Taxman Clobbers Granny

A Tribunal has ruled that the conversion of a barn into a granny-annex was subject to VAT because the annex could not legally be sold separately from the main house. New residential buildings are normally zero-rated but conversions and the like are subject to VAT at 20%.

In Gerrard Silver v HMRC the Silver family owned a listed building called Home Farm. There was a barn in the grounds of the building that had previously been used for chicken and duck pens and as a workshop. The family obtained planning permission to allow the conversion of the barn into a "granny annex" for Mr Silver's mother to live in. Permission was granted subject to a condition (the Planning Condition) that:

"the development hereby permitted shall not be used other than for the purposes of ancillary residential accommodation to the adjacent farmhouse known as "Home Farm" without the prior written consent of the Local Planning Authority."

Unfortunately, Mr. Silver's mother died before the barn conversion was completed.

Mr Silver claimed refund of the VAT incurred in respect of the conversion works under what are known as the DIY relief provisions, which apply where works are carried out otherwise than in the course of a business. However, the relief is only available in the case of a building "designed as a dwelling".

The Tribunal dismissed Mr Silver's appeal against HMRC's refusal of his claim. It ruled that the fact that the Planning Condition restricted use to "ancillary residential accommodation to the adjacent farmhouse" meant that the separate use or disposal of the barn as a dwelling was prohibited. The building was not "designed as a dwelling" within the meaning of the legislation. The Tribunal commented that matters such as separate house numbers or council tax registrations, or even future occupation in breach of the Planning Condition were irrelevant to the question as to whether a building was designed as a dwelling.

Although this decision concerned the DIY relief provisions, it has a wider significance. The same rule - that there must be no prohibition on the separate use or disposal of the relevant building - also applies to the zero rating of the construction of new dwellings. The decision highlights the importance of the wording of a planning consent in relation to the VAT recovery position and the fact that this issue needs careful consideration at the outset of development.

To find out more, please contact Caroline Wilton or Martin Banham-Hall.

Filed: 10/11/2011 13:57:33