A Direction was issued whereby HMRC were required to lodge with the Tribunal two copies of a bundle incorporating inter alia all the documents on which each party intended to rely.  Two copies were duly lodged with the Tribunal. 

(A) Items 1-7, comprising the Notice of Appeal.

(B)       Items 8 -16 comprising HMRC Statement of Case and the disputed decision of 5 May 2010.

(C) Items 17-51 comprising copy correspondence.

(D) Items 52-96 comprising plans, Planning Permission (2), Completion Certificate, record of enquiry to Contact Centre, completed Application Form and blank Form VAT 431NB with notes.

(E) Items 97-107 comprising s35 Value Added Tax Act 1994 and Group 5 of Schedule 8.

(F) Items 108-113 comprising the following Reports

Material Facts

(1)        Mr Phillips’ parents, Ian Robertson Phillips (“Mr Phillips Senior”) and Mrs Elizabeth Mary Phillips (“Mrs Phillips Senior”) bought an area of land on the Black Isle (approximately 20 miles north of Inverness) in 1974.  In 1976 Mr Phillips Senior built two small chalets on the ground.  Mr Phillips Senior and Mrs Phillips Senior operated the business, known as Wester Brae Highland Lodges, for many years before being able to extend and build a further two chalets.  The success of the business continued and latterly they owned and operated seven chalets.

(2)        In early 2003 Mr Philips and his wife decided to return to the Highlands to assist in the running of the business.  There was an area of land adjacent to his parent's home and on 27 February 2004, they made a planning application to The Highland Council, the local planning authority, to build a dwellinghouse.

(3)         Outline planning permission (reference 04/00189/OUTRC) was granted by The Highland Council on 11 August 2005 with a number of conditions attached.  In particular, condition 3 required that  

Prior to the issue of approval of any Reserved Matters Application to follow hereon, the proprietors shall enter into an agreement with the Planning Authority under Section 75 of the Town and County Planning Act (Scotland) 1997.  Specifically this agreement shall cover A) Restriction on further development B) Restriction on the holiday chalets being sold off individually and restriction on the holiday chalets being sold off independently from the house hereby approved.  This Agreement shall be in respect of the entire family holding in the vicinity of the site.

Reason - In order that the Planning Authority can retain effective control over the site in recognition of the substandard nature of the access.

(4)        A detailed planning application was made on 22 March 2007. 

(5)        On 10 August 2007, Mr Phillips Senior and Mrs Phillips Senior conveyed to Mr Phillips, a plot of ground extending to 0.680 hectares, being the site of the proposed dwellinghouse.  The plot of ground is adjacent to the subjects on which the chalets are situated.

(6)        An application was made to The Highland Council (reference 07/00283/FULRC) to vary the outline consent reference 04/00189/OUTRC by removing the aforesaid condition.

(7)        On 6 February 2008, Mrs Phillips Senior entered into a Minute of Agreement wherein she and her successors in ownership were described as “the proprietor”.  Condition (FIRST) of this Minute of Agreement declared that:-

The House shall be occupied, and the Proprietor will ensure that the house is occupied, only by persons engaged in the management or operation of the existing holiday chalet letting business operating on the Subjects together with their family members or other persons normally resident with them.  

(8)        The Highland Council granted detailed planning permission on 18 February 2008 (reference 07/00283/FULRC).  The detailed planning permission was subject to the following condition:-

1.  That the house subject of outline planning permission reference 04/00189/OUTRC shall be occupied only by persons engaged in the management or operation of the business trading as Wester Brae Highland Lodges, together with family members.

Reason - To accord with the terms of the planning permission and the legal agreement dated 6th February 2008.

(9)        Mrs Phillips Senior subsequently conveyed the site of the proposed dwellinghouse to Mr Phillips and his wife.

(10)     Mr Phillips commenced building the house to become known as Ardachy.

(11)     When the construction was nearing completion Mr Phillips reviewed the information within HMRC guidance note VAT 431 NB and sought advice from HMRC.  He spoke to an HMRC representative on 5 January 2010

(12)     The Highland Council issued their Acceptance of a Completion Certificate on 27 January 2010.

(13)     By letter dated 15 February 2010 Mr Phillips wrote to The Highland Council requesting clarification as to whether the house could be used separately from the business, to which The Highland Council replied on 9 March 2010 as follows:-

As you will be aware, the terms of the Section 75 Agreement that was negotiated with you in 2008 are that the house shall be occupied and the proprietor will ensure that the house is occupied only by persons engaged in the management or operation of the existing holiday chalet letting business together with their family members or other persons normally resident with them:

The agreement does not prevent severance of the house from the business but it clearly requires the occupants to be engaged in the management or operation of the chalet business.  The terms of the agreement therefore suggests that the house cannot be used separately from the business.

You imply in your letter that while you and your family have taken residence in the house but are not involved in the operation of the business.  I am advised that this would appear to be in breach of the agreement and the terms of the planning permission.  I would be obliged if you would explain the circumstances to me.

Mr Phillips wrote to confirm that the booking and reservation records for Wester Brae Highland Lodges were administered by his wife; and The Highland Council responded on 8 April 2010 to the effect that that this was sufficient to satisfy the terms of the Section 75 Agreement and the relative planning permission.

(14)     In the meantime, on 30 January 2010, Mr Phillips had submitted a form 431NB containing his VAT Claim for a total of £20,618.81.

(15)     By letter dated 5 May 2010, HMRC rejected the claim.

(16)     Mr Phillips requested an independent review.  There was a further exchange of correspondence and by letter dated 20 August 2010, the claim was again rejected.

(17)     Mr Phillips issued a Notice of appeal on 9 September 2010.

Legislation

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

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

(c) a residential conversion.

(1B) For the purposes of this section goods shall be treated as used for the purposes of works to which this section applies by the person carrying out the works in so far only as they are building materials which, in the course of the works, are incorporated in the building in question or its site.

(1C) Where—

(a) a person (`the relevant person') carries out a residential conversion by arranging for any of the work of the conversion to be done by another (`a contractor'),

(b) the relevant person's carrying out of the conversion is lawful and otherwise than in the course or furtherance of any business,

(c) the contractor is not acting as an architect, surveyor or consultant or in a supervisory capacity, and

(d) VAT is chargeable on services consisting in the work done by the contractor, the Commissioners shall, on a claim made in that behalf, refund to the relevant person the amount of VAT so chargeable.

(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 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 a building were treated as separate buildings.

Schedule 8 ZERO-RATING: GROUP 5) CONSTRUCTION OF BUILDINGS, ETC.

The grant by a person—

(a) constructing a building—

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

(ii) intended for use solely for a relevant residential or a relevant charitable purpose; or

(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.

The supply in the course of the construction of—

(a) a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose; or

(b) any civil engineering work necessary for the development of a permanent park for residential caravans, of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.

The supply to a relevant housing association in the course of conversion of a non-residential building or a non-residential part of a building into—

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

(b) a building or part of a building intended for use solely for a relevant residential purpose, of any services related to the conversion other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.

The supply of building materials to a person to whom the supplier is supplying services within item 2 or 3 of this Group which include the incorporation of the materials into the building (or its site) in question.

Notes:

(1) “Grant” includes an assignment or surrender.

(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 term of any covenant, statutory planning consent or similar provision; 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.

Submissions

Occupancy restrictions do not prevent the separate use or disposal of a dwelling. They are not, therefore, prohibitions within the meaning of Note (2)(c) of Schedule 8 to the VAT Act 1994 and do not affect whether a building is “designed as a dwelling”.  Common examples of occupancy restrictions include those that limit the occupancy of a dwelling to persons working in agriculture or forestry, or persons over a specified age.  However, where a restriction goes beyond identifying a particular class of person and ties the use of a dwelling to, for example, a commercial activity being carried out in another building, this is a prohibition within the meaning of Note (2)(c) to Group 5 of Schedule 8 to the VAT Act 1994 and the dwelling is not, therefore a building designed as a dwelling.

And after considering the specific circumstances of Ardachy, the letter concluded:

The terms of your planning consent clearly restrict the occupancy of Ardachy to persons engaged in the management or operation of a particular business, (Wester Brae Highland Lodges), together with their family members/other persons normally resident with them, rather than to a particular class of person.

In response to which Mr Phillips suggested, after noting that agriculture and forestry are common examples of occupancy restrictions, that his occupancy condition also defines a class of person, namely "a tourist industry worker".

A building is not `designed as a dwelling or number of dwellings' when it is prohibited from either separate:

use as a dwelling; or

disposal.

For example, this condition applies to exclude `granny' annexes constructed in the grounds of a main house. It can also be found where a dwelling cannot be used or sold separately from other premises, such as a caretaker's house at a school.

Often the prohibition only prevents the building being used as a separate dwelling.  Although a separate disposal could still be made, such as to another family member, the prohibition on separate use means that the Note 2(c) condition would have been broken and the building is not `designed as a dwelling or number of dwellings'.

Occupancy restrictions do not prevent the separate use or disposal of a dwelling.  They are, therefore, not Note 2(c) prohibitions.  Examples include restrictions that limit occupancy to people:

working, or last working, in the locality in agriculture or in forestry, or a widow or widower of such a person, and to any resident dependents; or

over a certain age.

With reference to the foregoing, Mr Phillips submitted that that the condition detailed within the planning permission for Ardachy complied with this (occupancy) category as his wife was working in the locality of the holiday letting business.

19.    Mr Phillips also sought to distinguish the case of Paul Cussins which HMRC had identified in their letter of 5 May 2010.  In that case, the specific wording of the condition attached to the planning permission had been "The residential accommodation hereby permitted shall only be occupied in conjunction with the commercial use hereby approved.  Reason - The site lies in an area where new residential development is restricted".  HMRC's decision to reject Mr Cussins’ claim was upheld by the Tribunal, but Mr Phillips distinguished this case in that Mr Cussins’ business and the residential accommodation were located within the same converted barn whereas Ardachy is totally separate from the Highland Lodge accommodation.  Also, Mr Cussins owned both the residential and commercial parts of the dwelling, and it was established (at paragraph 10 of the report that the occupation of the residential accommodation could not be separated from the commercial use of the business premises.

The phrase 'excluding ... the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function' in Article 13.B(b)(1) of the Sixth Directive introduces an exception to the exemption which Article 13.B provides for the leasing or letting of immovable property.  It thus subjects the transactions to which it refers to the general rule laid down in the Directive, namely that VAT is to be charged on all taxable transactions, except in the case of derogations expressly provided for. That phrase cannot therefore be interpreted strictly.

The wording of Condition 8 to our mind established a close nexus between the residential and commercial premises and taken in the context of the Published planning policies of Ryedale District Council and the reason for the decision as clearly stated this defines the domestic enjoyment as conjoined together with the commercial.

And Ms Tilling submitted that where, as in the present case, a property may only be occupied by a person who works in a specific identified business and it is known that but for that particular business the property could not have been built there, then that is a condition of significantly different character to an occupancy condition.

Reasons

(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) …………………………..

(b) ………………………….

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

The House shall be occupied, and the Proprietor will ensure that the house is occupied, only by persons engaged in the management or operation of the existing holiday chalet letting business operating on the Subjects together with their family members or other persons normally resident with them.

The wording attached to the grant of planning permission slightly differs in that there is no stated obligation on the proprietor

the house ………………shall be occupied only by persons engaged in the management or operation of the business trading as Wester Brae Highland Lodges, together with family members.

The essential element in each case is that there is a positive obligation on one or more of the occupants of the house to be engaged to a greater or lesser extent in the management of Wester Brae Highland Lodges.  There is no obligation which requires the house to be used in the management of the same. 

The agreement does not prevent severance of the house from the business but it clearly requires the occupants to be engaged in the management or operation of the chalet business.  The terms of the agreement therefore suggests that the house cannot be used separately from the business.

The second sentence implies that the house had to be used in connection with the business, but it is significant that when it was subsequently explained that Mrs Phillips administered the booking and reservation records for Wester Brae Highland Lodges, The Highland Council accepted that that this was sufficient to satisfy the terms of the Section 75 Agreement and the planning permission.

Occupancy restrictions do not prevent the separate use or disposal of a dwelling.  They are not, therefore, prohibitions within the meaning of Note (2)(c) to Group 5 of Schedule 8 to the VAT Act 1994 and do not affect whether a building is “designed as a dwelling”_.  Common examples of occupancy restrictions include those that limit the occupancy of a dwelling to persons working in agriculture or forestry, or persons over a specified age.

Significantly, the examples in document V1-8A extended to

to people: working, or last working, in the locality in agriculture or in forestry, or a widow or widower of such a person, and to any resident dependents.

However, where a restriction goes beyond identifying a particular class of person and ties the use of a dwelling to, for example, a commercial activity being carried on in another building, this is a prohibition within the meaning of Note (2)(c) to Group 5 of Schedule 8 to the VAT Act 1994 and the dwelling is not, therefore, a building “designed as a dwelling”.

But this comment has to be considered in the context that it is dependant on the same word “use” as appears in Note (2)(c).  The Tribunal heard that it was only Mrs Phillips that was engaged in relation to the business.  Her work was confined to the administration of the booking and reservation records.  There was no indication whether this work was carried out from the house or elsewhere, and indeed there was no obligation that Ardachy had to be used in any way in connection with the business. 

19. The building, Benaiah, was located in the countryside outside the built up area of Southwell.  The development was subject to strict planning control which required a special justification for its construction.  The Planning Inspector who granted permission for the development was satisfied that such a justification existed, namely, that there was a clear functional need for a full-time worker to be in sight and sound of the cattery.  The Inspector found that the cattery business was well-established, profitable, and financially sound.  Further he decided that the cattery could not be run from the other properties on the orchard owned by Mr Wendels' mother and brother because the properties had no functional relationship with the business. The Planning Inspector concluded that the need for a full-time worker at the cattery and the unavailability of suitable alternative accommodation constituted a special justification for the dwelling in relation to prevailing policies on residential development in the countryside.

The opinion of the Tribunal was

45. In the Tribunal's view the question whether the separate use or disposal of Benaiah was prohibited by the relevant planning consent should be determined by the proper construction of the wording of that consent, not by the extraneous circumstances surrounding the granting of the consent.  Note 2(c) uses the phrase that the separate use, or disposal of the dwelling is not prohibited by the term of any statutory planning consent..  The wording of the planning condition imposed in respect of the development of Benaiah restricted the occupation of the dwelling to a person solely or mainly employed or last employed in the cattery business or a widow or widower of such a person, or any resident dependent.  The condition correctly construed placed no prohibition or even a restriction on the separate use and disposal of the property.  The condition was in all respects an occupancy condition.

46. The Tribunal considers it helpful to compare the wording of the condition imposed on Benaiah with that considered by the Upper Tribunal in Lunn which was: "the development hereby permitted shall only be used for purposes either incidental or ancillary to the residential use of the property known as Radbrook Manor and shall not be used for commercial".  It is clear from the wording of the Lunn condition that the use the disputed development was subservient and connected to the residential use of the larger development known as Radbrook Manor.  In contrast the condition imposed on Benaiah did, not link its use or its disposal with the cattery business.  The condition imposed related to the category of persons occupying the property, and in no way restricted its separate use or disposal as a dwelling house.

JOHN M BARTON, WS

TRIBUNAL JUDGE

RELEASE DATE: 7 June 2011