England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
ON APPEAL FROM THE VAT & DUTIES TRIBUNAL

		Royal Courts of Justice Strand, London, WC2A 2LL
		22nd July 2005

Lord Justice Ward :
 


Introduction

1. Hopwood Hall used to be a residential school owned and run by the Nottinghamshire County Council for boys aged 10 to 16 who had behavioural difficulties and special needs. Latterly the boys attended the school as weekly boarders accommodated in bedrooms or dormitories on the first floor of the main building and an extension connected to it. The kitchen, dining room and laundry were on the ground floor as were the educational areas such as the classrooms, craft rooms, gymnasium and reception areas. At night the pupils were supervised by members of the staff who, when on duty, slept overnight in staff bed sitting rooms on the first floor adjacent to the dormitories. At the outside corner of the basically L-shaped main building was the so-called Head's Flat, a self-contained maisonette with kitchen and living rooms on the ground floor and bedrooms on the first floor. The school closed down in 1995.
2. The property was acquired by Mr Ivor Jacobs and builders instructed by him converted the school into a family home which has been described by the Value Added Tax & Duties Tribunal as "quite magnificent". It is now an imposing mansion with accommodation for the family, guest accommodation, a "sleep-over room" for children, an orangery, an indoor swimming pool and Jacuzzi, and "an impressive array of sporting and leisure facilities". Importantly for the purposes of this appeal, three self-contained staff flats were constructed as part of the conversion of the first floor. The conversion involved very substantial building works and must have cost a small fortune.
3. Mr Jacobs claimed a sum in excess of £300,000 for the VAT paid in respect of this conversion omitting from the claim any tax relating to the work on the upper floor of the old school buildings described as the "former relevant residential accommodation." The Commissioners of Customs & Excise (as they were then) refused it. He appealed. On 13^th February 2004 the Manchester VAT & Duties Tribunal whose Chairman was Lady Mitting allowed his appeal. The Commissioners then appealed. On 22^nd October 2004 Evans-Lombe J. disagreed with part of the Tribunal's reasoning but broadly speaking dismissed the appeal, his judgment now being reported as Customs & Excise Commissioners v Jacobs [2004] EWHC 2358, [2004] STC 1662. The Commissioners have now appealed to us.

The VAT scheme.

4. As is well known a taxable person is obliged to account for and pay VAT on the supply by him of any goods and services but he is entitled to deduct from the VAT payable – the "output tax" – the amount of VAT – the "input tax" – allowable on the supplies of goods or services to him if made in the course of his business.
5. If the business in which the taxable person is engaged is the construction of a building used for residential purposes, then the disposal of the property would ordinarily not be a taxable supply but an exempt supply. The United Kingdom has preferred to retain a system of zero-rating set out in the case of the construction of buildings in Group 5 of Schedule 8 of the VAT Act 1994. The European Commission does not much like this system of zero-rating but in E.C. Commission v United Kingdom [1988] STC 456, the Court of Justice rejected the Commission's argument that it should be permitted only in the case of housing constructed by a local authority. The Court held that the United Kingdom had not contravened Article 17 of the E.C. Council Directive 67/228 because:-

"36. … The measures adopted by the United Kingdom in order to implement its social policy in housing matters, that is to say facilitating home ownership for the whole population, fall within the purview of 'social reasons' for the purposes of the last indent of art 17 of the Second Directive."

6. It is, however, also settled case law (see most recently E.C. Commission v Republic of Finland [2004] STC 1232, paragraph 33) that:-

"the terms used to specify the exemptions which constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person must be interpreted strictly".

Transactions falling within Group 5 do constitute such an exception and consequently Group 5 must be interpreted strictly.

7. When the builder or developer sells the building in the course of his business, he can recover his input tax if he can bring himself within Group 5. The so called do-it-yourself householder who is not engaged in the building business would not ordinarily be entitled to deduct the input tax because he is treated as the ultimate consumer who has to bear the burden of VAT himself. That may be harsh, especially if he employs builders to do the work for him. No doubt to alleviate that hardship Section 35 of the VAT Act 1994 allows him to claim a refund of VAT in certain circumstances. The issue in this appeal is whether Mr Jacobs can bring his claim within Section 35 of the Act.

The material provisions of the VAT Act 1994.

8. Omitting the immaterial parts, Section 35 provides as follows:-

"Refund of VAT to persons constructing certain buildings.

(1) Where –

(a) a person carries out building works to which this section applies,

(b) his carrying out of the works is lawful and otherwise than in the course or furtherance of any business, and

(c) VAT is chargeable on the supply, acquisition or importation of any goods used by him for the purposes of the works,

the Commissioners shall, on a claim made in that behalf refund to that person the amount of VAT so chargeable.

(1A) The works to which this section applies are –

(a) the construction of a building designed as a dwelling or number of dwellings;

(b) the construction of a building for use solely for any relevant residential purpose or relevant charitable purpose; and

(c) a residential conversion.

…

(1D) For the purposes of this section works constitute a residential conversion to the extent that they consist in the conversion of a non-residential building, or a non-residential part of a building, into

(a) a building designed as a dwelling or number of dwellings;

(b) a building intended for use solely for a relevant residential purpose; or

(c) anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings.

…

(4) The Notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group."

9. Item number 1 of Group 5, the group which deals with "Construction of buildings, etc." relates to the first grant by a person:-

"(b) converting a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings or a building intended for use solely for a relevant residential purpose, of a major interest in, or in any part of, the building, dwelling or its site."

10. The following Notes to this group are relevant for our purposes:-

"(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied –

(a) the dwelling consists of self-contained living accommodation;

(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

(c) the separate use, or disposal of the dwelling is not prohibited by any term of any covenant, statutory planning consent or similar provisions; and

(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.

(4) Use for a relevant residential purpose means use as –

(a) …

(d) residential accommodation for students or school pupils;

…

(g) an institution which is the sole or main residence of at least 90% of its residents,

except use as a hospital, prison or similar institution or an hotel, or similar establishment.

…

(7) Subject to Note (9) below "non-residential" in relation to a building or part of a building means -

(a) neither designed nor adapted for use as a dwelling or number of dwellings nor for a relevant residential purpose, …

(9) The conversion, other than to a building designed for a relevant residential purpose, of a non-residential part of a building which already contains a residential part is not included within items 1(b) or 3 unless the result of that conversion is to create an additional dwelling or dwellings."

Section 35 as applied in Customs & Excise Commissioners v Blom-Cooper [2002] EWHC 1421 (Ch) [2002] STC 1061 and on appeal [2003] EWCA Civ 493 [2003] STC 669.

11. This was the first and so far as we know the only authoritative decision on section 35. It was heard during the course of the proceedings before the Tribunal and the Tribunal delayed its decision to await its outcome.
12. Sir Louis and Lady Blom-Cooper purchased a former public house for conversion into a family dwelling. The first and second floors had been used as residential accommodation but no part of the cellar, the ground floor and the third floor attic space had been so used. Their claim for a refund of VAT was disallowed by the Commissioners, allowed by the Tribunal, affirmed in the High Court but disallowed by the Court of Appeal. In the High Court Peter Smith J. rejected the Commissioners' argument that the requirements in section 35(1D) were not satisfied unless the effect of the works is that the non-residential part is, itself, converted into a dwelling. He held that it was enough if the building had comprised a non-residential part which was the subject of conversion works, provided that, after conversion, the building (taken as a whole) was a building designed as a dwelling. The Commissioners did not pursue their appeal against that finding. It was, however, accepted by counsel for the Commissioners that the appeal could not succeed unless Note 9 to Group 5 could be invoked. The judge had held that Note 9 had no application to the construction of section 35(1D).
13. On appeal Chadwick L.J. with whom Potter L.J. and Black J. agreed held as follows:-

"22. It follows, as it seems to me, that on the facts in the present case, the only answer that can be given to the question "into what has the non-residential building or non-residential part of the building (in relation to which the works have been carried out) been converted?" is "a building designed as a dwelling" within para. (a) of s. 35(1D). In particular, the answer to that question cannot be "[something] which would fall within para. (a) … if different parts of [the] building were treated as separate buildings". The reason is that, if different parts of the building at 1 Southgate Road were treated as separate buildings, none of those "separate buildings" would fall within the description "a building designed as a dwelling" set out in Note (2) to Group 5. On the facts in the present case, para. (c) of s. 35(1D) can have no application.

26. … the purpose and effect of Note 9, in conjunction with Note 7 is to give a restricted meaning to the expression "converting [or conversion of] … a non-residential part of the building" for the purposes of Group 5 of Schedule 8. The Notes, taken together, have the effect that, where (before conversion) the building already contains a residential part, the conversion of a non-residential part will not be treated as "converting [or conversion of] … a non-residential part of the building" for the purposes of Group 5 unless the result of that conversion is to create an additional dwelling or dwellings.

27. If, on a true analysis, the purpose and effect of Note 9, in conjunction with Note 7, is to give a restricted meaning to the expression "converting [or conversion of] … a non-residential part of a building" for the purposes of Group 5 of Schedule 8, then the same restrictive meaning must be given to that expression for the purposes of section 35(1D). That is what section 35(4) plainly requires. The words of the section are, "[t]he Notes to Group 5 … shall apply for construing this section as they apply for construing that group". The effect of s. 35(4) and Note 7 and 9, taken together, is that, where (before conversion) the building already contains a residential part, the conversion of a non-residential part will not be treated as "converting [or conversion of] … a non-residential part of a building" for the purposes of s. 35(1D) unless the result of that conversion is to create an additional dwelling or dwellings.

30. In a case where the works consist in the conversion of a non-residential part of the building, para. (c) of s. 35(1D) will be in point if, but only if, the effect of "treating different parts of [the] building … as separate buildings" is that one or more of those parts (treated as a separate building or buildings) would fall within paras. (a) or (b) of s. 35(1D). For that condition to be satisfied, the effect of treating a part of the building as a separate building must be that the (hypothetical) separate building would (for example) be "a building designed as a dwelling"; that is to say, that the hypothetical separate building will meet the requirements in Note (2) to Group 5 of Sch. 8. And, if that condition were satisfied, then it seems to me inevitable that, in a case where the actual building, taken as a whole, had (before conversion of the non-residential part) already contained a residential part, conversion of the non-residential part would result in the creation of an additional dwelling. At the least, I cannot conceive of circumstances in which it would not do so. It follows that, on the facts, Note (9) would not require a restricted meaning to be given to the expression "conversion … of a non-residential part of the building" in a case in which para. (c) of s. 35(1D) were in point. But that is not this case."

14. This case does not answer the question which falls for consideration in this appeal, namely whether that additional dwelling or dwellings must be created in the non-residential part alone or in the building as a whole.

The Tribunal's decision.

15. The Tribunal set out carefully how, after a fire in 1957 destroyed the original turn of the century Hall, it was replaced by a two storey so called "CLASP building", an acronym for Consortium Local Authority Special Projects, whatever that might mean. The new building retained its link to the extension which had been constructed in 1947. From their study of the various plans, the Tribunal found the following:-

"14. …the extension housed, on the ground floor, the kitchen, hall, dining room, library and craft and classrooms and, on the first floor, medical rooms, a nursery and a limited amount of residential accommodation. The first floor of the CLASP building was devoted entirely to residential accommodation comprising dormitories, bathrooms and several staff bed-sits. The ground floor accommodated in the main reception area, reception rooms and craft and classrooms. …

16. Later the Tribunal said in paragraph 53:-

"With regard to the staff flats, it is clear from our findings of fact (paragraph 14) which are drawn from the plans and the oral evidence that they were created out of what originally had been entirely residential – the upper floor of the far wing of the old CLASP building. This had originally housed dormitories, bathrooms and staff bed-sits."

17. Dealing with the conversion of the Head's flat, they said:-

17. The area of the new house which requires specific mention is that which has been erected in what was the far wing of the old CLASP building. The corner area which had housed the head's flat is now, on the ground floor, a games room and the wing beyond separated by a covered entrance which in effect is a drive through to the courtyard, is stabling. On the first floor, over the games room is what Mr Jacobs describes as a "sleepover room" containing eight sets of bunk beds and over the stables are three staff flats."

18. As to the use made of the head's flat they found:-

"34. … The [flat] clearly has all the facilities for everyday living and must be a dwelling. In that it contained all of those facilities within itself, it is a self-contained dwelling. It has its own external front door on the ground floor but there is also internal access to the rest of the school at ground and first floor levels. We therefore find that in the head's flat there was, within the building as a whole, a part of the building which was designed as a dwelling. …

38. We therefore find as a fact that the head's flat was used as a dwelling …"

19. On the other hand, dealing with the staff bed-sits they found:-

"33. … the staff bed-sits were clearly not dwellings and so we find the plans indicate they contained a washbasin but there was no further evidence of any description that they contained any facilities beyond that – in particular no W.C. or cooking facility."

20. It had been argued by the Commissioners that the building was not non-residential because it fell within paragraph (d) or (g) of Note (4). They rejected both submissions. It was not used for residential accommodation for school pupils because:-

"30. … Hopwell Hall in our view and on the evidence in front of us was [primarily a school]. The children attended Hopwell Hall to be educated to be taught. … Because the children boarded, residential accommodation was provided for them but the provision of such accommodation does not render Hopwell Hall itself "residential accommodation". We … find that the building was first and foremost a school and that residential accommodation served as a secondary function – to accommodate the children who were being educated there. Put another way the purpose of the totality of the building, or the use to which it was put, was to educate the children and to accommodate them and such of the supervisory staff as were necessary while they were being educated. The building was not therefore as a whole residential accommodation but included within it was a element of such. Those parts which we would class as residential were the dormitories or the bedrooms, the staff bed-sits, bathrooms and toilet facilities, kitchen, dining room and laundry."

21. The Tribunal held that Hopwell Hall was not used as a institution which is the sole main residence of at least 90% of its residents because:-

"26. No boarding school child, except in the rarest of circumstances, sees school as his home or main residence. His main residence is where he returns for the holidays or weekends, usually his parents' home."

22. Dealing with the question whether Mr Jacobs had carried out a residential conversion they found:-

"46. It is quite clear in this case that that which has been converted is the whole building – not just a part. The original structure was gutted and out of it was created a dwelling house. We are therefore not dealing with the conversion of a part of building.

47. The question then becomes whether that which has been converted – i.e. the entire original building – was non-residential. "Non-residential" is defined by Note 7. The building must neither have been designed or adapted as a dwelling nor for a relevant residential purpose. … We have already found as a fact that Hopwell Hall did not fall within [Note 4(g) or Note 4(d)] and was not therefore adapted or designed for a relevant residential purpose. The Commissioners have never contended that the building was designed as a dwelling, which despite the headmaster's flat in one corner of one wing, it clearly was not. There was, as we have found, elements of the building which would have been residential but we are considering the building in its entirety because it is the entire building to which the works of conversion were carried out. What was converted was a building which was primarily a school, and the headmaster's residence and the boys' residential accommodation were ancillary to that main purpose. The residential accommodation within the school was a functional and necessary adjunct to the main purpose of the school. We therefore find that Hopwell Hall was, before conversion, a non-residential building."

23. The Tribunal dealt with the main question which troubles us in one sentence at paragraph 54:-

"We do not believe Note 9 is applicable, dealing as it does with the conversion of a part building, rather than the whole building with which we are dealing."

24. They therefore allowed the appeal and held that Mr Jacobs was entitled to recover the input tax which he claimed.

The judgment of Evans Lombe J.

25. He decided as follows:-

"17. It seems to me that notwithstanding the description of the staff bedsits in the last sentence of para. 30 above and also the description in para. 53 of the decision of the upper floor of the far wing of the CLASP building as "entirely residential", the Tribunal has found at para. 33 that the staff bedsits were "non-residential" within the meaning of Note (7)(a). The staff were not "students or school pupils" within Note (4)(d).

23. … having regard to their finding that Hopwell Hall contained Residential accommodation" ["Residential" being used by him and by counsel to denote parts of the building which do not fall within the statutory definition of "non-residential"] in the form of the headmaster's flat and areas used for a "relevant residential purpose" within Note (4) namely the residential accommodation of "school pupils", that the Tribunal's "whole building" approach to their decision and, in particular, Note (9) was inconsistent with the Court of Appeal's judgment in the Blom-Cooper case by which I am bound. …

24. It follows, in my judgment, that, following the Court of Appeal's decision in the Blom-Cooper case and contrary to the conclusion of the Tribunal, Note (9) applies in the present case. However the result of the application of Note (9) on the facts of the case is different. That is because, on the findings of the Tribunal, Mr Jacobs's conversion of Hopwell Hall produced additional dwellings in addition to a home for himself, namely, the staff flats.

25. It was argued on behalf of the Commissioners that those flats could not constitute additional dwellings within Note (9) because they resulted from the conversion of what had previously been Residential accommodation … It was argued that the additional dwellings had to result from "that conversion" which could only refer to a conversion "of a non-residential part of the building".

26. I am not convinced by this argument. It seems to me to be open to construe "the conversion" at the beginning of Note (9) to mean the conversion which actually took place, namely in this case, the conversion of the whole building so that the Note only makes VAT irrecoverable if an additional dwelling does not result from it, notwithstanding that the additional dwelling may have been created from a part of the building which was previously residential. This seems to me to be more consistent with the policy of the 1994 Act contained in s. 35 and with the passages in the judgment of Peter Smith J and the Court of Appeal …

27. But even if I am wrong about that it is clear to me that at least two of the staff flats which resulted from the conversion, which the Tribunal has found to constitute dwellings in Note (7) (a) were constructed, at least in part, from areas of Hopwell Hall which the Tribunal have found to be "non-residential". It follows on the facts of this case that Note (9) does not preclude Mr Jacob from recovering so much of the VAT payable by him in respect of goods and services referable to his conversion of those parts of Hopwell Hall which were "non-residential" in their previous use. (See the definition of "Works" in the first two lines of s. 35(1D)). It follows that tax paid in respect of goods and services supplied for the conversion of the headmaster's flat and the boys' accommodation must be excluded from recovery, the latter by reason of the combination of Note 4(D) and Note 7(A) when applied to the words "a non-residential" part of a building in s. 35(1D).

28. The broad effect of this conclusion is that this appeal must be dismissed. However the effect of it may produce a somewhat different result to that thrown up by the Tribunal's decision. As I understand it Mr Jacobs has not claimed the recovery of VAT referable to the conversion of the first floor of the CLASP building. On my conclusion this was generous however it may be that his claim extends to other parts of the building in particular the ground floor part of what was the headmaster's flat and other parts which were previously occupied by kitchens, dining rooms, bathrooms, lavatories etc. comprising accommodation for the boys within Note 4(D)."

Discussion.

26. Simplifying the facts we have here an original building part of which (the classrooms and associated teaching parts) were "non-residential" within the meaning given to that word by Note (7). It follows that the other part of the building had ex hypothesi to be Residential, i.e. not non-residential. (There is a separate dispute about the classification of the staff bed-sits but I will return to that later). In the course of the conversion the CLASP building was stripped to its steel structure and as far as the extension was concerned, the external walls, some internal walls and the roof structure was retained but much was razed to the ground and rebuilt. After the conversion the new building contained, as had been designed for it, four dwellings, the mansion itself and the three staff flats.
27. The appeal centres on how Note (9) is to be applied to those facts. Mr Mantle for the Commissioners contends that the principal issues which arise are these. The first and key issue is whether the words "that conversion …" towards the end of Note (9) should be construed to refer to "the conversion of the whole building" or to the "conversion of a non-residential part of a building". His answer is that the relevant conversion is the conversion of the non-residential part. His second issue is whether to be an additional dwelling created as required by Note (9) it must be shown that the dwelling results exclusively from the conversion of the non-residential part of the building or whether it is sufficient that only part of it results from the conversion of the non-residential part. His answer is that the additional dwelling must be created entirely out of the non-residential part.
28. His skeleton argument cogently states the "Practical Impact of the Two Construction Issues" in a way which is worth repeating:-

"39. Note 9 requires that the result of that conversion, within the meaning of the Note is to create an additional dwelling or dwellings. When the whole of a building, which contains a non-residential part and a Residential part is converted, a dwelling may be created in any one of three ways. A dwelling may be created:-

(1) By conversion of the whole (or part) of the Residential part with no non-residential part used in making the dwelling;

(2) By a conversion of the whole (or part) of the non-residential part, with no Residential part used in creating the dwelling;

(3) By a conversion of the whole (or part) of the Residential part together with the whole (or part) of the non-residential part, using both Residential and non-residential part to make the resultant dwelling.

40. The key issue determines whether, to count as a resultant additional dwelling for the purposes of Note 9, a dwelling:-

a) Can be created as described in (1), or (2), or (3) in the preceding paragraphs; or

b) Has to be created either as described in (2) or (3).

41. The second construction issue determines whether, to be a resultant additional dwelling for the purposes of Note 9, a dwelling:-

a) Can be created as described in (2) or (3) or

b) Has to be created as described in (2).

38. (sic). The judge's approach to the key issue on the construction of Note 9 has the practical result that a dwelling can be an additional dwelling for the purposes of Note (9), even if created exclusively from a Residential part as at paragraph 40(a) above. It is the widest possible construction."

29. The resolution of this dispute is important to the Commissioners and in the grand scheme of things much more is at stake than the not inconsiderable claim made by Mr Jacobs.
30. I do not find the solution at all easy. To remind myself of Note (9), it provides:-

"The conversion, other than to a building designed for a relevant residential purpose, of a non-residential part of a building which already contains a residential part is not included within items 1(b) or 3 unless the result of that conversion is to create an additional dwelling or dwellings."

31. I have no difficulty in concluding that the words "that conversion" refer back to the conversion which was the subject of the preceding words, namely, "the conversion … of a non-residential part of the building which already contains a residential part". It is important not to limit the ambit to the conversion of a non-residential part. One must not forget that the works qualifying for a refund are works to the non-residential part of a building, being a building which perforce contains two parts, the "non-residential part" as well as the "residential part". Subject to making that point I agree with Mr Mantle.
32. There is also, in my judgment, no difficulty in concluding as a matter of language that the conversion ("that conversion"), the result of which must be to create an additional dwelling or dwellings, is the conversion of the non-residential part of the building which already contains a residential part. But that is not to say that an additional dwelling has to be created from the non-residential part, as Mr Mantle contends. The language informs one of the result that has to be achieved but it throws no light on how or where that result is to be achieved. A literal interpretation does not answer what to my mind is the crucial question: must the additional dwelling or dwellings be created (either entirely or in part) in the non-residential part of the building or in the building as a whole. So the crucial question not answered by the language of Note (9) is where must that additional dwelling or dwellings be created.
33. To get to that answer I believe one must begin at the beginning. Note (9) is to be read as if it were part of section 35. It is section 35 as a whole which has to be construed.
34. Looking at section 35(1D) these points seem to me to emerge:-

i) The first is that the works constitute a residential conversion to the extent only that they consist in the conversion of a non-residential (part of a) building. If and to the extent that the works consist in the conversion of what is not non-residential, then those works are outside the scope of the subsection.

ii) Secondly the conversion qualifies not only when converting the whole of a non-residential building but also when converting a non-residential part of the building. If part is non-residential the other part must be treated as Residential, i.e., not non-residential.

iii) Thirdly the conversion qualifies if it has any one of three results set out in (a), (b) or (c), namely (a), a building designed as a dwelling or a number of dwellings, or (b), a building intended for use solely for a residential purpose or (c), anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings. In this case we are not concerned with (b) and (c).

iv) Fourthly, section 35(1D)(a) needs more analysis. It covers two types of conversion. The first is the conversion of a non-residential building. It is easy enough to see when a non-residential building is converted into a building designed as a dwelling or number of dwellings. There is an old building and after conversion a new building and the question is simply whether the new building is designed as a dwelling or number of dwellings. The building itself remains the same: it is its use which has been changed. But paragraph (a) also applies to the extent that a non-residential part of the building is converted. The question then arises, "Into what is that part to be converted?" The clear answer given by the language of the subsection is that just as in the case of the conversion of the building itself, the part of the building likewise has to be converted into a building designed as a dwelling or number of dwellings. Paragraph (a) does not require the part of the building to be converted into a part of the building designed as a dwelling. The subsection does not say that. Words would have to be written in to give it that meaning. It seems to me therefore that on the proper construction of paragraph (a) it is enough if the non-residential part is converted into, that is to say changed in its character and made part of, the new building which results from the conversion and it is in the building as a whole that one must look to find whether it - the building as a whole - has been designed as a dwelling or number of dwellings.

35. Thus it seems to me, still confining the analysis to s. 35(1D) only and without yet reaching Note (9), that the relevant questions would be:-

i) Was Mr Jacobs converting a non-residential part of the old school?

ii) Was he converting that part i.e. changing the character of that part so that a new building emerged which was designed as a number of dwellings?

iii) What extent of the total works consist in the conversion of the non-residential part?

36. Those questions have to be answered bearing in mind the help that can be given by the Notes to Group 5 in the construction of section 35 because that is what section 35(4) requires. Applying the Notes:-

i) By virtue of Note (2) the building will be designed as a number of dwellings if each of them at least consists of self-contained living accommodation with no provision for direct internal access from the dwelling to any other dwelling. On the facts of this case it is now common ground that the new Hopwood Hall was designed as four dwellings.

ii) By virtue of Note (7) and for the moment reading it without regard to Note (9) to which it is subject, at least part of the old school will be non-residential if it is neither designed nor adapted for use as a dwelling nor used for a relevant residential purpose.

iii) The head's flat cannot be a non-residential part of the school because it was designed as a dwelling. The staff bed-sits were not found to be dwellings but they could still be Residential parts.

iv) Parts of the old school were used for a relevant residential purpose as defined in Note (4). The dormitories, bathrooms and lavatories, dining room and kitchen, and the laundry were found to be used as residential accommodation for the pupils. There is, as I have said, a separate issue about the use of the staff bed-sits.

v) And now we get to Note (9).

37. The first thing to observe about Note (9) is that it has limited application. The conversion to a building designed for a relevant residential purpose is excluded from the ambit of its operation. In other words a conversion within the meaning of s. 35(1D)(b) is excluded. Note (9) is clearly aimed at the conversion taking place under s. 35(1D)(a) because both are concerned with the conversion of a non-residential part into something which includes dwellings. As I have interpreted section 35(1D) unaffected by Note (9), the works qualify as a residential conversion of part of a building if the building as a whole is designed as a dwelling or number of dwellings. Note (9) restricts that interpretation as has been held in the Blom-Cooper case. The converted building must have an additional dwelling and must not end up with the same number of dwellings as it had before the conversion.
38. As section 35(4) makes the notes apply for construing the section, one could easily paste the notes in as separate subsections of section 35. They should be so read in order to construe the section as a whole. So the scheme of section 35 is to limit its application by subsection (1A) to a residential conversion which is defined in subsection (1D). Thus "The conversion", the opening words of Note (9), link back to the "residential conversion" already referred to in (1A) and 1(D). "The conversion" in Note (9) is "The conversion … of a non-residential part of a building which already contains a residential part" which links the note to s. 35(1D)(a) because both are dealing with the conversion of a non-residential part as I have already indicated. Thus one would expect the additional dwelling or dwellings required by Note 9 to be found in the building as a whole in the same way as paragraph (a) has to be understood and not in the non-residential part of the building as Mr Mantle urges.
39. In my view the weakness of Mr Mantle's argument is that he gives no weight or meaning to the word "additional" in Note (9). It is in my view the crucial word. The result of the conversion of the non-residential part of the building which already contains a residential part must be to create an additional dwelling or dwellings and the vital question is: additional to what? It must be additional to what is there already. One cannot have a dwelling additional to the non-residential part which is being converted because it would not be a non-residential part if it already contained a dwelling. A non-residential part and a part which already contains a dwelling are mutually exclusive concepts. The dwelling has to exist outside the area contained within the non-residential part. It must therefore be a dwelling to be found in the building as a whole.
40. In my judgment Note (9) has to be construed so that the result of the conversion is to create in the building an additional dwelling or dwellings. One counts the number of dwellings in the building before conversion and again after conversion. If there are more on the recount, Note (9) is satisfied. If that is so then Mr Jacobs is entitled to his refund and the Commissioners' appeal must be dismissed.
41. I do not find that an unpalatable conclusion. Zero-rating of works of construction and conversion is authorised by Article 17 of the Second Directive and Article 28(2) of the Sixth Directive so long as the statutory measures are taken only "for clearly defined social reasons and for the benefit of the final consumer". The Court of Justice has held in EC Commission v UK, as I have set out, that "facilitating home ownership for the whole population" falls within the purview of "social reasons", not just the creation of local authority housing. Here three staff flats have been created in addition to the mansion for Mr Jacobs. I do not see that this takes too broad a view of the purpose which s. 35 is to meet even bearing in mind the need strictly to construe it.

What about the staff bed-sits?

42. The judge seems from paragraph 17 of his judgment to be finding some ambivalence on the part of the Tribunal in defining the character of the staff bed-sits. I do not see it. Paragraph 30 of the decision was concerned with whether the school as a whole was being used for a relevant residential purpose under Note (4)(d) and they concluded that the school as a whole was not "residential accommodation". Only parts of it were used for a relevant residential purpose on their findings, which are findings of fact which should not be interfered with, in paragraph 30 namely:-

"Those parts which we would classify as residential were the dormitories or the bedrooms, the staff bedsits, bathrooms and toilet facilities, kitchen, dining room and laundry."

43. Paragraph 33 of the decision dealt with a quite different point, namely whether or not the staff bed-sits could be classified as additional dwellings to the head's flat. The Tribunal held they could not be so classified and held that the old school had but one dwelling designed within it, namely the head's flat. If and insofar as the judge was excluding the staff bed-sits from being part of the "residential accommodation for students or school pupils" within Note (4)(d), on the basis that staff were not students or school pupils then of course I would agree with him that the staff could not be so called. But the relevant question is not whether the staff can be included within the meaning of "school pupils", but rather whether the staff bed-sits form part of the residential accommodation for the pupils. "Residential accommodation" is surely not confined strictly and only to the bedrooms or dormitories in which the pupils sleep. It is not challenged, for example, that their bathrooms and lavatories must be included. It is not challenged that the kitchen and dining room is included. It is not even challenged that the laundry forms part of their residential accommodation. In my judgment residential accommodation must embrace all that is ordinarily included in the accommodation in which they are residing and residential accommodation for young children, these boys ranging in age from 10 to 16, has to include accommodation for those who have to be on duty at night to supervise and care for them.
44. It does not seem to me that this misunderstanding by the judge makes any difference to Mr Jacob's claim because, as I understand it he never has claimed a refund in respect of the works on the first floor which he does not assert to have been works to a non-residential part of the old school. If it is necessary to deal with this part of the appeal I would allow it but would seek counsel's help in drawing the order that will follow. I would, if it helps, add that since the Head's flat was a dwelling and so not non-residential, that too cannot be included in the claim, if indeed the claim extends to it. To that extent the claim may need adjustment. As for the staff flats in the new mansion, they are all on the first floor as appears from paragraph 17 of the Tribunal' decision and so also outside the claim submitted by Mr Jacob. I do not understand the judge's concerns expressed in paragraph 27 of his judgment and do not see how they impinge on the validity of the claim. In default of agreement - which I hope will be possible given the years that have passed since the claim was submitted - the Tribunal will have to assess the amount of the refund in the light of our judgment.

Conclusion.

45. On the main issues which have engaged us, I would restore the decision of the Tribunal though for the different reasons I have given.

Lord Justice Clarke :

46. I agree.

Lord Justice Laws:

47. I also agree.