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!
- JUDGE FRAUD ALERT 280 4
- Closing my business down 76 4
- What do you all do in your spare time? 843 34
- New ACCOUNTINGQUESTIONS website launching 279 6
- VAT on long lease in comercial property that has opted to Tax 191 6
- Director - earning less than £8500 and no taxable benefits - PllD? 103 1
- So who has completed a 2015 tax return then? 589 12
- Scams are not always obvious 2,241 36
- Auto Enrolment - Director Only Answer 1,467 21
- CIS Subcontractor Catch Twenty Two Position after 14 years 190 2
- VAT flat rate scheme 109 1
- Can I record depreciation, prepayments and accrued expenses in cash accounting? 291 4
- Need some help on importing procedures and VAT 89 1
- I have let a client go as it wasnt worth the hassle, 2,093 19
- TaxCalc - A Return to Form 414 6
- Should a non trustee sign Scottish charity accounts? 153 1
- How do we get US withholding tax back? 224 3
- FPS or EPS 170 2
- Continuity of Practice 223 2
- IRIS Professional Yearend 145 2
- Moving away from CCH software 955
- QROP pension input amounts 441
- write off loan or loan to equity swap or both 384
- HMRC BENCHMARK EXPENSES 358
- Unused Losses and Post Cessation Receipts 326
- fraud 285
- EIS relief on transferring shares to spouse 260
- Sole trade business in UK, but the owner works from EU 229
- Construction CIS LLP Company 213
- EPS and CIS deductions 201