Readers' forum : Pub conversion

In May 2012 my client bought the freehold of a derelict pub from a brewery for £300 000 plus VAT of £54 000. He claimed the input tax on his first VAT return as a new registration. The reason for VAT being charged on only 90% of the price was because the premises included a first-floor flat. The only expenditure incurred until October 2013 related to building improvements.

My client intends to rent out the ground floor as a restaurant and the two first-floor flats to residential tenants (not holiday lets). He was charged £200 000 plus VAT for the ground-floor work and £100 000 plus VAT on the work to convert the first-floor flat into two smaller flats. The input tax was blocked on the latter cost (exempt rental activity) but was claimed on the ground-floor works because the client had made an option to tax election.

We...