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 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 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 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....