VAT: The muddle of apportionments

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Marie Stein reviews a case where VAT was due on the commercial part of a pub, but not on the residential area, and HMRC displayed a muddled approach.

The case of David & Rebecca Matthews (TC05426) concerns the VAT liability on the sale of an empty property that was previously occupied by a tenant and run as a pub.

At first glance this is a straightforward case where HMRC and the property owners disagreed on the proportion of the sales price which was liable to VAT. However, HMRC's assessment was based on an apportionment method that was agreed in 1989 for a quite different purpose.

The facts

The Matthews opted to tax the property, but did not charge any VAT when they sold it, arguing that all of the proceeds related to the residential part of the property - i.e. the flat - and was therefore VAT exempt (VATA 1994, Sch10, para 2(2)(a)). They supported their position with evidence showing the relative values of residential properties of similar size in the area, and other information about the value of residential property.

HMRC's assessment

HMRC disagreed with the taxpayers’ arguments and issued an assessment for VAT on 90% of the proceeds, on the basis that there was value in the commercial part of the property "in accordance with HMRC's established approach to public houses with residential service accommodation", the Brewers' Society Agreement (BSA). 

The decision

The tribunal agreed that there was value in the commercial part of the property, but the commercial section did not amount to as much as 90% of the total value, as HMRC had argued. The tribunal accepted the Matthews' suggestion that the floor area of the property could be used as the basis of the apportionment; being two-thirds commercial and one-third residential. The assessment was therefore reduced from VAT on 90% of the consideration to VAT on 66% of the consideration.


From a purely practical perspective, the judgment was about the correct apportionment of the sales price. The tribunal chairman commented that the BSA wasn't applicable in this case because the BSA was only supposed to apply to input tax on costs relating to opted tenanted public houses....


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About Marie Stein

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Marie Stein has worked in VAT since starting with HMRC in 1981. Since leaving HMRC in 1985, she has since worked her way through all of the Big Four accountancy firms (in one guise 
or another!) and a couple of others before starting her own consulting business in 2009.
Marie Stein can be contacted at [email protected]. Her books "VAT for residential property developers and contractors" and "VAT for DIY property developers" are now available in paperback from
She now runs her own successful website and has published two books: VATWoman's Guide to VAT and residential property development: How to save VAT and manage the process; and VATWoman's Guide to inter-company services, management charges, cost sharing and much more: Dealing with VAT on transactions with associated businesses.


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