This case relates to a property conversion. The VAT at stake is the input VAT incurred in relation to two of the resulting maisonettes. The taxpayer recovered this input VAT on the basis that the subsequent grants of the major interests in the converted properties were zero rated. The building that was converted was a public house, which comprised of a commercial (non-residential) area and residential areas. The conversion included an extra floor and created four maisonettes. It was agreed that the grants of the upper maisonettes were exempt. The grants in question were in respect of the lower two, which were converted from the non-residential first floor and some other residential parts of the old building.
The taxpayer argued that the supply is zero rated under VATA 1994 Schedule 8, Group 5, item 1(b):
‘The first grant by a person—
(b) converting a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings……
of a major interest in, or in any part of, the building, dwelling or its site.’
This issue has been addressed before, and much of the decision looks at the conflicting interpretations of the legislation in previous cases. HMRC relied on the Calam Vale Ltd Tribunal, which had a very similar fact pattern. This used a strict interpretation of the wording of 1(b) above and observed, as in the current case, that the conversion covered both residential and non-residential areas. Thus, the Tribunal concluded that the situation is not as described by 1(b) as it is not converting a non-residential building (i.e. in its entirety) or just the non-residential part of the building.
The Calum Vale observed this created an unusual result and used an example of a four storey office (non-residential use) with a caretaker’s residential attic flat across the top. Following the Calum Vale approach, a conversion into four vertical town houses would mean that none of the grants would be zero rated as each house would include part of the attic. Where four horizontal new flats were created and the attic left untouched, the major interest grants in the new flats would be zero rated and there would be full input VAT recovery on the conversion.
The taxpayer preferred a different interpretation – one used more recently in Alexandra Countryside Investments Ltd First-Tier Tribunal (FTT), which applied the reasoning of the Court of Appeal Judgment in Jacobs [2005 Civ 930], a DIY builders case. These cases considered that the correct approach was to look at the non-residential part of a building and consider what it had been converted into. Where that non-residential part became part of a new property then it was appropriate to look at that new property as a whole to determine whether it (the new property) was designed as a dwelling or number of dwellings. The FTT add that looking at Group 5 as a whole, the draftsman of 1(b) must have considered that the conversion of the non-residential parts of mixed use buildings into dwellings would fall into Item 1(b). This was supported by the fact that the alternative Calum Vale interpretation would render Note 9 unnecessary. To access the decision, click here