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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’: interaction of Group 5, Note 2 and Group 5, Note 7

For conversions, Note 2 (which defines when a building is ‘designed as a dwelling or number of dwellings’) is only used to determine the status of what a building is being converted into.

It must not be used to determine if, before conversion, a building is non-residential. This is confirmed in the Tribunal’s decision in Calam Vale Ltd (VTD 16869), which has been followed in all subsequent cases overturning an earlier decision in Temple House Developments Ltd (VTD 15583).

In coming to its decision the Tribunal considered the impact on dwellings constructed before the introduction of statutory planning control in the 20th Century and recognised that:

…it would be… absurd if… a building which had been put up without planning consent could… be a non-dwelling under Note 2(d) and its miniscule conversion into a lawful dwelling accordingly zero rated.

In Look Ahead Housing Association (VTD 16186) the Tribunal agreed that Note 2 should not be applied to Note 7 but then decided that bed-sits were non-residential as they were not self-contained. As a test of self-containment is found in Note 2, we believe the Tribunal ignored its own reasoning and came to an incorrect decision, the correct approach being taken in Amicus Group Ltd (VTD 17693). To this extent the decision in Look Ahead should not be followed.

In Amicus Group Ltd it was decided that, before conversion, bed-sitting accommodation converted to flats was used as a dwelling and was therefore not ‘non-residential’. The Tribunal correctly ignored a test of self-containment by simply asking if the accommodation was designed or adapted for use as a place where one lives, regarding and treating it as home (VCONST14010).