Pub Conversions – An interesting ‘development’ opportunity

A recent Tribunal decision has led to an interesting opportunity on the VAT recovery on costs when converting a pub to ‘new’ residential and could change the way in which developments are treated for VAT purposes in the future. This has wide range implications so read here for more details.

The case surrounds a company called Alexandra Countryside Investments Limited who converted a public house into two semi-detached houses. The company claimed the input VAT back on the work on the basis that it would be making a VATable sale, albeit zero rated. However HMRC rejected the claim as part of the public house had been used as a flat for a manager and so the conversion did not result in new dwellings being created but the conversion of an existing dwelling to form two more. The sale or lease of this would be exempt.

The case challenged HMRC's interpretation of the VAT law and their published guidance which states that "to qualify for zero-rating the conversion must only use non-residential parts of the building".

The Tribunal found that contrary to HMRCs guidance, it is not necessary for any conversion only to use non-residential parts of the building for zero rating to apply where additional dwellings are created. Therefore, in the example of a property being split vertically into a pair of semi-detached houses the onward sale or long lease will be zero rated.

Whether HMRC will adopt the Tribunal’s approach remains to be seen but if you have any clients who have converted previously or are thinking on converting to residential there may be an opportunity for VAT recovery.

We receive many calls each week regarding conversions of ‘commercial’ buildings into dwellings and it is important to consider the VAT position to ensure clients go into developments with the correct costings whilst maximising savings.

Please do not hesitate to contact our free helpline to discuss any potential developments that you or your clients may be involved in. In the majority of cases our advice can add value and increase profits.