In HMRC v Languard Homes Ltd and DD & DM Macpherson v HMRC  UKUT 307, the Upper Tribunal concluded that the sale of a converted residential property, which was previously part residential and part commercial, cannot be zero rated.
These two appeal cases were combined for the UT hearing as the facts were largely the same. The cases concerned VAT on the conversion of property.
The First Tier Tribunal (FTT) decisions in these cases differed: in Languard, the FTT found in favour of the taxpayer and HMRC appealed. In Macpherson, the FTT found in favour of HMRC, despite substantially the same facts, and so the taxpayer appealed.
In both cases:
- The ‘old’ property consisted of commercial premises and residential space.
- The old property was converted into solely residential property.
- The conversion increased the number of dwellings.
- The residential property resulting from the conversion included both residential and non-residential parts of the old building.
The key debate was on whether the wording of Item 1(b) Group 5 Schedule 8 of the Value Added Tax Act 1994, “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 number of dwellings”, includes residential properties created from the conversion of a part residential, part non-residential property:
- If it does, then the sale of the converted residential property can be zero rated and VAT on conversion costs is recoverable.
- If it doesn’t, then the sale is exempt and no VAT is recoverable.
The UT concluded, with some hesitation, that HMRC were correct: the wording of Item 1(b) and its accompanying Note 7 are such that zero rating can only be applied on the sale of the converted residential property if it had previously, entirely, been non-residential.
Neither taxpayer was entitled to zero rate the disposal of the new residential properties and therefore could not recover VAT on costs.
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