Land and property VAT – VAT recovery on conversion of pubs to houses?

In the current economic climate, there is an increasing number of pubs being converted to residential accommodation. If carefully managed, conversion works can qualify for the reduced rate of VAT of 5%. However, if the developer then goes on to sell the dwelling(s) and part of that space was previously used for residential purposes e.g. as staff living accommodation, input VAT recovery is usually blocked. Whilst the input VAT can be minimised to 5%, this still creates a VAT cost.

However, the Tribunal found in favour of the taxpayer, concluding that previously residential elements could be used in the conversion where additional dwellings are created. This meant that contrary to HMRC’s guidance, the sale could be zero-rated and the related input VAT recoverable. Whilst a Tribunal does not set a legal precedent and HMRC could still appeal the decision, if you are carrying out similar conversions, you may wish to consider putting in a protective claim for input VAT recovery. Please let us know if you would like to discuss this possibility.