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Pub conversions – legislation needs to be amended!

14th Mar 2016
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The combination of a reduction in the numbers of traditional pubs, and the need for more housing has led to the growth in pub conversions. The VAT outcomes vary depending on the details of the scheme. However, conversion work will include at least a proportion at the reduced 5% rate. The onward freehold sale, or long lease may be zero rated, rather than exempt. But a stream of Tribunal decisions has highlighted some problems in the way the legislation is applied.

This was considered in the case of Languard New Homes Ltd [2016] UKFFTT 129. The project started with a three story building, the ground floor being the pub (non-residential), and the first and second floors the manager’s flat (residential). A further floor was added. Four maisonettes were created, two from the ground and first floors, split vertically; and two from the second and third floors, also split vertically. The outcome was that the freehold sales were zero rated for the lower two maisonettes, but exempt for the upper two maisonettes.

(I did note that the company bought the pub as a TOGC, which continued to operate for six months before conversion. Presumably this was arranged so as to avoid a VAT charge on the purchase, and also possible SDLT issues.)

The decision reviewed previous decisions, including the Court of Appeal decision in Jacobs [2005] EWCA Civ 930. But, a comment made in the Calam Vale Ltd Tribunal (Decision 16869) decision caught the FTT’s eye:

“We are accordingly forced by an absurd (and perhaps none too carefully drafted) law into an absurd decision which flies in the face of common sense, or equity and of the social purpose which is supposed to underlie and inform zero-rating.”

The FTT was not impressed that HMRC relied upon that interpretation of the legislation!

The FTT also commented on HMRC Brief 22/05, which was issued following the CA decision in Jacobs. This allowed a D-I-Y claim where a building which included both residential and non-residential space was converted, as long as an additional residential unit was created. It indicated that HMRC’s application of this Brief was ‘unnecessarily strict.’

The decision highlighted the poor state of the legislation and HMRC’s inconsistent application of it. It seems a re-write is overdue.

The Languard New Homes decision is here: http://www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=8896

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