VAT on pub sales – New law update

A recent tribunal case indicates that the '90:10' rule commonly adopted for pub rents and pub sales will not always be correct.

The '90:10' approach allocates 10% of the price to the residential element – the 'pub manager's flat'.  Residential property is exempt from VAT on both rents and sales.

A split of 33% to residential was adopted in Matthews v HMRC, based on surface area of the pub premises.  

Why was a different approach taken in this case?

The starting point is that the '90:10' rule is not set out in any legislation.

A flat will be exempted from VAT even if the rest of the pub is opted to tax.  When sold together for a single total price, this is treated as a 'mixed supply' for VAT purposes.  Accordingly, an apportionment is required.

Where there is a mixed supply, an apportionment can be made between VATable and exempt elements based on their market  value, or their original cost, or another method 'so long as it gives a fair result'.

The standard value to the manager's flat of 10% has been justified in the hospitality industry based on the nuisance factors of living above pub premises, usually with no direct access.  It is based on valuation work carried out by the Brewer's Society in the 1980s.

In any event, an apportionment has to be made.  It is usually uneconomic to commission formal valuations. Accordingly the 90:10 ratio has formed a useful rule of thumb.  However cracks in this industry standard have appeared previously.  In the 2012 Enterprise Inns case the taxpayer already sought a different treatment – on appeal the Upper Tribunal found that other ratios were quite possible where agreed contractually (but on the facts Enterprise lost, as they had been invoicing for many years on the 90:10 basis).

Such a rule of thumb may survive for trading pubs with flats above accessed through the pub premises, making exceptions where there are particularly valuable flats, or poor pub premises. 

If you have any questions or would like more information, please contact one of our specialists below.

Author: Samuel Dooley

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Abigail Dry


I am a Partner in the Real Estate team based in the Liverpool office.


Tom Hubbard


I am an Associate at DWF's Liverpool office in the Real Estate team.