[2013] UKFTT 332 (TC)
TC02735
Appeal number: TC/2012/00228
VALUE ADDED TAX — VATA s 35, Sch 8 Group 5 Note (2) — “do
it yourself” builders’ scheme — whether relevant conditions met — yes — appeal allowed
FIRST-TIER tribunal
tax chamber
HENRIETTA PEARSON Appellant
- and –
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE & CUSTOMS Respondents
Tribunal:
JUDGE COLIN BISHOPP
MR RICHARD
THOMAS
Sitting in public in London on 11 October 2012 and 19
April 2013
Mr Ian Wadhams CTA, of Ingenhaag LLP, for the Appellant
Mr Les Bingham, Officer of HMRC, for the Respondents
© CROWN COPYRIGHT 2013
DECISION
1.
The appellant, Lady Henrietta Pearson, is the owner of a property known
as Hollowell Lodge Barn, situated in Northamptonshire. At the beginning of the
period with which we are concerned, the property was a semi-derelict former
farm building consisting of a disused barn with what had probably been an
animal shed adjoining it. On 8 January 1997 the local planning authority,
Daventry District Council, granted planning permission for the “conversion of
barn to provide holiday accommodation”. We were told that work started in about
2000, but was not complete and the building was still uninhabitable, when a
second application for planning permission was made. That permission was
granted on 31 January 2007 and authorised the “[c]hange of use of existing
holiday accommodation and conversion of adjoining barn to form one live/work
unit”. The appellant explained, and we accept, that the reference to an
“adjoining barn” was in fact to the animal shed, and that the “existing holiday
accommodation” was the barn.
2.
The question before us is whether the work, or the greater part of the
work, undertaken at the property on the strength of those planning consents is
zero-rated, as the appellant contends; or whether some of the statutory
requirements are not met with the consequence that the work is standard-rated,
as HMRC argue. The matter reaches us by way of an appeal against HMRC’s
refusal, conveyed by letter of 15 September 2011 and upheld on review, to repay
to the appellant the VAT, amounting to £40,233.18, she had incurred on the
building costs. No issue is taken about the amount of the claim; the only issue
we are required to determine is whether the conditions on which a repayment may
be made are satisfied.
3.
Those conditions are prescribed by s 35 of the Value Added Tax Act 1994.
The purpose of the section, broadly speaking, is to put those undertaking the
construction of a new dwelling, or the conversion of an existing building into
a dwelling, on the same footing as a commercial builder, who is able to recover
most of the VAT incurred in the course of the construction, while incurring no
output tax liability as the supply of the completed dwelling is zero-rated.
4.
The relevant parts of s 35 provide as follows:
“(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—
…
(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 a number of dwellings; …
(4) The notes to Group 5 of Schedule 8 shall apply for
construing this section as they apply for construing that Group….”
5.
The Note to Group 5 of Sch 8 on which HMRC relied in refusing the claim,
and the only one of any possible relevance here (it being accepted that Note
(16), which we do not think it necessary to set out, adds nothing), is Note
(2), which reads:
“(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.”
6.
We shall return to the statutory provisions later. What is clear even
from a cursory reading is that an understanding of precisely what has been done
is essential to the application of s 35. The appeal first came before us on 11
October 2012, when we saw various plans and heard some informal evidence from
the appellant. However, after we had retired to consider our decision it became
apparent that we did not have sufficient information about the work which had
been carried out to the building after the first planning consent was granted
but before the second consent, and about the further work which had been
undertaken since the grant of the second consent, to enable us to reach a
conclusion. Accordingly we arranged a second hearing, which took place on 19
April 2013, when additional plans and photographs were provided to us, and we
heard further explanations from the appellant.
7.
As we have said, before any work started the building was semi-derelict.
It consisted of an L-shaped barn, with the disused animal shed at the end of
one arm of the L-shape, making the whole into an approximate U-shape. The barn
had evidently been used for agricultural storage and the photographs showed
clearly that it was uninhabitable: there were holes in the roof, it lacked
windows and doors and the interior was open space. The photographs also show
that the animal shed consisted of some brick and some timber supports, carrying
a corrugated iron roof, that the interior was open to the elements and that it
too was uninhabitable.
8.
The first planning consent related only to the barn. As is customary, it
permitted development “in accordance with the application and plans submitted”,
but we were not provided with copies of either the application or the approved
plans. We did, however, have contemporary plans which we accept as
representative of what was in contemplation at that stage, namely the creation
within the barn of three bedrooms, two bathrooms, a kitchen and a living area. We
say “in contemplation” because later plans show rather different layouts of the
barn accommodation and we are bound to say that the appellant’s explanation of
the changes of plan and the evolution of the development was in parts rather
vague. We do, however, accept that the underlying intention, despite the
wording of the first consent, was to provide her and her husband with a country
home, and not to create holiday accommodation which, as one of the conditions
attached to the first planning consent stipulated, could “not be occupied by
any one person for more than 28 days in a calendar year”. The reason for that
condition was given in the planning consent in these terms “To permit the use
of the converted barn as a permanent residential unit would be contrary to the
prevailing planning policies for the area which presume against the creation of
dwellings in the open countryside”. As we understood her evidence, the
appellant accepted the condition in the hope that it might later be relaxed.
9.
It appears that it was not, however, so much a relaxation as a change of
policy which led to the grant of the second planning consent. Again, the
development was to be undertaken “in accordance with the application and plans
submitted”; on this occasion we did have a copy of the relevant approved plan,
though not of the application. The plan shows the barn without any detail of
its internal structure; it is simply marked “domestic dwelling previous
planning”. The detail shown, which is itself somewhat limited, relates entirely
to the disused animal shed, and indicates the intended creation of a “domestic
service area” and a “work at home area”, with various particulars, of no
present importance, of the proposed methods of construction. A doorway leading
from the “domestic service area” to the barn is marked as “existing door”.
10.
In fact, as the appellant explained and the photographs produced to us
showed, the plans do not accurately reflect what has been done. The bedroom and
bathroom accommodation is in approximately the same position as that shown on
the 1997 plans, with some changes of layout which do not seem to us to be of
any present significance. The area shown on those plans as the space for the
kitchen has in fact been made into a living room. The “domestic service area” shown
on the 2007 plan was originally intended to house the central heating boiler
and a hot water cylinder but they have in fact been located beneath it, in a
basement, and the “domestic service area” is occupied by a lavatory and a
vestibule. The “work at home area” is occupied in part by the kitchen and in
part by an open area which could be, but has not yet been, fitted out for use
as a working area. We discovered at the second hearing that there is an upper
storey, above only part of the former barn, which contains a bedroom and a
study, although the appellant was again rather vague about the use to which
those rooms are, or are to be, put. We were left with the impression that,
while she and her husband would probably undertake some work in the building,
its primary function was intended to, and would, be domestic.
11.
Standing back from the detail of the conditions attaching to eligibility
for the refund for which s 35(1) provides, it seems to us that what has been
done falls squarely within s 35(1A)(c) and (1D)(a): the appellant started with
a non-residential building and has converted it into “a building designed as a
dwelling”. The question therefore is whether any feature of the work, or of the
terms on which it was carried out, renders it ineligible for that refund.
12.
HMRC accepted when making their decision that paragraphs (a), (b) and
(d) of Note (2) were satisfied; they contended that paragraph (c) was not, and
could not be, satisfied because of conditions 9 and 10 to the 2007 planning
permission. They were:
“9. The residential accommodation of the live-work unit
hereby permitted shall not be occupied by any persons other than those
occupying the work element of the live-work unit.
10. The live-work unit hereby permitted shall be
occupied as a single integrated unit and laid out as shown on the approved
drawing and no further subdivision shall take place without the prior written
consent of the Local Planning Authority.”
13.
We interpose for completeness, since we think little or nothing turns on
them, that the reasons given for the imposition of those conditions were,
respectively, that “The separate use of the accommodation and work unit would
result in the creation of [a] new dwelling in the open countryside contrary to
policies … which presume against new dwelling in such location unless they are
essential for the purposes of agriculture or forestry” and “To safeguard the
amenities of those occupying the residential accommodation and to prevent the
creation of a separate living Unit.”
14.
It is apparent from the letters written by HMRC officers, when
communicating to the appellant the original decision to refuse to meet the
claim and on statutory review of that decision, that although Note (2) was
reproduced in full, reliance was placed entirely on paragraph (c). No reference
was made to any other provision of the Notes, or to s 35 itself. The question
before us, nevertheless, is not simply whether Note (2)(c) is engaged, but
whether the provisions of s 35, interpreted in accordance with the relevant
Notes, apply to the work. Because the work actually undertaken and the plans
differ, we need also to touch on Note (2)(d), and it is convenient to deal with
that provision first.
15.
That Note imposes two requirements: that planning consent has been
obtained; and that it has been complied with. Plainly the first part of the
requirement is satisfied; the question is whether the divergence between the
approved plans, or at least the second of them, and the finished building
offends the second. Quite what is meant by the phrase “in accordance with that
consent”, in this context, is unclear. At one extreme it could require HMRC
and, on appeal, this tribunal to decide whether the consent has been complied
with in every detail. At the other it could mean no more than that the consent
allows for development broadly equivalent to that undertaken, rather than for
something different such as, for example, the conversion of the existing
building into a shop.
16.
Some help on the point may be derived from the decision of this tribunal
in John and Susan Kear v Revenue and Customs Commissioners [2013] UKFTT 95 (TC), in which consent was given for the conversion of three adjacent
commercial buildings to a live-work unit, one building forming the working part
and the other two the living space. The consent was specific about which parts
of the resulting building could be used for each purpose, and a number of other
matters. The tribunal determined that there were several breaches of the
conditions, particularly of those prescribing the use which could be made of
each part, to the extent that the district valuer, when assessing the building
for council tax purposes, found that the extent of the commercial use of the
building was too small to warrant separate assessment; in essence there was little
more than nominal commercial use. The tribunal decided that those breaches were
sufficient to engage Note (2)(d), and that the work could not benefit from the
provisions of s 35.
17.
There is no equivalent provision here about the extent of the working or
the living area, beyond what is shown on the approved plan, which is itself
very imprecise: the “work at home area” is identified by that text, but its boundaries
are not demarcated. The conditions in the planning consent limit the use to be
made of the working area to Class B1 in the Schedule to the Town and Country
Planning (Use Classes) Order 1987, a class which includes general office work
of the kind undertaken by the appellant and her husband, but say nothing about
the location or the extent of the area to be so used. Thus this case is rather
different from Kear.
18.
We do not need to decide precisely where in the spectrum we identify in
para 15 above the line should be drawn. It is sufficient to say that we have
concluded that it is not a necessary requirement that HMRC or the tribunal
should be satisfied that any requisite consent has been complied with in every
particular. We reach that conclusion from the proposition that it is not the province of HMRC or this tribunal to police the planning rules. Whether the finished
building complies with the conditions imposed by the planning authority must be
a matter for that authority, and it is not for us to usurp its function. It
will be apparent from what has gone before that it is difficult to resist the
conclusion that the planning authority in this case has not insisted on strict
compliance with the approved plans. But in the absence of any adverse action by
it—and there was no evidence of any such action in this case—it is, in our
view, proper for the tribunal to proceed on the footing that the work was
lawful (as s 35(1)(b) requires) and that there was sufficient compliance with
the planning consent to satisfy Note (2)(d). We distinguish this case from Kear
on the basis that, there, the disregard of the planning consent was almost
complete; here, there has been compliance with the spirit, even if not the
strict letter, of the consent.
19.
We come, then, to the only other relevant provision, the Note (2)(c)
exclusion on which HMRC rely. Mr Les Bingham, the officer representing them
before us, argued that the point was essentially straightforward: conditions 9
and 10 of the planning permission made it clear that the residential part of
the building and the work unit could not be used or disposed of separately and
that was enough; Note (2)(c) was in point and it precluded a refund. For the
appellant, Mr Ian Wadhams, a chartered tax adviser, argued that if HMRC were
right, no live-work unit could ever satisfy the s 35 and Note (2)(c) requirements,
since separate occupation of the living and working parts of such a unit is
always prohibited. Indeed, the review letter itself says in terms that a
live-work unit cannot satisfy the requirements of s 35.
20.
We are not convinced that either Mr Bingham or Mr Wadhams has addressed
the correct question. The Note allows for a refund only when “the separate use,
or disposal of the dwelling is not prohibited by the term of any covenant,
statutory planning consent or similar provision”. The question to which that
provision gives rise is, “separate from what?”. In some cases—an example on
which Mr Bingham relied is Holden and Holden v Revenue and Customs
Commissioners [2012] UKFTT 357 (TC)—the residential and work sections of
the live-work unit occupy discrete parts of the building, and in Holden
there was, moreover, no internal means of access between them. One can well
understand the rationale for the imposition of the planning restriction on
separate disposal and, in such a case, the answer to the “separate from what?”
question is obvious.
21.
That is not, however, this case. The residential and working areas of
the building do not occupy discrete areas; the working area does not even have
a separate room. In reality the finished building does not differ in any
material way from any house whose occupant works at home, for example in a
study or on the dining room table. Indeed, occupation and use as a “single
integrated unit” are what condition 10 of the 2007 consent require. There is
nothing from which that “single integrated unit” can be separated, not merely
because of the terms of the planning permission, but as a matter of fact; for
separate use or disposal mere separation would be insufficient, and subdivision
of the whole would be required, and with it the creation of two discrete parts which
do not now exist. Note (2)(c) plainly contemplates either two structures or two
distinct parts of a single structure which, absent any legal restriction, could
be the subject of separate occupation, or could be disposed of individually. It
follows, in our view, that if there is nothing from which the dwelling can be
separated, as is the case here, any apparent legal restriction is otiose and
the Note is not engaged. The reality, as we find, is that the appellant has
undertaken a residential conversion within the intended scope of s 35.
22.
The appeal must, therefore, be allowed.
23.
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.
COLIN BISHOPP
TRIBUNAL PRESIDENT
RELEASE DATE: 26
April 2013
