VATLP22340 - Option to tax: supplies not affected by an option: buildings used for both commercial and residential purposes
Where a taxpayer has opted to tax a building which consists of both commercial and domestic accommodation, such as a pub or shop with living accommodation above, the option to tax will disapply on the part being used as a dwelling. The taxpayer must apportion the rental income/sale proceeds between the standard rated commercial element and the residential element
The residential part will generally be exempt, unless the grant qualifies as a zero rated first grant of a major interest in a new dwelling. In relation to pubs it is the normal industry practice to treat 10% of the value as relating to the supply of domestic accommodation. Such treatment has been accepted by HMRC (though no formal agreement exists). There will be exceptions to this, most notably where pubs are operated on a lock-up basis or where the 90/10 split is clearly inappropriate. Similarly, the sale of a farm will normally have to be apportioned between the exempt farmhouse used as a dwelling and the standard-rated farmland and farm buildings.
If the part of the building designed for domestic use is intended to be used for business purposes, such as a flat over a shop which is to be used exclusively as a storeroom or office, the whole supply is standard rated.