In Capital Focus Limited v HMRC [2016] UKFTT 0440 (TC), the First-Tier Tribunal ("FTT") has applied a purposive approach in interpreting Schedule 8 of the VAT Act 1994 ("VATA") and has found that a house in multiple occupancy can properly be viewed as a zero-rated dwelling under the legislation. The purpose of the legislation is to zero-rate the creation of new homes where none existed before.
A developer, Capital Focus Limited, purchased a commercial building with the intention of converting it into residential accommodation and then selling it. In general, the disposal of an interest in land is exempt from VAT, but there are a number of exceptions. Under Item 1(b), Group 5 of Schedule 8 VATA, the first grant of a major interest in a non-residential building converted into a building designed as a dwelling (or a number of dwellings) by the person converting it is a zero-rated supply for VAT purposes and any input VAT incurred is recoverable. Accordingly, Capital Focus Limited registered for VAT and sought to recover the VAT it had been charged on the purchase price on the basis that it intended to develop the property and sell it as a single residential unit.
The property was subsequently converted into a residential property with 10 bedrooms, four of which were ensuite with two bathrooms for the remaining six occupants. Each occupant had their own room key, but they shared utility bills and a communal kitchen (although there was nothing to prevent them preparing food in their own rooms).
HMRC denied the developer's claim to recover input tax on the basis that a house of multiple occupancy could not be a dwelling within the zero-rating provisions of schedule 8 VATA and therefore the supply was exempt and any input tax incurred that was directly attributable to it was not recoverable.
The appeal to the FTT concerned the meaning of "self-contained accommodation" in the context of the condition in Note 2(a) to Group 5. However, the FTT held that it was not necessary to reach a conclusion on whether each individual unit within the property consisted of self-contained accommodation because the property as a whole clearly contained the basic elements of living and was therefore a self-contained property in itself.
The real question before the FTT, therefore, was whether a property with multiple occupancy could be a dwelling within the zero-rating provisions.
The FTT noted that although Schedule 8 does not specifically refer to multiple occupancy dwellings, it does not specifically exclude them either. Furthermore, the FTT commented that the zero-rating provision of Item 1(b) is an exception to the general rule that the grant of any interest in or right over land is exempt from VAT. Therefore, the provision does not fall to be construed strictly whereas the exemption does.
The FTT accepted that the purpose of the legislation is to zero-rate the creation of new homes where none existed before. Therefore, applying a purposive construction to schedule 8 VATA, the FTT found that a property with multiple occupancy where people live can be a dwelling within the zero-rating provisions.