VAT issues on converting part residential property into residential
Two VAT cases on the related point of the VAT treatment of the sale of a converted property as to whether it would be a zero rated supply illustrates the need to be very clear on how you design your conversion if you are relying on its sale being zero rated at completion to recover your VAT costs.
The two cases were HMRC v Languard New Homes Ltd and HMRC v MacPherson. In Languard the taxpayer had bought an old public house – the ground floor was all commercial and the first and second floors were all residential accommodation.
The property in the MacPherson case was an old village shop with commercial on the ground floor with residential on both the ground and first floor.
After the conversion in Languard the ground and first floors were converted vertically into two maisonettes; a third floor was added and this, combined with the existing second floor accommodation had also been converted vertically into two more maisonettes.
In MacPherson, the conversion took elements of both the residential and non-residential to create two semi-detached dwellings.
The VAT point under consideration was - When the properties were sold could the completed dwellings qualify as zero-rated sales.
The decision of the Upper Tribunal in both was the sale of the new dwellings did not qualify for zero rating. The fact remained that none of the dwellings created in either of the projects had been created by converting part of a building that had not been previously designed as a dwelling. What had occurred was that part of a non-residential building had been combined with part of a residential building – the fact that the new dwelling contained some space which had formerly been non-residential was not enough to qualify the disposal of that new dwelling for zero rating.
The message is that care is required in establishing the VAT impact on your property plans. Give our VAT course on Construction a visit if your VAT knowledge needs a brush up. See here for more information on VAT - Construction, Land & Property course