28 September 2017

A recent decision of the Upper Tribunal could affect how developers approach conversions of partly non-residential properties (such as pubs or shops with accommodation) into new dwellings.  

Where a non-residential property has been converted into one or more dwellings, the first sale of such a dwelling may qualify for zero-rating for VAT purposes. This is important because a zero-rated supply allows recovery of VAT paid on supplies used in carrying out the conversion. If the sale does not qualify for zero rating, it will be exempt for VAT purposes, in which case there can be no recovery of the input VAT.

The cases 

The recent cases of HMRC v Languard New Homes Ltd and MacPherson v HMRC [2017] UKUT 0307 concerned the conversion into new dwellings of buildings that were originally partly commercial and partly residential (one being a pub and the other a shop, both with residential accommodation). The issue was whether the sale of new dwellings made up partly of the former non-residential part and partly of the former residential part could be a zero-rated supply.  

The decision

The Upper Tribunal, faced with opposing conclusions reached by the First-tier Tribunals in the two cases, held in favour of HMRC. Zero-rating would not apply to a dwelling that was created from an amalgamation of the non-residential and residential parts of an original building. The Upper Tribunal reached this decision with some hesitation and it was acknowledged that potentially curious results could arise.  

A developer might be able to achieve zero-rating or not depending on how it decided to divide up the old space. The Upper Tribunal gave the example of a building with commercial use on the ground floor and residential use on the upper floors.  Zero-rating could be achieved in respect of dwellings created using only the ground floor space (because that is a conversion solely out of a non-residential part of the original building), but not if new vertical dwellings are created (each comprising part of the ground and upper, former residential, floors). 

It is unlikely that any VAT saving will necessarily be a determinative factor in how mixed-use building conversions are designed (particularly if the VAT saving is only 5% as opposed to 20% in the case of certain supplies made as part of qualifying conversions). But developers will need to bear in mind the VAT implications when converting such buildings.  


Key contact

Ian Carnochan

Ian Carnochan Partner

  • Tax
  • Corporate Tax
  • Real Estate Tax

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