A. You are correct in thinking that the first grant of a major interest (freehold sale or lease of more than 21 years) in a dwelling that has been converted from a non-residential building can be zero-rated, thus enabling a business to register for VAT and claim full input tax recovery on the costs.
However, to qualify as a non-residential conversion the building being converted must never have been used as a dwelling or for a relevant residential purpose; or if previously residential, in the 10 years immediately before the sale, not have been used as a dwelling or for a relevant residential purpose.
The conversion of a garage, which has been occupied together with a dwelling, into a building designed as a dwelling is thus not a non-residential conversion unless the dwelling in question has been empty for 10 years or more. The legal reference is Note 8 Group 5 Schedule 8 VAT Act 1994 which states: “References to a non-residential building….do not include a reference to a garage occupied together with a dwelling.
This means that if a non-residential conversion has not taken place the sale of dwelling will be exempt from VAT. If your client does not make any other taxable supplies your client will not be able to register for VAT. If your client does make taxable supplies he will be able to register for VAT but the input tax will be non-recoverable unless it falls within the partial exemption de-minimis limits.
If you have clients that are constructing, converting or renovating residential properties for rent or sale why not contact the VAT Advice Line on 0844 892 2470 to discuss the implications. Our team of experts have a wealth of experience in land and property issues and can also provide a written consultancy service at £180 per hour plus VAT.
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