Are you a self-builder or commercial property developer looking to buy and convert a public house into a single or series of residential dwellings? If so you will be interested in expert advice on pub conversion building projects and VAT.
Gerry Myton is recognised as one of the leading authorities on VAT in the UK. He is the Indirect Taxation Partner at Harwood Hutton, Beaconsfield, and in this blog he outlines what you should be aware of when planning a pub conversion building project.
One of the features of the UK economy in recent years has been the number of pub closures. The demise of one local amenity gives rise to other uses, such as a conversion to dwellings. Most pubs contain an existing element of residential use whether that is for the owner publican, tenanted sites or managed houses. The VAT position of conversions has vexed developers for years and two recent cases, Languard New Homes Ltd and MacPherson, illustrate the continuing VAT issues with pub conversions.
The sale of a newly converted “non-residential to residential” property, or a converted property which creates additional dwellings, can be zero rated. This is important as it means that the developer can claim VAT on the conversion costs.
The issue with pub conversions centres on the VAT legislation, which states that the zero rate only applies to the conversion of non-residential buildings or non-residential parts of buildings. If any part of the finished dwelling was previously used for residential purposes, the conversion of the non-residential part does not permit the developer to zero rate the sale of the final dwelling. There is an exception to this if the result of the works was to create an additional dwelling or dwellings.
As outlined above, pubs usually include an element of residential accommodation on the upper floor or floors, with commercial use on the ground and other floors depending on the degree of commercial usage. The VAT issue arises where the conversion takes the form of a vertical split to create two terraced houses. These type of conversions mean that the new dwellings all incorporate a part that used to be commercial and a part that was always residential.
This is exactly the situation in Languard and MacPherson. The Upper Tribunal has decided that none of the dwellings in either case had been created by converting part of a building that had not been previously designed for use as a dwelling, because they had been created from an amalgamation of the non-residential parts and the residential parts. Consequently, neither company has succeeded so far in obtaining zero -rating and thus recovery of input tax charged at 20% on the conversion works.
In addressing the conversion of a pub to residential use, consideration needs to be given to the use of the pub over the last 10 years, and the nature and type of conversion. Spending time considering the VAT implications may not be wasted time/cost as a ‘zero rate disposal with 5% VAT on costs’ versus an ‘exempt disposal and 20% VAT on costs’ makes a significant difference to the development profit!
Here at CLPM we regularly work with specialists of all types including VAT specialists such as Gerry Myton at Harwood Hutton. If you’re planning a pub conversion building project then we’d love to hear from you. Our experienced QS team can help you with construction cost services such as estimating, competitive tendering and contractor appointment. Our sustainability experts can help advise you on energy performance matters or how best to heat your building. We can also give you independent advice on renewables and support your pub conversion project once it is onsite.
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