VAT notice 708 confirms their interpretation of mixed-properties conversion. Section 5.3.5 says the following:
...if the conversion uses a mixture of non-residential parts of the building and other parts such as when you:
- convert the same property into a single house or
- convert the same property by splitting it vertically into a pair of semi-detached houses, each of which use part of what was the living accommodation
The onward sale or long lease of the house/houses cannot be zero-rated and is exempt.
In light of the FTT ruling property developers who convert mixed use properties into dwellings, increasing the number of dwellings, have a better chance of zero-rating the subsequent sale and reclaim input VAT on the costs of conversion.
Developers who have carried out such conversions recently have little prospect of making a retrospective claim: a decision of the FTT does not set any precident. HMRC is also likely to argue prevailing practice and deny any repayment of VAT arguing unjust enrichment.
Update: HMRC is appealing this decision.
Case reference: Languard New Homes Ltd v HMRC  UKFTT TC04917
HMRC guidance: VAT Notice 708