Whether the grant of a major interest in a converted dwelling containing a former residential part can be zero-rated

The appeals of Languard New Homes Limited (Languard) and DD & DM MacPherson (MacPherson) were heard together as both raised the same legal issue on very similar facts. The issue is whether the supply of a new dwelling, which occupies space which used to be partly residential and partly non-residential, is zero-rated or whether it only qualifies for zero-rating if it occupies space all of which used to be non-residential.

In both cases HMRC contended that zero-rating was not available on the sale of the ‘new’ residential units because part of an existing dwelling was incorporated in each of the new units. However, different panels of the First-tier Tribunal (FTT) came to different conclusions in the two cases.

The MacPherson case involved the purchase of a village shop premises with office and storage space as well as living accommodation. The property was converted into two semi-detached dwellings. The Languard case involved the purchase of a public house that consisted of both pub premises and accommodation. Languard converted the premises into four maisonettes. Two of which occupied both former non-residential and residential space.

The FTT concluded in the Languard case that as the number of dwellings in the building was increased to four, zero-rating could apply to the sale of the ground and first floor maisonettes which incorporated the pub. However, in the case of MacPherson, the FTT ruled zero rating did not apply.

The Upper Tribunal allowed the appeal in Languard and dismissed the appeal in MacPherson, holding that the fact that a new dwelling contains some space that used to be non-residential is not enough for it to qualify for zero-rating.

CVC comment: interestingly, the UT commented that it reached its conclusion that HMRC was correct with some hesitation. This interpretation may lead to circumstances whereby a developer can achieve zero-rating on most of the building or none of it depending on the way it is divided for conversion. The UT expressed concern that the limited circumstances in which zero-rating is available may influence the decisions taken by developers as to how to reorganise the space in a building that they plan to convert. HMRC contended that even if this was a factor in conversion decision making, this would likely be one factor of many arising from the location of the building including the state of the local housing marketing for different kinds of dwellings.

An excellent case summary and commentary by © CVC