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Tough Limits on ‘Residential Conversion’ VAT Exemption

In a decision which places tight limits on a VAT exemption widely used by property developers, the Upper Tribunal has ruled that extensive works carried out on a barn did not quality as a ‘residential conversion’ because the restored structure was attached to an existing cottage and was not fitted with a kitchen of its own.

FarmhouseThe barn adjoined a listed cottage and the project had involved knocking through an opening between the two buildings. The listed building consent for the scheme was stated as being for the conversion of the existing barn ‘to form part of’ the existing cottage. On that basis, Her Majesty’s Revenue and Customs (HMRC) took the view that there had been no creation of a new dwelling and refused the developer a VAT rebate in respect of materials used in the project.

In dismissing the developer’s appeal against that decision, the Tribunal noted that the evident purpose of the VAT exemption extended to residential conversions by section 35 of the VAT Act 1994 was to confer a tax advantage on works which create new or additional dwellings out of non-residential building stock. The project could not be said to have created a new, self-contained, unit of living accommodation because the barn lacked a kitchen and had direct internal access to the dining room of the existing cottage.

The Tribunal also ruled that it had no jurisdiction to consider the developer’s plea that he had been given a ‘legitimate expectation’ that he would benefit from the VAT exemption through informal, telephone, communications with an HMRC officer. Even had such jurisdiction existed, the Tribunal noted that it would have found on the evidence that the officer had given no unambiguous assurance on which the developer would have been entitled to rely.