The Upper Tribunal has denied VAT zero-rating for dwellings converted from partly non-residential and partly residential areas in a building. 

The appeal involved two joined cases. In the first case, MacPherson had bought a village shop which comprised of office space on the ground floor and living accommodation on the ground and first floors. The shop was converted into two semi-detached dwellings. Each of the dwellings consisted of areas that previously formed part of the living accommodation and part of the former commercial areas. 

In the second case, Languard bought a public house which consisted of a non-residential ground floor and two residential upper floors. It converted the public house into four maisonettes, two of which were situated on part of the ground floor and part of the first floor. The other two were built on a newly constructed third floor. 

In both cases HMRC refused the developers’ application to zero-rate their supplies. 

The Upper Tribunal held that the first grant of a major interest in the converted dwellings could not be zero-rated because each of the dwellings comprised both former residential and non-residential areas. It held that, for zero-rating to apply, a converted dwelling must have been converted entirely from a former non-residential area. 

The result of the Upper Tribunal’s decision is that when a new dwelling is created in a building which was previously partly residential and partly non-residential, the number of dwellings in the converted building should be counted. If the number exceeds the number of dwellings which existed before the conversion, then zero-rating will apply but only in respect of the dwellings that have been converted wholly from former non-residential areas. The decision severely limits the availability of zero-rating and is likely to be appealed.