Multi-conversion

Conversion of residential and non-residential property into two houses

The taxpayer a partnership bought an old village shop which included living accommodation. It converted the property into two four-bedroomed semi-detached houses and sold them. The sales were treated by the taxpayer as zero rated because it had converted the non-residential part of the building into dwellings (VATA 1994 Sch 8 group 5 item 1(b)). The partnership claimed input tax on the related costs of the project.

HMRC disallowed most of the claim on the basis that the sales were exempt because the houses incorporated part of the existing living accommodation. It said the project could not qualify as a ‘residential conversion’ because the property was already partly residential.

The First-tier Tribunal agreed with HMRC. The judge agreed that if the property were divided it would contain a residential part and a non-residential part. However...