Zero rating conundrum

The taxpayer was a property development company that converted a pub into two semi-detached houses sold them and claimed input tax in relation to the conversion on the grounds the sales were zero rated.

HMRC refused the claim saying the sales were exempt because the pub had included a manager’s flat parts of which would have been incorporated into the houses.

The taxpayer appealed.

The disputed legislation was in VATA 1994 sch 8 group 5 note (9):

“The conversion other than to a building designed for a relevant residential purpose of a non-residential part of a building which already contains a residential part is not included within items 1(b) or 3 unless the result of that conversion is to create an additional dwelling or dwellings.”

The First-tier Tribunal decided the creation of the additional dwelling by the company meant note (9) did not...