The case of Alexandra Countryside Investments (ACI) is of interest to the property development sector. HMRC’s current policy is that the sale of a dwelling created by converting a property, which contains an element of an existing dwelling, does not qualify for zero-rating if the new dwelling incorporates part of an existing dwelling (meaning VAT recovery on related costs is restricted). However, if a DIY house builder submits a claim for a similar conversion the VAT on the cost of converting the non-residential part of the building may be reclaimed.
ACI bought a pub and converted it into two semi-detached houses. Part of an existing flat for the pub manager had been incorporated into both houses which HMRC said meant that the subsequent sale of the houses could not be zero-rated.
The Tribunal looked at the Jacobs case in detail. An ex-school, containing a flat for the headmaster, was converted into a residence for Mr Jacobs. This resulted in a new residence with four additional flats. An element of the original flat was incorporated into the new residence. The Court of Appeal decided that as the resultant number of dwellings was greater than the number of dwellings prior to the works then it meant that the “additional dwelling or dwellings” criteria in Note 9 was met and the DIY claim was valid. Whilst HMRC had accepted this decision they had taken the view that this only applied to DIY claims (under section 35 of the VAT Act 1994) and not the zero-rating provisions (Section 30 of the 1994 VAT Act). The current Tribunal saw no reason for the distinction of the interpretation of Note 9 between s30 and s35 claims and allowed the appeal, contrary to an earlier case (Calam Vale) where the Tribunal had not had the benefit of the Court of Appeal’s decision for Jacobs. The Tribunal also commented on the brevity, inaccuracy and attitude of HMRC’s formal review letter which the Tribunal thought effectively said “We” (HMRC) “are right and you are wrong” for which HMRC apologised to the Tribunal.
If the sale of a converted property is zero-rated then VAT may be reclaimed on all conversion costs, including the conversion of the previously residential part of the buildings. Thus developers may be able to recover more VAT than a DIY claimant, who is restricted to reclaiming VAT only on the conversion of the non-residential part of the building. This judgment still fails to deliver parity between developers and DIY claimants.
There may be grounds to revisit cases where repayments of VAT have been refused on a similar basis