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HMRC internal manual

VAT Construction

HM Revenue & Customs
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Zero-rating major interest grants after a non-residential conversion: is the building the subject of a ‘non-residential conversion’: conversions of buildings that already contain a residential part

Major interest grants in converted buildings that contain a part that was previously residential are not normally zero-rated.

The exception is where the additional dwelling or dwellings created by the conversion is contained entirely within a part of the building that was previously non-residential. Zero-rating is limited to the grant in that part.

There is no provision for such grants to be apportioned. The decision in Calam Vale Ltd (VTD 16869) confirms this. The Tribunal stated:

…if you take a four-storey office block with a wide frontage and a caretakers flat occupying the whole of the attics and convert that block vertically into four town houses (each incorporating a quarter of the attic) you will get no relief; if you convert it horizontally into four flats, leaving the attics untouched, you will get relief… Equity would suggest that there should be apportionment; the Act, whether inadvertently or by design, makes no provision for this.

The relevant legal provisions are different for grants in dwellings compared to grants in buildings (or parts of a building) intended for use solely for a ‘relevant residential’ purpose.

For grants in dwellings the relevant legal provision is in the Value Added Tax Act 1994, Schedule 8, Group 5, Note 9.

Note 9 works in the following way:

Step Issue Action
1 Does the building, as a whole, contain residential and non-residential parts? Yes, go to step 2.
No, then the building is either wholly ‘non-residential’ or wholly residential and Note 9 does not apply.      
  2 Does the conversion of the building create an additional dwelling or dwellings? (By additional, we mean increasing numbers from one or more but not from zero to one or more) Yes, then relief is available for the dwelling or dwellings created entirely within the non-residential part.
No, then no relief is available.  

The Court of Appeal in Ivor Jacobs ([2005] STC 1518) supports having to compare the number of dwellings in the whole of the building pre-conversion with the number post-conversion. LJ Ward said of Note 9 that:

In my judgment, Note 9 has to be construed so that the result of the conversion is to create in the building an additional dwelling or dwellings.

For grants in a building (or part of a building) converted for use solely for a ‘relevant residential purpose’ the provision is Item 1(b) (VCONST04200).