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HMRC internal manual

VAT Construction

Zero-rating major interest grants after a non-residential conversion: is the building the subject of a ‘non-residential conversion’: designed or adapted for residential use

A common misunderstanding is that the VAT definition of ‘designed as a dwelling’ (contained in Group 5, Note 2 - VCONST14100), which is used to determine the status of a building after its conversion, is used to decide its status before conversion. For the reasons stated in VCONST04450, this is not the case.

A building is designed for residential use if that was its original purpose when constructed. For example, in Neil and Jane Hicking (VTD 17117) the fact that the dwelling was dilapidated and subject to a ‘closing order’ under the Housing Act did not make it ‘non-residential’.

Similarly, in James Halcro-Johnston (VTD 17147), it was decided that the absence of central heating, running hot water, and sanitation in a Scottish croft did not make the croft ‘non-residential’.

In both cases the buildings were originally constructed for use as dwellings and had been used as such in the recent past.

Some buildings have a dual use when constructed. For example a public house typically includes living accommodation for the landlord or licensee. The living accommodation of such buildings is designed or adapted for residential use. Therefore, subject to its past ‘use’ (explained at VCONST04460), it is not non-residential. VCONST04500 explains the implications of converting the remaining, non-residential, parts of such properties.

A building is adapted for residential use when it has been changed, altered or transformed. This was confirmed in the case of Davison v Birmingham Industrial Co-operative Society ([1920] 90 LJKB 206), a case under the Housing Act 1919. The work need not have been extensive.