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Vat payable purchase of mixed use (pub) conversion to residential?

My partner, based on certain seemingly incorrect advice, has purchased a recently closed pub at auction from the brewery with a view to converting into two semi-detached houses, one of which she intends to live in.

The building comprises a pub on the ground floor and a flat on the first floor which is rated for council tax, accessed through the pub itself and was until recently lived in. There is also a further floor comprising cellars previously used for the beer storage and pub paraphenalia.
Essentially the intention is to convert a previously mixed use building (2 floors commercial (pub) & 1 floor residential) solely into residential by splitting the building vertically in two and thereby creating two dwellings each (previously) consisting of 2/3 commercial and 1/3 residential.

The purchase is subject to VAT on 90% of the building (being the pub) as, presumably, the brewery has Opted to Tax as is the norm in such circumstances. A 10% deposit has been paid on the purchase and completion is due within a week.

She was originally advised, incorrectly as it turns out, that there was no way of avoiding the VAT on the purchase price (despite later finding out that certificate 1614D could be used to disapply the option to tax, thereby avoiding payment of VAT on the purchase price). Furthermore, she was advised that the best course of action would be to form a (VAT Registered) limited company to purchase the property which would enable the recovery of the VAT paid on the Purchase price (amongst other things). This she has done.

Ignoring, for now, the possible use of form 1614D (as the price was fixed at auction the acceptance of the certificate prior to completion is at the Vendor's discretion) and the wider implications of VAT on the conversion costs and other taxation matters in general, the question is:

Considering the circumstances of the conversion, is it possible to reclaim the VAT on the purchase through a VAT registered Ltd co?

The answer would seems to turn on whether or not the two dwellings created would be zero-rated or exempt and I am concerned that, given the circumstances the later may be the case. i.e.

Whilst conversion of a commercial property to residential is zero-rated, it appears to me that if the conversion contains any element of residential the sale of such a dwelling(s) would be exempt. In fact, HMRC Notice 708 para 5.3.5 and the examples given appears to deal specifically with these circumstances:

• You convert a two-storey public house containing bar areas downstairs and private living areas upstairs (and so was in part being ‘used as a dwelling’ – see sub-paragraph 5.3.1) into a single house. The onward sale or long lease is not zero-rated and you cannot apportion your charge. 

• You convert the same property by splitting it vertically into a pair of semi-detached houses, each of which use part of what was the living accommodation. The onward sale or long lease is not zero-rated and you cannot apportion your charge. 

I am aware of the Jacobs (2005) case which found that, as an additional dwelling had been created, the defendant could reclaim VAT on the conversion costs (for the commercial/non-residential elements only), but as this case deals with the DIY scheme and specifically VAT on conversion costs rather than purchase costs, I don't think it is applicable in this case. Futhermore, in HMRC's business brief 22_05, with reference to builders and developers in oppose to the DIY scheme, their stated stance in relation to this Jacobs case is that:

"Our policy remains that the zero rate will not apply to any dwelling(s) deriving (whether in whole or in part) from the conversion of the residential part."

I am presuming that, if my partner purchases the pub under the Ltd. co, she would be classed as a developer in spite of the fact that at least one of the properties is for her own use and she has no previous development experience.

In light of the limited time available before completion, we would be very grateful for all comments! 

Many Thanks


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01st Nov 2011 09:02

Pub conversion

The only way you can achieve any zero rating is if a non-residential part of the building is converted to a dwelling for onward sale or long lease. The proposed vertical split will mean that cannot be achieved.

The preferable route, which you mention, is to ask the Vendor to accept a VAT 1614D.

The other mitigation of VAT costs is the 5% rate applicable for some conversions. From your posting I think you are already aware of this possibility.

Thanks (0)
01st Nov 2011 13:13

Hi Les

Many Thanks for your response. You comments seem to (very unfortunately) confirm our concerns.

We are aware that there is a possibility of a reduced rate on the conversion and although we haven't got to the bottom of that either, the vat on the conversion is likely to be much less than that on the purchase, which is our primary concern right at this moment.

We are currently awaiting a response from the Vendors with respect to 1614D (with crossed fingers)

We presume from your post that the Jacobs case, which achieves a zero rating on the commercial parts of the building and enables apportionment accordingly, is not applicable to our circumstances for either/or/both of the reasons stated (i.e, 1 - it relates only to conversion cots, not purchase costs 2 - it relates to the DIY scheme rather than a Ltd. co?)

I don't suppose you know of any other case law relating to these circumstances?

Thanks again,


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01st Nov 2011 13:50

Pub Conversion


I don't think that Jacobs applies, since it relates to works done to convert a non-residential part of a building to a dwelling.

I think that your case is a matter of Law and practicality. The main (avoidable) VAT cost was on purchase. The aim of the legislation, as far as I understand it, is for a developer not to pay VAT on purchase, and then benefit from the 5% rate, since his onward supply is expected to be exempt. I don't know of any other helpful cases.

Thanks (0)
01st Nov 2011 15:03


You've hit the nail on the head in that the main Vat cost was on purchase and that this was avoidable (using cert 1614D). Now the price is fixed its at the vendors discretion as to whether it still is.

The Jacobs case contained both residential & non-residential and from what I recall, dwellings were created out of part of each (i.e. at least one of the dwellings was previously both residential & commercial) hence HMRC revised policy:

Quote from HMRC business brief 22/05


HM Revenue & Customs’ revised policyHMRC now accept that, for the purposes of the DIY Refund Scheme, the conversion ofa building that contains both a residential part and a non-residential part comes withinthe scope of the Scheme so long as the conversion results in an additional dwellingbeing created. Decision:HMRC appealed the Tribunal’s decision to the High Court. The High Court rejected the Tribunal’s ‘primary use’ test and held that the school was in part residential and in part non-residential. However the High Court also rejected HMRC’s view that any additional dwelling must be created entirely from the non-residential part. It held that the VAT incurred on converting the non-residential part used in creating the 4 dwellings was recoverable through the scheme. This is because converting the school had created additional dwellings, the school having contained one dwelling before conversion and four afterwards. The VAT incurred on the conversion of the residential part of the school was not recoverable. The "primary test" according to the High Court, was that an additional dwelling had been created (as per our circumstances - currently one flat; will be 2 house) and on this basis Jacobs was successful. However, this case dealt specifically with the DIY scheme and HMRCs view would appear to be that this ruling is not applicable to "developers or builders" (we're assuming that by purchasing through a Ltd. co. we would be viewed as falling into the classification by default)Builders and developers

HMRC do not consider that the Court of Appeal decision has any impact in similar situations where a building, which is part residential/part non-residential, is being converted into a number of dwellings and the number of dwellings present post-conversion is greater than the number of dwellings present pre-conversion.

Items 1(b) and 3(a) of Group 5 to Schedule 8, VAT Act 1994 restrict the zero-rating to the dwelling(s) deriving from the conversion of the non-residential part. Our policy remains that the zero rate will not apply to any dwelling(s) deriving (whether in whole or in part) from the conversion of the residential part.

Personally, I think HMRCs differentiation on this ruling with respect to builders and developers, is arguable in that the purpose of the DIY scheme is to  "This Scheme puts you in a similar position to a person who buys a zero-rated converted property from a property developer"
i.e. under this ruling, and the scheme, and where the property is mixed use,  the DIYer would be better off than the developer - Not in a similar position.

But who am I to argue?!? ... I was wondering (hoping) that someone else may have challenged HMRCs view on the basis is discriminates against the developer/builder

Also the case is concerned with VAT on conversion costs not Vat on purchase, though presumably if HMRC took the same view with respect to developers as DIYers, in that the property was, effectively zero-rated despite being mixed use prior conversion, then that would subsequently enable reclamation of Vat on the purchase too

Any more thoughts anyone????????

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02nd Nov 2011 13:48

Pub Conversion

I have re-read the Jacobs case, and the HMRC Business Brief. HMRC are trying to restrict the application of the case, esp under the sub-head 'Builders and developers.'

It can be argued, I think, that the case does apply to the conversion you describe:

the first grant of a major interest in a building, or part, which is converted from non-residential to a dwelling(s) is zero rated  by Item 1(b).

if the building contains a residential part (which it does), then item 1(b) will apply if the conversion leads to an increased number of dwellings (which it does).

Thus the sale or long lease will be zero rated, and therefore input tax recoverable (in contrast to my previous posting). However, given HMRC's BB, this is not clear cut, and the Client should seek (paid) professional advice.

Thanks (1)
02nd Nov 2011 14:27


Many Thanks once again for your reply and especially given that you've taken the time to re-read the Jacobs case.

I'll re-read it again in light of your comments, but nonetheless, personally, given HMRCs explicit attempts to restrict the application in the BB, I would not bank on the outcome and if given the option of using cert 1614D by the vendors I think that would be the best course of action, do you agree? In any event, such a challenge would undoubtedly involve considerable time, effort and expense I'd expect, given HMRCs stated view in the BB.

Does anyone else know of any cases which may relate to this issue?

Thanks (0)