Vat payable on purchase of mixed use (pub) conversion to res

[CLW]

Apoologies for the rather lengthy post - I got a little carried away!
My partner, based on certain seemingly incorrect advice, has purchased a recently closed pub at auction from the brewery with a view to converting into two semi-detached houses, one of which she intends to live in.

The building comprises a pub on the ground floor and a flat on the first floor which is rated for council tax, accessed through the pub itself and was until recently lived in. There is also a further floor comprising cellars previously used for the beer storage and pub. Essentially the intention is to convert a previously mixed use building (2 floors commercial (pub) & 1 floor residential) solely into residential by splitting the building vertically in two and thereby creating two dwellings each (previously) consisting of 2/3 commercial and 1/3 residential.

The purchase is subject to VAT on 90% of the building (being the pub) as, presumably, the brewery has Opted to Tax as is the norm in such circumstances. A 10% deposit has been paid on the purchase and completion is due within a week.

She was originally advised, incorrectly as it turns out, that there was no way of avoiding the VAT on the purchase price (despite later finding out that certificate 1614D could be used to disapply the option to tax, thereby avoiding payment of VAT on the purchase price). Furthermore, she was advised that the best course of action would be to form a (VAT Registered) limited company to purchase the property which would enable the recovery of the VAT paid on the Purchase price (amongst other things). This she has done.

Ignoring, for now, the possible use of form 1614D (as the price was fixed at auction the acceptance of the certificate prior to completion is at the Vendors discretion) and the wider implications of VAT on the conversion costs and other taxation matters in general, the question is:

Considering the circumstances of the conversion, is it possible to reclaim the VAT on the purchase through a VAT registered Ltd co?

The answer would seems to turn on whether or not the two dwellings created would be zero-rated or exempt and I am concerned that, given the circumstances the later may be the case. i.e.

Whilst conversion of a commercial property to residential is zero-rated, it appears to me that if the conversion contains any element of residential the sale of such a Dwelling would be exempt. In fact. HMRC Notice 708 para 6.3.5 and the examples given appears to deal specifically with these circumstances:

"You convert a two-storey public house containing bar areas downstairs and private living areas upstairs (and so was in part being ‘used as a dwelling’ — see subaragraph 5.3.1) into a single house. The onward sale oi long lease is not zero-rated and you cannot apportion your charge."

"You convert the same property by splitting it vertically into a pair of semi-detached houses, each of which use part of what was the living accommodation. The onward sale or long lease is not zero-rated and you cannot apportion your charge."

I am aware of the Jacobs (2005) case which found that, as an additional dwelling had been created, the defendant could reclaim VAT on the conversion costs (for the commercial/non-residential elements only), but as this case deals with the DIY scheme and specifically VAT on conversion costs rather than purchase costs, I don’t think it is applicable in this case. Furthermore in HMRC's business bnef 22_05 with reference to builders and developers in oppose to the DIY scheme, their stated stance in relation to this Jacobs case is that:

"Our policy remains that the zero rate will not apply to any dwelling(s) denying (whether in whole or in part) from the conversion of the residential part."

I am presuming that. if my partner purchases the pub under the Ltd co. she would be classed as a developer in spite of the fact that at least one of the properties is for her own use and she has no previous development experience.

In light of the limited time available before completion, we would be very grateful for all comments!

Many Thanks

[Generix]

My first question which might be unviable due to commercial reasons/profitablity or due to planning permission etc.

Can the property be demo'd and rebuilt?

Else I think, and this is a big think for me - haven't got time to flick to the page today, haven't really got time to be postnig this either - would you not be doing a converted number of dwellings and therefore qualify for reduced rate on some of the works? (Saving you at least something?)

I would wait for one of the people who like or at least know about the property VAT to post here though, as if I'm honest I'm not interested in it and therefore only the the motivation to read the text if I'm being paid - even then I'll still trust s44/pawn/etc over my thoughts!

[towat]

I had a similar query here http://www.taxationweb.co.uk/forum/grade-ii-listed-building-part-residential-etc-t36166-10.html which may help. In order for a company to register for VAT and recover the VAt on the purchase it would have to prove a that it was or intended to carry on a VATable business, dificult if the lettings are to be residential. If the property has been empty for more than 2 years you can reduce rate the conversion costs I believe.

[Generix]

So basically - can't remember from reading your post earlier whether you already know this - you have 2 issues;

Issue 1: Can your sale be made taxable?

Issue 2: (if answer to issue 1 = yes then no need to worry about issue 2) Can you get a reduced/zero rate of VAT on the works/costs.

[CLW]

Thanks very much Generix & Towat for the replies

Generix - No the property cannot be demo'd & rebuilt - yes its commercially unviable

Towat - We're not too concerned with the Vat on the conversion at this stage and are aware that there may be possibilities to reduce rate certain elements.It's the Vat on the purchase which is the much greater issue and has not been budgeted for based on previous advice.
I've read your post with interest, although it deals mainly with the Vat on the conversion costs.

I would be interested in knowing how the group of 4 got on with claiming back the Vat on the purchase, although the circumstances are different to ours. i.e. presumably, if Vat was reclaimed on the purchase it was through the Vat registered business on just those parts that remained commercial (and that an option to tax was exercised on these parts)

Our circumstances relate specifically to conversion works and the ability to zero-rate conversions of commercial premises to residential. The problem being that each dwelling contains BOTH (previously) commercial and residential parts of the building and I suspect is exempt in its entirety as a result.

Any more comments gratefully received ! ... especially if anyone knows of any case law which deals specifically with this issue (mixed use conversion to residential and whether the resultant residential property(ies) are zero-rated or exempt)

[section 44]

Considering the circumstances of the conversion, is it possible to reclaim the VAT on the purchase through a VAT registered Ltd co?

Yes, although it is a surprising short/simple question for such a long post so I shouldn't read too much into this answer.

I had a similar query here http://www.taxationweb.co.uk/forum/grade-ii-listed-building-part-residential-etc-t36166-10.html

I wouldn't read too much into the advice on that thread. While the concluding posts envisage the VAT registered company/business recovering the VAT, it does not consider the inevitable claw-back of any recovered VAT given that ultimately there would be exempt supplies (CGS etc).

[CLW]

Section 44, Thanks for the response

If the answer is "Yes" can you elaborate on how/why this is the case?

Sorry the post is so long, I just wanted to ensure all relevant info was in there and give my background research to show illustrate the concerns

Many Thanks

[section 44]

Practically I do not see any VAT paid on the purchase price being recovered.

It might be worth considering whether VAT is due on 90% of the purchase price. That is, whether or not some other (lower) apportionment to the usual 90:10 split would be just and reasonable and/or whether the residential element is self-contained.

[section 44]

She was originally advised, incorrectly as it turns out, that there was no way of avoiding the VAT on the purchase price (despite later finding out that certificate 1614D could be used to disapply the option to tax, thereby avoiding payment of VAT on the purchase price).

I wouldn't read too much into this. While technically a VAT1614D can be given unilaterally before the price is fixed, clearly a potential seller is not compelled to sell or could re-negotiate the price. In circumstances such as this, VAT is going to be a cost and the only question is who effectively bears it. It would be too simple to think that but for want of a VAT1614D the seller would take the VAT hit (claw-back of previously recovered VAT and/or irrecoverable VAT on deal costs).

[CLW]

Thanks for your further comments, Section 44

Whilst I accept that if the vendors stands to lose out (in terms of claw-back of previously recovered VAT and/or irrecoverable VAT on deal costs) they may well want to negotiate the price accordingly if the cert 1614D is presented prior the price fixing, at least if the cert had been presented at the proper time then we would have been made aware of this potential cost, if any and could have negotiated accordingly.

As I understand it, the Vat claw-back that the vendor may stand to lose by (voluntarily) accepting the certificate is restricted to that incurred on the sale and any other Vat reclaimed in the last "Vat" year (partial exemption year? - Not having operated a Vat registered business before I am unclear as to the exact period or how it is calculated/nominated, but I'm assuming it's akin to the companies chosen tax year?) Am I correct in this assumption?

I'm a little confused as to why in your previous post the answer was "Yes" and in your recent post you say "Practically I do not see any VAT paid on the purchase price being recovered." ?

The Contract (accepted as of the gavel fall) states that 90% Vat is due (the commercial / pub element) the remaining 10% being the residential part. As the residential comprises 1 floor and the commercial 2 floors this is clearly not an equitable split, but I believe the 90/10 split is the norm for pubs and that apart from contract stating the 90/10, I wouldn't have thought HMRC (presuming it would be HMRC to whom we'd have to appeal) would be too amenable to any adjustment as it would be against there interests. Yes/no?

The flat is on the first floor and is only accessed by walking through 10m or so of the pub and has no other reasonable access (apart from a ladder to a window!) the flat is self contained although the kitchen currently has no appliances in it. I presume they belonged to the previous tennants who have removed them, but I suppose there is a possibility that they never used the pub kitchen instead.

Many Thanks, CLW