Are new dwelling conversions zero-rated for VAT?

It is a truth universally acknowledged that a new dwelling constructed and sold must be zero rated. Jane Austen probably chose not to write this sentence because it is not true.

A variety of cases have demonstrated that the VAT rules relating to property are opaque and the judge in one case was roundly condemnatory: ‘With the greatest reluctance … we are accordingly forced by an absurd (and perhaps none too carefully drafted) law into an absurd decision which flies in the face of common sense of equity and of the ‘social purpose’ which is supposed to underlie and inform zero rating.’

Calam Vale Ltd had converted a pub into two new residential dwellings and sold them. The taxpayer thought these sales would entitle it to recover the VAT paid on its costs but HMRC rejected the claim and the tribunal upheld that...