09 Mar 2016
Croner Tax has successfully represented a taxpayer in the Tax Tribunal in relation to VAT recovery on a pub conversion. There has been a series of recent Tax Tribunal cases concerning the VAT treatment of the sale of dwellings which have been converted from mixed commercial/residential buildings. Typically, these are pubs with manager’s accommodation above, but also include shops with connected flats. The issue is whether dwellings created partly from the commercial areas and partly from the existing residential areas can be zero-rated on sale. HMRC’s long-standing policy is that a dwelling which incorporates any area which was previously residential is VAT exempt when sold, meaning that developers have not had the right to reclaim related input VAT. Croner Tax represented Languard New Homes Limited (TC02762) in an appeal which re-examined this issue following earlier decisions in Alexandra Countryside Investments (TC02751) and D.M. & D.D.Macpherson (TC04746). The good news is that the Tribunal in Languard has agreed with ACI (and disapproved Macpherson). Languard vertically converted a public house into maisonettes, making use of the old bar area as well as the manager's accommodation in each of the two new dwellings. The Tribunal found that the sale of these maisonettes was zero-rated and not exempt as argued by HMRC. The Tribunal decided that the social purpose of the legislation was to encourage home ownership by increasing the availability of dwellings and therefore must have been intended to permit zero-rating to such sales, as long as additional dwellings are created. If Languard had converted the pub into a single house, the sale would be exempt but by converting the bar and manager’s accommodation into two maisonettes, the social purpose was achieved. It will be interesting to see how HMRC react to this setback. They chose to ignore the ACI decision and no doubt thought that Macpherson had undone any damage. Croner Tax has two further identical cases waiting to be heard, so hopefully HMRC will accept the outcome in Languard and publicly announce a change in policy. The outcome also opens the possibility of retrospective VAT claims by developers who have followed HMRC’s policy on previous conversions. For more information, see our tribunal representation services.
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