HMRC have republished Revenue and Customs Brief 13 (2016), first issued on 23 August 2016.  

The construction of new dwellings or the conversion of non-residential buildings into a dwelling benefit from advantageous VAT treatment (zero-rating) in a way that does not apply to a residential renovation or redevelopment.  However, HMRC has always been strict in interpreting what is a dwelling and this can cause problems and trip up many developments. Revenue and Customs Brief 13 (2016) removes one of these problems.  

Historically, HMRC has accepted that one building may contain several dwellings, each of which benefits from zero-rating.  However, where a residential property is spread over more than one building, HMRC has, historically, refused to accept that there is a dwelling. 

According to the HMRC VAT Construction manual (VCONST14120), "A dwelling consists of self-contained living accommodation when the basic elements of living (sleeping, washing, preparation of food, and so on) are located together within a defined area ...".  On a strict reading of HMRC's interpretation of this requirement to date, a property that has only an outside toilet ("privy") would not have constituted a dwelling because the building did not include one of the most basic "so on"s.  Whilst the days in which properties do not contain an indoor privy are hopefully long gone, there are cases where a property is spread across more than one building.  This can be as a design feature (such as was the case for Mr Catchpole where additional bedrooms were contained in a nearby building) or possibly it is because a group of small outbuildings are being preserved but converted into a single residence.  Fortunately, this unfortunate position has now been resolved.  

HMRC's change in policy is to be welcomed as a sensible change in approach.  It was a little odd that separate sleeping accommodation for your car (ie a garage) benefited from zero-rating but sleeping accommodation for members of your family did not.