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!
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