DECISION
Introduction
1.
This decision concerns a claim for a refund of VAT under the “DIY
Builders Scheme” in respect of the conversion of a non-residential building to
a building designed as a dwelling.
2.
The only issue in dispute related to the application of Note 2(c) to
Item 4, Group 5, Schedule 8 of the Value Added Tax Act 1994 (“VATA94”).
3.
That note effectively precludes any relief in relation to the VAT on
materials used in the residential conversion if, inter alia, any term of any
statutory planning consent prohibits the separate use or disposal of the
dwelling.
4.
The present appeal concerns the effect of a particular planning
permission condition in relation to a “live/work” unit. One of two commercial
buildings on a property was converted to a residential dwelling, whilst the
other remained subject to a commercial use planning permission.
5.
The relevant planning permission imposed a restriction on the use of the
continuing commercial building (requiring that it should only be used/operated by
the occupiers of the residential dwelling). The effect of the condition was
that in practical terms it was extremely unlikely that the residential dwelling
would be used or disposed of separately from the commercial dwelling. It did
not however on its face impose any express restriction on the separate use or
disposal of the residential dwelling.
6.
The question for determination in the appeal was therefore essentially
whether the practical effect of the restriction was to impose a prohibition
that should be seen as disqualifying the VAT repayment claim for failing to
satisfy Note 2(c).
The facts
7.
The parties had agreed a short statement of facts. The facts were not
disputed and were quite clear.
8.
The site in question was at Sich Lane, Woodhouses, Yoxall,
Staffordshire. It originally included two separate barn-like buildings for
which there was a class B1 light industrial use planning consent. There was no
physical connection between the buildings, though they were only a short
distance apart on the same curtilage. The properties had been occupied for the
purposes of a small business which had failed. All attempts to re-let the
premises to another business user had failed, over a period of just under
twelve months.
9.
On 27 September 2010 application was made, through an agent, for
planning permission to convert one of the two buildings into a dwelling house;
the other building was to be retained as a commercial building with B1 planning
consent. It was envisaged that the two buildings would be used together as
what is commonly called a “live/work” unit. The Appellant’s wife worked in a
small business which was capable of being run from the continuing commercial
building, and the Appellant envisaged that he and his wife would live in the
newly converted dwelling, with the business being operated from the adjacent
commercial unit.
10.
The planning application was accompanied by a letter from the
Appellant’s agents. They summarised the proposal, emphasising the ways in
which it would accord with the various relevant planning policies. They stated
that “The proposals provide a practical live/work facility ensuring this
presently vacant building is brought into positive use.” They referred to the
residential use as being “associated” with the continuing commercial use. One
of the planning authority’s policies apparently required that “conversion of
buildings to residential use will only be supported where every reasonable
attempt to secure commercial use has been made or where the residential use is
a subordinate use to the commercial use”. The agents addressed that point by
stating “The present proposals retain economic use on site, therefore, even
though the residential use is not subordinate, the live/work facility retains a
significant floor area for commercial activity. Policy is complied with.”
11.
On 16 November 2010 the local planning authority (East Staffordshire
Borough Council – “ESBC”) granted planning permission for the conversion.
There were a number of conditions imposed, the relevant one of which reads as
follows:
“6. The workshop/office within the application site shall
only be used/operated by the occupiers of the dwelling hereby granted
permission.”
12.
The Appellant thereafter commenced the conversion works on the building
intended for residential use, completing those works on 13 July 2011.
13.
In the course of the conversion, the Appellant incurred £40,047.05 of
VAT on materials which were incorporated into the dwelling as part of the
conversion. He made a claim for repayment of that amount on 7 October 2011
under section 35 VATA94, a claim which was refused by HMRC on 11 October 2011.
14.
The essential basis for their refusal was set out in their letter of
that date:
“Because of the above quoted condition 6 from your planning
permission it is not possible to use the dwelling separately from the working
space. As a result your dwelling is not eligible for VAT refund under the DIY
scheme.”
15.
In a further letter dated 3 November 2011, HMRC enlarged slightly on
their reasoning when they said:
“You have stated in your letter that there is no restriction
on the property being sold separately. I agree that there is no specific
condition in the planning permission restricting the separate sale of the
dwelling [from] the workshop/office. However it is clear that the separate use
of the workshop/office from the dwelling is restricted by the terms of the
planning permission.
…..
Although [Condition 6] would seem to only prevent the
separate use if [sic] the office from the dwelling I can only assume
that the same restriction would apply to the use of the dwelling from the
office. The restriction imposed on the planning permission means the dwelling
and workshop/office can only be occupied as a single unit by the occupiers of
the dwelling.”
16.
HMRC were asked to undertake a statutory review of their decision.
Before doing so, they wrote to ESBC in relation to the condition in the
planning permission. Their letter dated 23 January 2012 included the
following:
“The interpretation by HM Revenue & Customs of Condition
6 is that the workshop can only be used by the occupier of the dwelling, but
the occupier of the dwelling is not obliged to use the workshop.
HM Revenue & Customs understand that the Local Planning
Authority consider the two buildings as one live/work unit and would not permit
the separate disposal of the dwelling from the work unit.
If this is an incorrect understanding of the planning
permission clause I would be grateful if you would be willing to provide a full
explanation for the purpose and effect of Condition 6.”
17.
In reply, ESBC sent an email on 27 January 2012, which included the
following text:
“Your interpretation of the planning condition is correct,
and the Local Planning Authority consider the two buildings as a single
live/work unit, and the separate disposal of the dwelling would not be
permitted.”
18.
On 13 February 2012, HMRC issued their statutory review, in which they
upheld their earlier decision. In their letter, they stated the following:
“The planning permission was granted in respect of the conversion
of the workshop (Class B1) to form live/work unit; although the wording
indicates that the workshop may only be used by the occupier of the dwelling,
but the occupier of the dwelling is not obliged to use the workshop, the fact
that the planning permission was granted for one live/work unit does suggest
the intention that it should be considered as such.
…
Your representative considers that the planning condition
places no condition on the use or sale of the dwelling.
Although the wording of the planning condition restricts the
use of the workshop to the occupier of the dwelling, the conversion of the
Class B workshop into a dwelling was granted in relation to the workshop/office
within the application site, which indicates that the two buildings should be
used together as one live/work unit.
The planning permission was not granted in respect of a
dwelling with no connection to another building or use and as such “separate
use” has not been demonstrated.
…
In the alternative, although your representative considers
there would be no condition on the sale of the dwelling, HM Revenue &
Customs consider the two separate buildings are one live/work unit and
‘separate disposal’ of the dwelling from the work unit would not be permitted.
This interpretation has been confirmed with East
Staffordshire Borough Council.
Conclusion
In conclusion, the Officer’s decision to reject of [sic]
the claim as ineligible under the DIY Scheme is upheld: the dwelling in
question may not be used or disposed of separately from the B1 use and as such
the designed as a dwelling conditions of Note 2(c), Group 5, Schedule 8
of the VAT Act 1994 have not been fulfilled.”
19.
The Appellant now appeals against this decision.
The law
20.
This appeal is concerned with a very narrow point of interpretation on
Note 2(c) to Group 5, Schedule 8 VATA94. We do not therefore set out at length
the uncontentious provisions of section 35 and Schedule 8 VATA94.
21.
The key question is whether the property in question was “designed as a
dwelling” for the purposes of section 35(1D)(a) and 35(4) VATA94.
22.
The relevant provisions in Item 4, Group 5, Schedule 8 VATA94 are as
follows:
“Notes –
….
(2) A building is designed as a
dwelling or a number of dwellings where in relation to each dwelling the
following conditions are satisfied –
….
(c) the separate use, or disposal of the dwelling is not
prohibited by the term of any covenant, statutory planning consent or similar
provision”
Arguments
Appellant’s arguments
23.
On behalf of the Appellant, Mr Jones argued that Note 2(c) was quite
clear. It only gave rise to a problem if the planning permission contained a
term which “prohibited” the separate use or disposal of the dwelling.
Condition 6 did not do so. It simply placed limitations on what use could be
made of the remaining commercial building.
24.
Condition 6 could undoubtedly be expected to have the practical effect
that the dwelling would only be sold together with the commercial building, but
there was nothing in Condition 6 that “prohibited” the Appellant (or his successors
in title) from doing anything in relation to the dwelling.
25.
They could, if they liked, sell it and retain the commercial building.
That would give rise to practical problems because it would prevent them from
using or operating the commercial building retained by them – but this was
irrelevant. They were free to leave it vacant and unused if they wished. The
use of the word “prohibited” in Note 2(c) made it quite clear that it was only
if some substantial legal restriction operated to prevent the separate use or
disposal of the dwelling that Note 2(c) would operate to deny the VAT reclaim.
26.
Mr Jones referred us to Simon Jones v HMRC [2012] UKFTT 503
(TC). In that case, an agreement under section 106 of the Town and Country
Planning Act 1990 included provisions which bound the land on which two
buildings stood. The agreement contained a covenant “(a) not at any time to
occupy or allow or permit the occupation of the office other than by an
occupier of the residential premises (“the barn”) and by up to three employees
of the occupier of the barn and (b) not to sell lease or otherwise dispose of
the barn separately from the office and vice versa”.
27.
Simon Jones was decided on the basis that the section 106
Agreement could not, as a matter of law, prevent a separate disposal of
the two parts of the property if the owner so chose. The only question
therefore was whether the condition prohibited the separate use of the
dwelling. The Tribunal held, on the basis that the owner was free to leave the
commercial building unused, that there was no prohibition of any separate use
of the dwelling; effectively, the fact that the owner could not use the
commercial building separately from the dwelling did not mean that he could not
use the dwelling separately from the commercial building – he was always free
to leave the commercial building unused.
28.
In Simon Jones, HMRC had also obtained confirmation from the
local planning authority to the effect that, in their opinion, the relevant
condition meant that “ownership of the residential and commercial premises
could not be split.” The Tribunal gave no weight to that opinion, finding it
to have no legal effect.
29.
Although that case was not binding upon us (as another First-tier
Tribunal decision), Mr Jones invited us to follow the same line of reasoning.
30.
Mr Jones also invited us to disregard the various other authorities
cited by Mrs Payne-Dwyer as being irrelevant. He pointed out that:
(1)
The relevant planning condition in Cussins v HMRC [2008] UKVAT V20541 applied specifically to the residential dwelling (unlike the present
case);
(2)
The planning condition in Oldrings Development Kingsclere Limited v
HMCE [2002] VATD 17769 was entirely different from the present case – it
simply said “[T]he approved domestic studio shall not be used for any
commercial purpose” and the VAT and Duties Tribunal declined to accept the
local planning authority’s interpretation or gloss on the meaning of the
relevant condition;
(3)
The planning condition in Kear v HMRC [2013] UKFTT 095 (TC) also
specifically applied to the residential premises:
“The residential floorspace of the livework unit shall not be
occupied other than by a person solely or mainly employed or last employed in
the business occupying the business floorspace of the unit, a widow or widower
of such a person, or any resident dependents.”
This meant that Kear was entirely irrelevant to
the present case.
(4)
In Gardiner v HMRC [2012] UKFTT 726 (TC), the main concern
appeared to be whether the building work was done for business or non-business purposes.
The terms of the relevant planning condition were only peripherally considered
as part of an entirely different argument, namely whether the repayment claim
failed because it was incurred “in the course or furtherance of any business”
pursuant to section 35(1)(b) VATA94.
HMRC’s arguments
31.
On behalf of HMRC, Mrs Payne-Dwyer argued that the two parts of the site
were “inextricably linked” to make a single live/work unit. There was an
obvious close nexus between the two parts, clearly demonstrated by the terms of
Condition 6. It was also clear that the intention of the Appellant was to
occupy and use the two parts of the site as a single unit. Paragraph [37] of Gardiner
made it clear this was highly relevant:
“It is our view that the primary question is to determine the
Appellants’ intention in carrying out the building work.”
32.
She also pointed out that in Catchpole v HMRC [2012] UKFTT 309 (TC) it was held that two buildings could be considered together as a single
dwelling, and she invited us to find that in the present case there was a
single live/work unit, comprising two buildings, to which composite entity
Condition 6 applied so as to preclude a separate use or disposal of either part
of the combined entity.
33.
In effect, she was arguing that it was appropriate to consider the
actual effect of the condition, which was (both in the light of the terms of
the condition itself and also in the light of the Appellant’s actual
intentions) to preclude any kind of separate use or disposal of the dwelling, even
though on its face Condition 6 only mentioned the commercial building.
34.
She also submitted that the opinion of ESBC should be given weight as it
was a single, clear expression of opinion – unlike the numerous and conflicting
opinions offered by the planning authority in Oldrings, which clearly
purported to add to the existing condition rather than simply interpret it.
Discussion and decision
35.
We are concerned to establish whether the “separate use, or disposal of
the dwelling” was “prohibited” by any “term” of Condition 6, in a situation
where the terms of Condition 6 were expressed to apply to the commercial
building and not to the dwelling.
36.
For the reasons submitted by Mr Jones, we find that Condition 6 contains
no such prohibition.
37.
We give no weight to the opinions expressed by ESBC. The provisions of Condition
6 must be interpreted by the Tribunal as they stand, not given some wider
meaning by reference to the expressed opinion or wishes of the local planning
authority.
38.
Whilst the practical effect of Condition 6 was (and is) to make it
unlikely that the owner would ever wish to dispose of the dwelling separately
from the commercial unit, Condition 6 does not, in our view, “prohibit” such
disposal. Condition 6 simply means that if the owner of the dwelling chooses
to dispose of it separately, he is likely to be left with a white elephant in
the form of a commercial building which he cannot lawfully use or operate.
However unlikely an outcome that may be in practical terms, it does not, in our
view, amount to a prohibition within the meaning of Note 2(c).
39.
Similarly, when considering separate “use” rather than “disposal”, the
owner of the dwelling would be entitled either to use/occupy the commercial
building or he would be entitled to leave it unused and unoccupied, without any
breach of Condition 6. The fact that the owner is unlikely, in practical
terms, to leave the commercial building completely unused/unoccupied cannot in
our view be regarded as meaning that there is some kind of prohibition, imposed
by Condition 6, against the separate use of the dwelling. We cannot see
therefore how it could be said that the separate use of the dwelling is
“prohibited” by Condition 6.
40.
In short, if there is a prohibition against the use or operation of
building B by any person other than the occupier of building A, that will
clearly amount to a prohibition against the separate use of building B.
However, it cannot properly be said that the same prohibition also takes effect
to prohibit the owner or occupier of building A from separately using or
disposing of building A in whatever way he wishes, however ill-advised he may
be in practical terms to do so.
41.
It follows that we find Note 2(c) is satisfied in relation to the
dwelling in this case; accordingly it satisfies the definition of “building
designed as a dwelling” and the appeal must therefore be allowed.
42.
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.
KEVIN POOLE
TRIBUNAL JUDGE
RELEASE DATE: 13 March 2013
