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The cases of Languard New Homes Limited ('Languard') and DD & DM Macpherson ('MacPherson') Limited were heard by the Upper Tribunal together as both appeals concerned the zero-rating of converted properties. Firstly, in the case of MacPherson, the facts were that the partnership purchased an old village shop which, on purchase, comprised of office space and storage on the ground floor and residential accommodation on the ground and first floors.

Planning permission was subsequently obtained allowing the partnership to convert the property into two semi-detached dwellings. Both newly formed properties contained elements of the commercial and residential parts of the old property.  In the case of Languard, the business purchased a public house which consisted of commercial property on the ground floor and two floors of residential accommodation. This was then converted into 4 maisonettes.

During the conversion a 4th floor was added to the property and the property was then converted vertically so that the ground and first floor comprised two maisonettes and the third floor and new fourth floor comprised the remaining two. On selling the maisonettes Languard treated the two properties that partly consisted of the previous commercial element as zero-rated (with the sale of the other two maisonettes being treated as exempt). HMRC appealed against the use of zero-rating in this instance as the conversions used space that had previously been used as residential property.

The Tribunal concluded that zero-rating was not applicable in either instance as none of the dwellings created from the public house in Languard or the shop in MacPherson had been created by converting part of a building that was not previously designed for use as a dwelling as they had been created from a combination of both non-residential and residential parts. The fact that the new dwellings contained space that was non-residential prior to conversion is not sufficient to allow zero-rating.  Instead, the new dwelling must wholly sit within the foot-print of a non-residential part of the building for the onward sale of that building to attract VAT at the zero-rate.

As demonstrated by the two above cases, it is crucial to establish the correct VAT treatment of property transactions at the earliest opportunity due to the complexity of the relevant legislation in addition to the high value of any potential VAT element attributable to the supply.

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