Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

VAT Construction

HM Revenue & Customs
, see all updates

Zero-rating major interest grants after a non-residential conversion: is the building the subject of a ‘non-residential conversion’: treatment of void spaces in residential buildings

We had not considered spaces such as roof voids, basements and circulation areas that may not in themselves be used directly for accommodation purposes in houses, flats and communal residential buildings to be non-residential.

However, in Merlewood Estates Ltd (VTD 20810), the Tribunal found that the ‘construction’ of new flats in the roof space of an existing block of flats was the conversion of a non-residential part of a building into a ‘building designed as a number of dwellings’. As a result, the first grant of a major interest in the new flats was not exempt but zero-rated under Item 1(b) of Group 5. The Tribunal stated:

In considering the arguments of the parties we begin with the relevant facts which are that new dwellings were intended to be constructed in the existing roof space of buildings which were occupied as blocks of flats. Each block had three stories and contained either twelve or eighteen existing flats. Before the conversion the roof spaces were not owned or occupied by the residents of the flats who had no access to them. The roof spaces were effectively empty. This is not a case where the roof space of a building, used by a single household and occupied with the rest of the house, was converted.

We then have to ask whether the roof space in each of the buildings the subject of this appeal was ‘a non-residential part of a building’ within the meaning of Item 1(b). Before referring to any of the Notes to Item 1(b), our preliminary view is that they were. They were empty; nobody lived or had ever lived in them; nobody regarded them or treated them as home; they were not and never had been habitable; the only person with access to them was the Appellant; and so in our view they could not be regarded as residential.

[HMRC] argued that [the roof spaces] were integral to the residential part of the building but that is not part of the statutory test. However, even if it were, we are of the view that, on the facts of this appeal, the roof spaces were not integral to the residential parts of the buildings. The roof spaces contained no utilities necessary for the residents to be able to dwell in the flats below; the residents could not use the spaces for storage or for any other reason; and the residents did not have access to the roof spaces. Item 1(b) refers to ‘a non-residential part of a building’ which assumes that a part of a residential building could be non-residential. Some meaning has to be given to the words ‘non-residential part’.

As a result of this decision, we accept that roof spaces and similar voids in buildings ‘designed as a number of dwellings’ can be non-residential if they are similar to the roof spaces in the above.

We still maintain that roof spaces and similar voids in a building designed as a single dwelling or a communal residential building are not non-residential.