The Upper Tribunal has denied VAT zero-rating for dwellings converted from partly non-residential and partly residential areas in a building (Languard New Homes Ltd v HMRC and DD & DM MacPherson v HMRC [2017] UKUT 307 (TCC)).

1. Original decisions

The appeal involved two joined cases with similar facts and in respect of which the decisions of the First-tier Tribunal (FTT) had reached opposite conclusions. The FTT was differently constituted in each case.

In the first case, MacPherson had bought a village shop that comprised office space on the ground floor and living accommodation on the ground and first floors. The building was converted into two semi-detached dwellings. Each of the dwellings consisted of areas that previously formed part of the living accommodation and part of the former commercial areas.

In the second case, Languard bought a public house that consisted of a non-residential ground floor and two residential upper floors. It converted the public house into four maisonettes, two of which were situated on part of the ground floor and part of the first floor. The other two were built on a newly constructed third floor.

Both MacPherson and Languard sold the dwellings and tried to zero-rate their supplies, but HMRC refused to allow the zero-rating. MacPherson and Languard both appealed to the FTT, although Languard accepted that the supplies of the upper maisonettes should not be zero-rated as they had not been converted from a former non-residential area.

In MacPherson the FTT decided that the sales of the dwellings were not zero-rated. In Languard the FTT found that the sales of the maisonettes were zero-rated.

2. The appeal

On appeal by the developers, the Upper Tribunal held that the first grant of a major interest in the converted dwellings could not be zero-rated because each of the dwellings comprised both former residential and non-residential areas. It held that, for zero-rating to apply, a converted dwelling must have been converted entirely from a former non-residential area and that the Court of Appeal decision in Blom-Cooper and Jacobs did not apply. In that case, the Court had said that it was not necessary for a converted dwelling to be comprised exclusively of a former non-residential area and that zero-rating could apply in respect of such proportion of a new dwelling which had been created from a non-residential area. However, the Court of Appeal’s indication on this point was not binding as it did not have to consider this particular issue in the Blom case.

The result of the Upper Tribunal’s decision is that when a new dwelling is created in a building which was previously partly residential and partly non-residential, the number of dwellings in the converted building should be counted. If the number exceeds the number of dwellings which existed before the conversion, then zero-rating will apply but only in respect of the dwellings that have been converted wholly from former non-residential areas. The decision severely limits the availability of zero-rating. However, hopefully the case will be appealed and the more common sense approach indicated by the Court of Appeal in the Blom case confirmed.