A client has acquired a large house with a detached garage. He intends to live in the house but would like to convert the garage into a separate dwelling and sell it. Please can you confirm that the sale will qualify for zero-rating as a non-residential to residential conversion and therefore that my client will be able to register for VAT to recover the input tax incurred on the conversion costs?
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.