VAT: residential and non-residential building not zero rated when sold as houses

Section 35, Value Added Tax Act 1994 (“VATA”) confers a right on a DIY builder to claim a refund of VAT on goods used and the services of certain contractors used in carrying out a ‘residential conversion’.

A ‘residential conversion’ is defined for the purposes of section 35 in section 35(1D) VATA. ‘Works constitute a residential conversion to the extent that they consist in the conversion of a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings’.

There the words ‘to the extent that’ introduce the concept of works qualifying as a residential conversion even if what is converted includes a residential part of a building. In such a case Note (10) to Group 5, Schedule 8 (as applied by section 35(4) VATA) provides for an apportionment of the total VAT incurred to ascertain the amount which can be claimed under section 35.

The amount which can be reclaimed will be the amount of VAT attributable to the works carried out in converting the non-residential part of the original building (Note (10)(b) and (iii)).

In the First-tier Tribunal (Tax) case of DM & DD MacPherson v Revenue & Customs [2015], the building had comprised ground floor village shop, office and ancillary storage accommodation with ground and first floor living areas. The appellant property developers had hoped their disposal of the two semi detached houses, which resulted from the conversion, would be zero-rated under item 1(b), Group 5, Schedule 8, of VATA as ‘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 thereby facilitating a total input tax recovery as opposed to a partial refund of VAT incurred on the building works.

However item 1(b), Group 5, Schedule 8, VATA does not apply when the subject of the conversion is a building which contains one or more residential parts as well as one or more non-residential parts.

When interpreting item 1(b), to see whether a person is converting (or has converted) ‘a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings’, one has to examine the conversion actually carried out. In MacPherson the building (taken as a whole) was not a non-residential building within the definition in Note (7) because it was designed for use as a dwelling by virtue of the living accommodation contained within it.

It may be that if one divided up the building it would be found to contain a residential part and a non-residential part, all the same it would be incorrect to describe the conversion works here as the conversion of the non-residential part of the building – the entire property was being converted. So the property developer had not converted a non-residential building or non-residential part of a building and the conversion did not qualify to be zero-rated, because it fell outside item 1(b), as not being ‘the simple conversion of a non-residential part of a building but the conversion of that part plus a residential part’.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.