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VAT & Conversion of public house to residential

VAT & Conversion of public house to residential

The client purchased a public house from a brewery chain. The brewery charged VAT on the purchase price at 17.5% after deducting from charge, for VAT purposes, 10% to account for the residential element of the premises, i.e. VAT was charged on 90% of the purchase price. NB The pub had not traded for several months prior to purchase and also the property was only one of, I suspect, a 100 or so owned by the brewery and so did not fall for treatment within the transfer of a going concern rules.
The input VAT was claimed on the client's first VAT return.
The client has now ceased trading and the Final VAT return is due for completion.

The client has decided to retain the property and convert it to residential use ( for use by themselves) and local authority "change of use" has been applied for and granted.

Comments would be gratefully accepted with regard to the following:
1. Is VAT to be accounted for on the final return in the normal way by way of
market value of asset on cessation of trade.
2. No local estate agents were prepared to offer a valuation on the property
prior to change of use having been granted (as were the bank not prepared
to offer residential mortgage without the same).
A post "change of use" valuation has now been received.
The point to all of this is would it be it be acceptable to discount the valuation
provided to take account of the fact that the valuation would have been less on
cessation since no change of use had been granted. Local agents won't provide
an estimate of the then value and council took nearly 12 weeks to give consent. If
yes, how much is a sensible percentage discount.
Also note the pub & business had been up for sale for nearly 18 months prior with
no takers. The pub is opposite (15 metres away) from a derelict block of flats with
all the problems that brings.
3. If VAT is due in the normal way are there any reliefs available by way of reduced
rates,etc that can be utilised.

Due to the well publicised delays at VAT office concerning registrations,etc
the client has been fortunate in as far as as the final return actually arrived in the
same week as the change of use consent (i.e. 12 weeks after cessation ! ).
However the situation needs to be concluded and it would be nice to soften the blow of the VAT if at all possible.
References to relevant material would be greatly appreciated.

Many thanks in lieu of (hopefully) some informed replies.

P Davies


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13th Sep 2007 16:46

Unless your Client has opted to tax the property in addition to having recovered the VAT on the purchase, he is not required to account for VAT at deregistration.

If the 90% cost more than £250,000 the building will be a Capital Goods Scheme item and there may be a claw back of some of the input VAT claimed on the purchase.

The VAT on the conversion from a pub to a dwelling is more complex. I would recommend your client spend a little time with a VAT specialist (like me) to determine whether he is entitled to recover any VAT incurred via a DIY Builders claim.


Paul Taylor
Senior VAT Consultant

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13th Sep 2007 19:11

DIY schemes won't work
Following conversion the property to residential, the eventual disposal of the property (whether by way of sale or lease) will be exempt from VAT, not zero rated. This is because the 10% residential element contaminates the conversion and prevents there being a zero rated conversion from business to residential. Consequently the DIY builder scheme would be a waste of time. I would refer you to the recent Tribunal case of PJG Developments, where the facts were similar to those of your client. Therefore, you may find that while there is no clawback on deregistration, there are no reliefs available on the conversion. In addition, if your client has not actually used the property following its purchase, the subsequent exempt supply of the property will trigger a clawback under the partial exemption regulations. You need to take specialist advice sooner rather than later.

Mark Buffery

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14th Sep 2007 09:32

Clarification, Mark?
The question doesn't indicate (I don't think) whether the pub is to be converted into a single dwelling or two (or more separate ones). Presumably if it were the case that, say, tthe existing residential element is an upstairs flat and the ground floor pub were being converted into a separate flat then the 5% rate on conversion costs and z-rating on sale would apply (not the latter in this case as the owner will use it themselves).

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By Anonymous
14th Sep 2007 13:33

FAO Paul Taylor
Thanks for reply. Would you mind clarifying why no VAT would be due
and is there any specific reference material/VAT notice(s) I could refer to.

Many Thanks

Paul Davies

PS Other readers comments would also be appreciated if anyone else
has knowledge of the subject.

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