[2011] UKFTT 528 (TC)
TC01375
Appeal number
LON/2009/0573
LON/2009/0647
Appeal
against decision by HMRC that construction work carried out should be standard
rated for VAT purposes because the new structure was an extension or enlargement
to an existing building – the new structure was a building joined
to the original on both floors with internal access for staff throughout –
appeal dismissed
FIRST-TIER TRIBUNAL
TAX
(1)
TL SMITH PROPERTIES LTD Appellants
(2) TREGWILYM LODGE LIMITED
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL: S.M.G.RADFORD (TRIBUNAL JUDGE)
M.TEMPLEMAN
Sitting in public at 45 Bedford Square, London WC1 on 13 July 2011
Mr Richard Barlow for the
Appellant
Mr David Bedenham, instructed
by the General Counsel and Solicitor to HM Revenue and Customs, for the
Respondents
© CROWN COPYRIGHT
2011
DECISION
1. This
is an appeal against a decision by HMRC dated 2 February 2009 that VAT at the
standard rate was chargeable on certain construction work performed by TL Smith
Properties (“TLSP”) for Tregwilym Lodge Ltd (“TLL”) (together “the Appellants”).
2. The
Appellants appealed on 3 March 2009 on the basis that the decision was
incorrect and the construction supplies qualified for zero rating.
Background and facts
3. TLSP
is a building contractor registered for VAT with effect from 1 February 1998.
4. TLL
owns and operates a residential care home for the elderly and also a nursing
home catering for elderly people with mental infirmity or dementia and is not
registered for VAT.
5. In
an email dated 16 December 2008 TLSP’s representative sought clearance from
HMRC that construction work which they had performed for TLL was zero-rated for
the purposes of VAT.
6. On
2 January 2009 HMRC wrote to TLSP requesting the plans relating to the
construction work. These were provided by TLSP’s representative on 7 January 2009.
7. On
2 February 2009 HMRC replied to TLSP informing it that HMRC did not consider
that the work undertaken satisfied the statutory test for zero rating and it
was therefore liable for VAT at the standard rate.
8. TLSP
and TLL each filed separate notices of appeal in respect of this decision on 3 March 2009.
9. On
7 April 2009 a clerk of the Tribunal directed that these appeals be
consolidated.
10. Mr Brian
Rosenberg, managing director of TLL gave evidence for the Appellants.
11. He confirmed
that previously the care home had no nursing services. It provided board and
lodging and the personal, social and healthcare needs of the residents were
provided by the district nursing team and community psychiatric nurses via the
general practitioner.
12. He stated that
demand for residential care services had always been high in the Newport area. However as the residents became more frail it became clear that the district
nursing team could not meet all their needs. As a result the residents had to
be reassessed and transferred to homes with nursing services which was
difficult for them.
13. It was therefore
decided that following the grant of planning permission a new build nursing
facility would be built alongside the existing residential care home.
14. Construction
commenced in April 2008 and the two existing houses on the site were
demolished. The development of the new nursing facility also involved the
construction of new kitchen and laundry facilities.
15. Mr Rosenberg
described the new structure in accordance with the plan provided and explained
that because all the residents had a primary diagnosis of dementia and were
moderately to extremely confused they were very vulnerable. Security and safety
were therefore of the essence and there were swipe cards for access to the
various areas which were provided only to the staff.
16. The old kitchen
was replaced with new equipment and was developed on the edge of the newly
built nursing facility and serviced both the needs of the nursing home and the
residential care home. Entry and exit from the kitchens is by swipe cards.
17. He stated that the
new laundry was between the nursing home and the residential home and also
accessed by swipe card.
18. Mr Rosenberg
confirmed that although the original plan was to have just one main entrance
through the new structure because this was what the regulator wanted, in the
event the old entrance to the residential home was kept and is used as an
entrance and exit by visitors to this facility.
19. Mr Rosenberg stated
that the residential service and the nursing service were run as two distinct
and very separate businesses with different staff. The only common denominator
to both were the kitchens, laundry and registered manager who had an office in
the new building (with access to the residential home by swipe card) and who in
regulatory terms had responsibility for both services.
The Legislation
20. Section 30 of the
Value Added Tax Act 1994 (“VATA”) provides as far as is relevant
(1)
Where
a taxable person supplies goods or services and the supply is zero-rated, then,
whether or not VAT would be chargeable on the supply apart from
this section—
(a)no VAT
shall be charged on the supply; but
(b)it shall
in all other respects be treated as a taxable supply;
and accordingly the rate at which VAT is
treated as charged on the supply shall be nil.
(2)
A
supply of goods or services is zero-rated by virtue of this subsection if the
goods or services are of a description for the time being specified in Schedule
8 or the supply is of a description for the time being so specified
21. Group 5 of
Schedule 8 of VATA which relates to zero rating provides as far as is relevant:
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…
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
22. The notes to
Group 5 of Schedule 8 of VATA provide as far as is relevant:
(4) Use for a
relevant residential purpose means use as—
(a)….
(b)
a home or other institution providing residential accommodation with personal
care for persons in need of personal care by reason of old age, disablement,
past or present dependence on alcohol or drugs or past or present mental
disorder;
(c)
a hospice;
(d)….
(e)….
(f)….
(g)
an institution which is the sole or main residence of at least 90 per cent. of
its residents,
Except
use as a hospital, prison or similar institution or an hotel, inn or similar
establishment.
(12)Where
all or part of a building is intended for use solely for a relevant residential
purpose or a relevant charitable purpose—
(a)a
supply relating to the building (or any part of it) shall not be taken for the
purposes of items 2 and 4 as relating to a building intended for such use
unless it is made to a person who intends to use the building (or part) for
such a purpose; and
(b)a
grant or other supply relating to the building (or any part of it) shall not be
taken as relating to a building intended for such use unless before it is made
the person to whom it is made has given to the person making it a certificate
in such form as may be specified in a notice published by the Commissioners
stating that the grant or other supply (or a specified part of it) so relates.
(16)For
the purpose of this Group, the construction of a building does not include—
(a)
the conversion, reconstruction or alteration of an existing building; or
(b)
any enlargement of, or extension to, an existing building except to the extent
the enlargement or extension creates an additional dwelling or dwellings; or
(c)
subject to Note (17) below, the construction of an annexe to an existing
building.
(17)Note
16(c) above shall not apply where the whole or a part of an annexe is intended
for use solely for a relevant charitable purpose and—
(a)
the annexe is capable of functioning independently from the existing building;
and
(b)
the only access or where there is more than one means of access, the main
access to:
(i)
the annexe is not via the existing building; and
(ii)
the existing building is not via the annexe.
(18)A
building only ceases to be an existing building when:
(a)
demolished completely to ground level; or
(b)
the part remaining above ground level consists of no more than a single facade
or where a corner site, a double facade, the retention of which is a condition
or requirement of statutory planning consent or similar permission.
Appellant’s Submissions
23. Mr Barlow
submitted that TLL operated the residential care home separately from the
nursing facility and the regulation of the two was quite different. This
influenced the design of the new structure.
24. The new building
was designed solely for a relevant residential purpose under paragraph 2 Group
5 of Schedule 8 of VATA.
25. The care home
was the old building and the nursing home was new. Both fell within Note 4 of
the notes to Group 5 Schedule 8 at 4(b) and (g) and 12 (a) and in his
contention the new structure was not within Note 16(a) or 16(b). In the
Appellants’ contention the new structure was not an enlargement or extension of
the old building as contended by HMRC.
26. Mr Barlow
submitted that it was necessary to look at the building as a whole. He referred
to the case of Customs and Excise Commissioners v London Diocesan Fund [1993]
STC 369 in which Mc Cullogh J held that whether the work constituted an enlargement
of an existing building was to be determined by looking at that question as a
matter of fact and degree considering the work as a whole and that the starting
point was to look at the building before any work commenced.
27. He submitted
that in the London Diocesan Fund case the judge referred to the three
stage test derived from the Tribunal decision in the St Andrew’s Building Co
Ltd case. This is (i) was there an existing building prior to the
commencement of any works; (ii) was there still an existing building once any
projected demolition involved had been carried out; and (iii) was the completed
building to be described as the conversion, construction, alteration or
enlargement of the existing building.
28. He submitted
that it was not the intention of the legislation that every new structure that
abutted an old building should be treated as an extension.
29. He referred to
the HMRC letter dated 2 February 2009 and said that their view was wrong. For
security reasons there was no unimpeded link between the two buildings and
although in the plans there was to be only one main entrance in fact the
original entrance had remained albeit with a new front door.
30. He submitted
that it was irrelevant that the new structure could not be disposed of
separately because the law made no rule about that and in any event all that
would be needed was to block the joining corridors.
31. He referred to
the case of Cantrell and another v Customs and Excise Commissioners [2000]
STC 100 and Same (No 2) STC in which the Vice Chancellor said that it
was legitimate to look beyond the physical characteristics.
32. Mr Barlow
submitted that in any event the physical characteristics showed that it was
quite clearly a new structure.
33. On the facts it
was quite clear that some connection between the buildings was not enough to
dislodge the fact that it was a new structure.
34. In Cantrell No
2 the Vice Chancellor agreed with Lightman J that at least where the
physical characteristics of a building are relevant to the uses to which it can
be put, those characteristics are relevant to deciding the question whether the
new building is an annexe of the old. Mr Barlow contended that the same would
apply to the question of whether the new structure was an extension or
enlargement of the old building.
35. In summary the Appellants
contended that the new structure was not substantially physically connected to
the existing building; the new structure was considerably larger than the
existing building; it was intended to be used as a separate nursing home
distinct from the existing building which is a residential home; the new structure
was self-contained and functioned independently from the existing residential
home; the new structure employed its own more highly qualified staff and the
new structure’s distinct purpose as a separate nursing home was separately
registered.
36. There was no
free flowing between the buildings. As a result of the vulnerability of the
residents the law did not allow it.
HMRC’s Submissions
37. Mr Badenham
submitted that the London Diocesan Fund case was a 1993 case and pre
VATA. There were different provisions and demolition was not relevant.
38. He submitted
that having regard to the physical nature of the relationship between the
original building and the new structure there was a substantial link between the
two.
39. They were linked
by a corridor on the ground floor which provided a permanent access from the
existing building to the new structure intended for routine use by staff. By
virtue of this neither structure could be disposed of separately. Both buildings
shared a common kitchen, laundry and plumbing facilities.
40. Mr Badenham
contended that Cantrell No 1 was the case on point. Cantrell No 2 was
an annexe case and so not relevant.
41. Mr Badenham
submitted that the appropriate test was that enunciated by Lightman J in Cantrell
No 1:
“The two stage test for determining whether the works
carried out constituted an enlargement, extension or annexe to an existing
building is well established. It requires an examination and comparison of the
building as it was …before the works were carried out and the building or
buildings as they will be after the works are completed and the question then
to be asked is whether the completed works amount to the enlargement of or the
construction of and extension or annexe to the original building (see Customs
and Excise Comrs v Marchday Holdings Ltd [1997] STC 272. I must however add a
few words regarding how the question is to be approached…First the question is
to be asked as at the date of supply. It is necessary to examine the
pre-existing building or buildings in the course of construction when the
supply is made. What is in the course of construction at the date of the supply
is in any ordinary case (save for the example where a dramatic change is later
made in the plans) what is subsequently constructed. Secondly the answer must
be given after an objective examination of the physical characters of the
building or buildings at the two points in time, having regard (inter alia) to similarities
and differences in appearance, the layout, the uses of which they are capable
of being put and the functions which they are physically capable of performing.
The terms of planning permissions, the motives behind undertaking the works and
the intended or subsequent actual uses are irrelevant, save possibly to
illuminate the potential for use inherent in the building or buildings.”
42. Mr Badenham
dealt with each of Lightman J’s tests in turn.
43. As to the
appearance he submitted that the original building consisted of two floors and
was constructed of red brick with white sash windows directly underneath each
of which there was paintable brickwork. The roof was of black tiles.
44. The addition to
the original building consisted of two floors and was constructed of red brick
with white sash windows directly underneath each of which there was paintable
brickwork. The roof was of black tiles. It was plain from the photographs
supplied in evidence that the new structure and the original building, whilst
constructed at different times, shared significant features.
45. As to the layout
the main entrance to the building after the works were conducted was located in
the new structure and this was where the office of the administrative manager
to both facilities was located.
46. Having entered
through the main entrance the original building was accessible on both floors
albeit with the use of a swipe card only available to the staff. Apart from the
necessity of a swipe card the access was unimpeded. Mr Badenham contended that
the connection between the original building and the new structure was very
different to the position in Chacombe Park Development Services where Mr
Barlow found that
“the linking structure only serves the purpose of a
back-up fire escape from either building to the other”.
47. As to the
function test Mr Badenham submitted that there was a single kitchen and a
single laundry for both buildings and it could not therefore be said that the
addition could operate independently without recourse to the original building.
48. He submitted
that there was also a single administrative office and reception area and again
this was an indication that the two parts of the building could not operate
independently of each other.
49. Further by
virtue of the unimpeded access between the two buildings they could not have
been disposed of separately.
50. He contended
that as per Lightman J the use and the motive were unimportant. One had to
consider what the reasonable man would say.
51. He submitted
that putting aside motive, intention, subsequent actual use and the terms of
the planning permission, the appearance, lay out and functionality of the
building as at the date of supply were such that an educated layman would
describe the new structure as a enlargement or extension of the original
building. The educated layman would, as concluded in HMRC’s decision letter,
view the resulting building “as a single
establishment offering different levels of care rather than two distinct
homes”.
52. One might say
that the new structure was too big to be an extension but it was not enough
just to look at the surface appearance.
Findings
53. We found that the
new structure was an extension or an enlargement of the existing building.
54. We found that
the buildings were linked albeit by doors which could only be accessed by the
swipe cards provided to the staff who had access to all parts of the buildings.
This would include the kitchen staff who would need
such access to serve meals. Presumably other domestic staff such as cleaners
and those who operated the laundry would also need to go backwards and
forwards.
55. Although Mr
Barlow submitted that these links could be blocked off to create two entirely
separate buildings there remained the fact that there was a single kitchen and
a single laundry for both buildings and it could not therefore be said that the
addition could operate independently without recourse to the original building.
56. Looking at the
photographs we found that the new structure had the appearance of being an
extension of the original building. It is physically
joined to the original building, has the same appearance and even includes bay
windows like the original house.
57. In making this finding we did not attach importance
to the reproduction of the same colour of bricks, tiles etc in the new building
as were in the original building as we found it quite usual that the appearance
of houses is matched in certain areas. We found much
of this is to be the requirements of the planners but they quite clearly believed
that what they were sanctioning was an extension and specifically required the
two buildings to be joined as the new construction would otherwise have been
too close to the next houses.
58. There is also a
single administrative office and reception area and we found this an indication
that the two parts of the building could not operate independently of each
other.
59. We considered
the London Diocesan Fund case but did not find it helpful. The new structure
did not just abut the original building. It was joined to it and when
completed, having looked at the original building before work started, could
best be described as an extension or enlargement.
60. We considered Mr
Barlow’s submission that the physical characteristics showed that the new
structure was quite clearly a new building. He contended that the Vice
Chancellor’s agreement with Lightman J in the Cantrell No 2 case, that
where the physical characteristics of a building are relevant to the uses to
which it can be put, those characteristics are relevant to deciding whether the
new building is an annexe of the old, would apply to the question of whether the
new structure was an extension or enlargement of the original building.
61. However,
although the new structure was built for the purpose of accommodating those
residents who needed nursing care, we found that it was a building joined to
the original on both floors with internal access for staff throughout. In
addition key services, kitchen and laundry were shared. We found this made it
an extension or enlargement which was not self contained and nor could it
function independently.
Decision
62. The appeal is dismissed
63. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
TRIBUNAL JUDGE
RELEASE DATE: 4 August 2011
