A Public Discrimination - Graham Elliott ATII reports on a VAT tribunal which does no credit to statutory law.

A Public Discrimination
Graham Elliott ATII reports on a VAT tribunal which does no credit to statutory law.
When a VAT tribunal declares the law to be absurd, then one has the grounds to express considerable disappointment as well. But where the absurdity leads directly to an unfair discrimination between one person and another, it brings thoughts of human rights to the fore. Unfortunately, there are many unfairnesses which the European Court of Human Rights is unlikely to address.
We must also acknowledge that taxation law making is (to use spin talk) about drawing demarcation lines, and that such lines always leave some innocent cases on the wrong side. Very true, and often unavoidable this may be, but in the case discussed in this article, the result also goes entirely against government policy of recycling properties which no longer serve their original purpose, and turning them into dwellings. This is a happy alternative to new building on green field sites, and what better to do than to take the traditional public house, and knock it into one grand dwelling or several nice flats?
A business conversion
Of course, under Item 1(b) of Group 5 of Schedule 8 to the VAT Act 1994, a business converting a pub into a dwelling or dwellings should be able to grant a zero-rated major interest in the resultant property, thereby crystallising full recovery of VAT on the conversion costs. This should make the cost of the conversion some 15 per cent cheaper than would be the case if the supply were exempt, as it would be if the work involved converting an existing dwelling into, say, several dwellings. This is because the pub is (perhaps) a commercial building, out of which a business has been run, and qualifies as a consequence for this helpful VAT relief.
This is a particularly common source of conversion properties in my experience, and set to become more so, potentially. If we believe that we are drinking more at home, and moving away from the traditional pint in the traditional environment, then increasing numbers of pubs of marginal profitability must become available for conversion. They are also eminently suited to such conversion, at least as much as warehouses, and more so than barns. But, unlike the average wharf building or milking parlour, they usually present a distinct problem for those trying to apply the VAT relief.
The residence problem
That problem is that publicans have by tradition lived above the shop. A pub will typically include a residential unit for the publican family.
The notes which govern Item 1(b) (and which I quote in reverse order), provide a thicket of tricky restrictions which ensnare the traditional pub. First, in note 9, we are told 'The conversion,... of a non-residential part of a building which contains a residential part is not included within Item 1(b)... unless the result of that conversion is to create an additional dwelling'.
A simple paraphrase of this would be that if a new residential unit (or dwelling) is created out of space part of which was formerly used as a dwelling, then the zero rate cannot apply to any part of that newly created unit. There is a puzzling caveat to the effect that zero rating may apply if more than one dwelling is thereby created, but exactly how can that be achieved where one is dealing with the conversion of a definable part? After all, it does not refer in this passage to the conversion of the entire building, to the effect that, if multiple units are created, then one can ignore the formerly residential part in any single unit. It refers to the one unit which has been created. So the seemingly helpful caveat is illusory. For every converted unit which incorporates former dwelling areas, there is no relief.
That might seem to be the end of the matter but for the interaction of notes 7 and 2 to the same group.
Note 7 is in effect a bridging passage that says: 'Subject to note 9 below [which we have just discussed] 'non-residential' in relation to a building or part of a building means: (a) neither designed nor adapted for use as a dwelling or number of dwellings...'. So, what exactly defines a 'dwelling'?
Definition of a dwelling
Note 2 states that 'A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied –
(a) the dwelling consists of self-contained living accommodation;
(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
(c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statute or a planning consent or similar provision;
(d) a statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.'
If one said that the above conditions defined whether a unit was residential or a 'dwelling', then there would be some hope that a pub flat failed to rank as a dwelling. It may not be entirely self-contained living accommodation (as the kitchen might double for use to service the pub). Its separate use or disposal may be prohibited (and in practical terms should be). There may not have been formal planning consent granted for it.
The recent case
In the case of Calam Vale Limited (16869) the tribunal was asked by the appellant to allow its conversions, which created several flats, but each incorporating part of the old pub flat, to be regarded as zero rated. This was because there had been no statutory planning consent for the pub flat. It had therefore never been a dwelling within the meaning of note 7, and by extension had not been residential for the purposes of note 9. So, logically, note 9 did not apply, since there was no residential part incorporated.
The problem faced by the tribunal was one concerning the legal construction of the status of notes to a group in a schedule. The difficulty is that one note cannot be said to condition another note. It conditions the items, but not the notes. Hence, note 2 only affected new dwellings as discussed in the preceding items, not the nature of a dwelling contained in notes 7 and 9, which referred to the potential old dwellings, rather than newly created ones.
Graham Elliott is VAT Partner with Hays MacIntyre. The views expressed in this article are his views and not necessarily those of his firm.
 

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