England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE VAT & DUTIES TRIBUNAL

		Royal Courts of Justice Strand, London, WC2A 2LL
		22/10/2004

The Hon. Mr. Justice Evans-Lombe :

1. This is an appeal under section 11 of the Tribunals and Inquiries Act 1992 by the Commissioners of Customs and Excise ("the Commissioners") from the decision of the Value Added Tax and Duties Tribunal ("the Tribunal") whereby the Tribunal concluded that the respondent, Ivor Jacobs ("Mr Jacobs") was entitled to obtain a refund of Value Added Tax which he had paid on the supplies of building materials and services used in the conversion of Hopwell Hall into a substantial residence for himself. The hearing before the Tribunal took place over two days on the 21^st January and 1^st March 2002 after which the parties submitted written submissions. On the 12^th July 2002 Mr Justice Peter Smith gave judgment in the case of Customs and Excise Commissioners v Blom-Cooper [2002] STC 1061. That case was also concerned with the recovery of value added tax by a taxpayer incurred in the conversion of a building to residential use, of which the parties to these proceedings seem to have been aware and that the decision in that case would be taken to appeal. On the 2^nd August 2002 the Tribunal published and distributed to the parties its findings of fact as a result of which in September 2002 further written submissions were made by the parties to it. On the 4^th April 2003 the Court of Appeal gave judgment allowing the Commissioner's appeal from the decision of Peter Smith J [2003] STC 669. In consequence of the Court of Appeal's judgment in September and November 2003 the parties, who had been awaiting the Court of Appeal's decision, submitted further written submissions to the Tribunal. On the 13^th February 2004 the Tribunal handed down its decision in favour of Mr Jacobs.
2. Hopwell Hall was purchased by Mr Jacobs in May 1996 from the Nottinghamshire County Council who had themselves purchased it in November 1950. It was a substantial building which was used by the County Council as a residential school for boys between the ages of 10 and 16 with behavioural difficulties. However the school kept normal educational terms with the boys residing at the school in term time only. Until 1986 the boys had stayed in the school seven days a week but after that date the school became a weekly boarding school with all boys going home each weekend. Whilst the boys were in residence they would be cared for by residential childcare staff who would sleep overnight in accommodation set aside for them on the school premises while they were on duty. The County Council purchased what was the original Hall built in about 1900. From time to time thereafter the original building was added to and adapted for the purpose of the school. In 1957 the original Hall was burned down and was replaced by a modern steel and concrete structure on the site of the original Hall called a Consortium Local Authorities Special Projects building known as "The Clasp Building" and is so referred to in the Tribunal's judgment. The Clasp Building was L shaped and built on two stories. The top storey contained bedrooms and bathrooms etc for the boys and also "bed-sit" accommodation for the duty staff. At the corner of the L was a self-contained "maisonette" for the headmaster which extended down to the ground floor. This separate maisonette contained all the features of a house with bedrooms bathrooms a kitchen and living rooms etc inaccessible from the rest of the building save through a separate door at ground floor level. Also included in the building were the normal school facilities for feeding the boys and classrooms and other facilities where they could be taught.
3. As will be seen it was material to the Tribunal's decision how the different parts of Hopwell Hall had been used prior to its purchase by Mr Jacobs and how the residence into which it was converted after that purchase was laid out. For this purpose the Tribunal had before it a series of plans made at different times during the ownership of the County Council and also plans of the building as converted into a residence for Mr Jacobs. The Tribunal also heard oral evidence directed to the same question.

The Relevant Statutory Provisions

4. Section 35 of the Value Added Taxes Act 1994 ("the 1994 Act") provides as follows:-

"35 Refund of VAT to persons constructing certain buildings

(1) Where –

(a) a person carries out 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)…

(b)…

(c) a residential conversion. …

(1D) For the purpose 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 a 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 the 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."

5. Schedule 8 to the 1994 Act when read with other provisions of the 1994 Act, under the heading "Group 5 construction of buildings etc", provides for the zero rating for VAT purposes of the supply by builders to purchasers of newly constructed buildings or new conversions of a "non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings or building intended for use solely for a relevant residential purpose" – see item 1(b) of the Group. In "notes" set out in the text the schedule gives guidance on the construction of its provisions. At note (2) appears a definition of "designed as a dwelling" as follows:-

"(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 the terms 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.

At note (4) appears a definition of "relevant residential purpose" as follows:-

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

(a) a home or other institution providing residential accommodation for children;

(b) …

(c) …

(d) residential accommodation for students or school pupils;

(e) …

(f) …

(g) an institution which is the sole or main residence of at least 90% of its residents;…."

6. It is accepted that the dormitories, bathrooms, kitchens, dining rooms etc used by the boys in terms, though latterly not at weekends, constituted accommodation used for "a relevant residential purpose" within (4)(d).
7. Note (7) defines the term "non-residential" as follows:-

"(7) Subject to Note (9) "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 or for a relevant residential purpose; or

(b) …"

8. Note (9) provides:-

"(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)… unless the result of that conversion is to create an additional dwelling or dwellings."

9. Lord Justice Chadwick sets out the statutory scheme in which section 35 of the 1994 Act is placed in paragraphs 5 – 11 of his judgment in the Blom-Cooper case. For the sake of brevity I will not repeat those paragraphs here but gratefully adopt them. At paragraph 10 he describes the statutory purpose behind section 35 as follows:-

"10 The inclusion of item 1of Group 5 in schedule 8 to the 1994 Act – so making the first grant by a person of a major interest in a building which has been constructed for, or converted to, residential use a taxable supply (albeit zero-rated) - enables a developer who is a taxable person (and who is making such supply in the course or furtherance of his business) to recover as input tax the VAT charged on supplies to him of goods and services. But that, of course, is of no assistance to a person who is carrying out comparable works, but who is not doing so in the course of a business and who (usually) will not be a taxable person. Such a person cannot take advantage of the provisions for the recovery of input tax which are contained in section 25 of the 1994 Act. It is to relieve such a person – a person "carrying out works … otherwise than in the course or furtherance of any business" - of the burden of the VAT charged on supplies to him of goods and services that section 35 has been enacted. That section enables a person who (if he were carrying out the works in the course of a business) would be able to take advantage of the provisions for the recovery, as input tax, of the VAT chargeable on the supply to him of goods and services, but who cannot do so (because he is carrying out those works otherwise than in the course of a business), to claim a refund of the VAT element of monies paid to his suppliers."

10. In the same case at first instance, Peter Smith J was dealing with a submission on behalf of the Commissioners "that for the section (Section 35(1D)) to bite and the refund to occur, the entirety of the dwelling which emerges from the conversion works must be carved out of the non-residential part of the building." He rejected this submission and at paragraph 21, having given examples of the unfortunate effect of such a construction said this:-

"21 These examples show that it cannot have been intended for the statute to operate in that way if there is an easier way. In my judgment there plainly is. The references in section 35(1D) are designed to ensure that if a mixed use building is converted, provided a dwelling house emerges, then relief will be obtained in respect of that part of the building which is converted to a dwelling house use, which was formally not used for residential purposes. Thus in the present case the respondent obtains relief for those parts of the works which were carried out on the non-residential part."

11. In the Court of Appeal at paragraphs 16 and 17 Lord Justice Chadwick deals with the point in this way:-

"16 On appeal to the High Court, the Commissioners challenged the tribunal's decision on two grounds: first, that the requirements in section 35(1D) are not satisfied unless the effect of the works is that the non-residential part is, itself, converted into a dwelling; second, that (in any event) note (9) to Group 5, of schedule 8, requires that the result of the conversion must be to create an additional building.

17 The judge rejected the first of those contentions. 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 whole) was a building designed as a dwelling. As he put it, such a case fell plainly within paragraph (a) of section 35(1D); but "If there was any doubt, the case would fall plainly within paragraph (c)." Although the judge's conclusion on that point was challenged in the appellants' notice as filed, that challenge was not pursued at the hearing. It was accepted by counsel for the Commissioners in this Court that the appeal could not succeed unless note (9) to Group 5 of schedule 8, to the 1994 Act could be invoked."

12. In the Blom-Cooper case the courts were considering the application of section 35 (1D) to the conversion of what had been a public house where the ground floor and basements were exclusively used for the business of selling drink to the public and storage while the first and second floors were used by the publican as residential accommodation entirely separate from the ground floor with a separate entrance. Following its purchase in 1998 the new owner gutted the building and converted all of it to residential use. At paragraph 12 of his judgment Lord Justice Chadwick, considering the second contention contained in the appellant's notice before him, namely, that where the relevant conversion was of a mixed use building note (9) to Group 5 of schedule 8 requires that the result of the conversion must be to create an additional dwelling, said this:-

"12 It is important to have in mind: (i) that Group 5 of schedule 8 to the 1994 Act is to be construed in accordance with the notes contained in schedule 8 – section 96(9) – and, in particular, in accordance with the notes to Group 5 itself; and (ii) that section 35(4) requires that the notes to Group 5 of schedule 8, apply for construing section 35 'as they apply for construing that Group'."

13. He then sets out note (9) to Group 5 (set out above) and continues:-

" In the light of that note, it is beyond argument – as it seems to me – that, if the conversion in the present case had been carried out by a developer in the course of a business (so that Group 5 was directly in point), the conversion would not fall within item 1(b). The result of the conversion has not been to create an additional dwelling."

The Tribunal's decision

14. Note (7) to Group 5 defines the meaning of "non-residential" when that phrase is used in section 35. In order to avoid the awkward phrase "not non-residential" I will describe parts of the building which do not fall within the statutory definition of "non-residential" as Residential. When I use the word "residential" without a capital letter I will be using it in the colloquial sense i.e. not necessarily complying with the definition in note (7)(a) "neither designed nor adapted for use as a dwelling or number of dwellings". It appears to me that some of the difficulties in the present case have arisen from the fact that the Tribunal has used the word "residential" in both the colloquial and technical senses without making it clear in which sense the word is being used.
15. At paragraph 31 of the decision the Tribunal to reject the commissioners' submission that the entire building of Hopwell Hall was, prior to its purchase by Mr Jacobs, used for a relevant residential purpose within the meaning of note (4) to Group 5. Their reasons for doing so are summarised at paragraph 30 of the decision as follows:-

"Because the children boarded, residential accommodation was provided for them but the provision of such accommodation does not render Hopwell Hall itself "residential accommodation". [By using " " the Tribunal were, in my judgment, intending a technical meaning to residential in the context of Note (7)] We accept Mr Barlow's contention and find that the building was first and foremost a school and that the 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 whilst they were being educated. The building was not therefore as a whole residential accommodation but included within it was an 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."

16. The Tribunal then went on at paragraph 32 to consider whether "the building or any part of it was a dwelling or dwellings before conversion" noting that the point arose in relation to the headmaster's flat and the staff bed-sits. In this process they would be guided by note (2) to Group 5. At paragraph 32 and 33 they deal with the latter accommodation in this way:-

"In this context we take the word dwelling to have its ordinary every day meaning and it would contain such facilities as would be required to carry out the "major activities of life, particularly sleeping, cooking and feeding plus toilet facilities"… on this basis the staff bed-sits were clearly not dwellings and so we find. The plans indicate that they contained a washbasin but there was no further evidence of any description that they contained any facility beyond that – in particular no WC or cooking facility."

17. It seems to me that notwithstanding the description of the staff bed-sits in the last sentence of paragraph 30 above and also the description in paragraph 53 of the decision of the upper floor of the far wing of the Clasp building as "entirely residential", the Tribunal has found at paragraph 33 that the staff bed-sits were "non- residential" within the meaning of note (7)(a). The staff were not "students or school pupils" within note (4)(d).
18. Applying the same test of the nature of the accommodation provided, at paragraph 38 the Tribunal found that the headmaster's flat was a separate dwelling and so was "Residential".
19. The Tribunal then proceeded to consider the nature of three staff flats which were created on the first floor of what had been the Clasp building as a result of the conversion by Mr Jacobs. At paragraph 43 the Tribunal "find as a fact that the three staff flats are self contained dwellings and do not have internal direct access to any other dwelling or part of a dwelling." It seems to me to follow from this finding that the staff flats constituted "additional dwellings" within note (9) to Group 5.
20. It seems clear from their decision that the Tribunal realised, although they do not expressly find, that the staff flats were constructed in part, at least, from the part of the Clasp building on the first floor which had previously been used to contain the staff bed-sits. This court is bound by the Tribunal's finding of fact unless they are demonstrably misconceived. I was, however, shown two plans, which were before the Tribunal, of the first floor of the Clasp building one of the layout before the conversion when the building was being used as a school, and one of the layout after the conversion. It seems to me clear from those plans that two of the staff flats included areas previously occupied by the staff bed-sits.
21. Under the heading "final submissions and conclusions" at paragraphs 44 – 55 the Tribunal gave its final decision. The Tribunal's approach was to look first at what had been converted and come to the view that the entirety of the building of Hopwell Hall had been converted into a single dwelling for Mr Jacobs. The Tribunal then continue at paragraph 47 as follows:-

"47 The question then becomes whether that which had 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. The wording of note (7) quite clearly refers back to the precise wording of section 35(1D). It is the building or part building out of which the dwelling is created which, as an entity, has to be non-residential. Miss Graham Wells' [solicitor for the Commissioners at the Tribunal] contention in her original submission was first that Hopwell Hall had to be taken as a whole and secondly that taken as a whole Hopwell Hall was not a non-residential building because the whole building was used for a relevant residential purpose pursuant to either note 4(g) or note 4(d). We have already found as a fact that Hopwell Hall did not fall within either category 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 were, 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 was 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."

22. At paragraph 54 the Tribunal hold note 9 to be inapplicable to this case "dealing as it does with the conversion of a part building, rather than the whole building with which we are dealing."
23. In my judgment, having regard to their finding that Hopwell Hall contained Residential accommodation 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 Appeals' judgment in the Blom-Cooper case by which I am bound. In that case the conversion in question was of the whole building part of which consisted of Residential accommodation. The Court of Appeal held that the conversion on that case had to be treated as the conversion "of a non-residential part of a building which already contains a residential part" within note (9). They therefore allowed the appeal and held that Lady Blom-Cooper was not entitled to recover VAT on supplies of goods and services to her for the purposes of the conversion. This was so because at the end of the conversion only one dwelling emerged and in consequence there was no "additional dwelling" required by note (9) to bring the conversion within item 1(b) of Group 5 and so within section 35(1D).
24. It follows, in my judgment, that, following the Court of Appeals' 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. This 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, which appears to reverse Miss Graham Well's submissions on the facts to the Tribunal recorded in paragraph 51 of its decision. It was argued that the additional dwellings had to result from "that conversion" which could only refer to the 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 that 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 section 35 and with the passages in the judgment of Peter Smith J and the Court of Appeal which I have set out at paragraphs 10 and 11 above.
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 within note (7)(a) were constructed, at least in part, from areas of Hopwell Hall which the Tribunal have found to have been "non- residential". It follows on the facts of this case that note (9) does not preclude Mr Jacobs 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 section 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 section 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). I will hear counsel on the form of order which should follow.