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Kids Church v Customs and Excise [2003] UKVAT V18145 (16 May 2003)

CONSTRUCTION – Charity constructing self-contained building within derelict warehouse for carrying on its charitable activities – Described by trustee as "internal annexe" – Advised by Commissioners Advisory Service that construction supplies zero rated – Commissioners rule that supplies standard rated – Access to building through walls of warehouse – Whether "annexe" – VATA 1994, Sch 8, Gp 5, Item 2, Nn (6), (16), (17)

LONDON TRIBUNAL CENTRE

KIDS CHURCH Appellants

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: ANGUS NICOL (Chairman)

ANGELA WEST FCA

Sitting in public in Bristol on 19 February 2003

Rod Fortune, trustee, for the Appellants

Nicola Shaw, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

Kids Church, the Appellant, is a charitable trust which has as its objects the promotion of the social, emotional and spiritual development of children and young persons by encouraging understanding of the Christian faith, and the care of children and young people in the community. The activities of the Appellant were at first carried on in a school hall, but the number of children attending grew rapidly and larger premises became necessary. The Appellant was offered a lease, for £1 a year, of some 900m² of a disused warehouse, for three years initially and renewable thereafter. A considerable amount of work was necessary to make these premises suitable for the children, and this was put in hand. The Appellant was initially advised by the Customs Advisory Service that the construction of an "internal annexe" would fall within Group 5 of Schedule 8 to the Value Added Tax Act 1994, and would be zero rated. However, when one of the suppliers of goods and services for the works asked for confirmation that the supplies were zero rated, the local VAT office ruled that they were properly standard rated. It is against that decision that the Appellant appeals.

The facts

The facts were not in dispute. Mr Rod Fortune, one of the trustees of the Appellant, who appeared on the Appellant's behalf, also provided a helpful statement of the facts, which we take from that statement and find to be as follows.

Most of the children who attend the Appellant's activities live on housing estates round Andover in Hampshire, an area in which over 65 per cent of primary school children have special educational needs. The Appellant trust was set up in 1996, and over the following five years the numbers attending the activities rose from twenty to more than 160 each week, and there were even more who wished to attend. It was in 2000 that the decision was made to expand and seek larger premises.

In mid-2001 a company called Lionel Hitchen Ltd, which owned a redundant industrial estate, offered a three-year lease to the Appellant of about 900m² ("the Premises") in a disused warehouse at a rent of £1 a year. The lease was renewable at the end of the three years. That area was approximately an eighth of that of the whole warehouse, which was in very poor condition and unusable as it stood. Its concrete floor was broken and there were large oil spillages on it; also the roof leaked and the electrical wiring was old and possibly dangerous. The Appellant considered that, as it then was, it was quite unsuitable for any purpose involving children. It would be necessary to carry out a good deal of work on the Premises to make them fit for use. It was decided that it would be necessary to lay a 5-inch concrete floor, to erect fire-proof partition walls between the Premises and the rest of the warehouse, and to install new electrical wiring. This was estimated to cost, in all, about £40,000, excluding VAT. It was also decided to investigate whether that cost, or any part of it, might be zero rated, and Mr Fortune undertook to make inquiries.

First, Mr Fortune consulted Notice 701/1, which he found on the Customs and Excise website. Item 20 in that Notice is headed "What building work for charities can be zero rated?" Under that heading, paragraph (b) stated:

"(b) Self-contained annexes

From 1 March 1995, zero rating applies to supplies to a charity of services in the course of constructing an annex giving internal access to an existing building, providing the annex has its own primary access and is capable of functioning independently of the existing building."

That appeared to Mr Fortune and his fellow trustees to cover their situation precisely, but nevertheless he decided, prudently, to seek official confirmation. The website also directed his attention to the Customs National Advice Service, for which a telephone number was given.

In mid-December Mr Fortune contacted the National Advice Service, and explained, in his own words, "our situation regarding the construction of an internal annex for charitable purposes within a non-charitable existing building." He was told that an annex did not have to be an external construction and that providing it was a separately accessed part of the existing building the construction services would be exempt from VAT. Mr Fortune asked whether written confirmation of this was necessary, and was told that it was not, but that the Appellant would have to present the construction service suppliers with a "Certificate of zero-rated and reduced-rated building work". There was a standard form of that certificate which could be downloaded from the website. The Appellant was very pleased to learn this, and estimated that it would save the trust some £7,000.

By mid-January 2002 orders had been placed for some of the renovation work. On 25 January Mr Fortune contacted the Advisory Service again specifically to ask about the words "constructing an annex giving internal access to an existing building" in Notice 701/1 paragraph 20(b). Those words had suggested to the trustees that it would be necessary to make provision for an access door in the firewall partition so as to permit access to the remainder of the warehouse. Neither the Appellant nor Lionel Hitchen Ltd needed this door, and it would just be an additional expense. Mr Fortune explained again that this was to be an internal annex (his emphasis), and the advice which he received was that the construction work was covered by paragraph 20(b) and that it did appear that the Appellant would have to incorporate an access between the Premises and the remainder of the warehouse. He was also advised that he would only need confirmation of this in writing if the supplier requested it, in which case he should ask the local VAT office for it. As a result of that telephone advice the Appellant modified their plans so as to include the additional access. On 15 February Mr Fortune inquired of the Advice Service whether plumbing supplies would be zero rated if they did the plumbing work themselves. He was advised that it would not, since zero-rating could only apply when the supplies were made by a VAT-registered supplier.

A little while later one of the suppliers requested confirmation of zero rating. Inquiries were made at the VAT office in Poole. As a result, the Appellant was informed that the work on the Premises was not eligible for zero-rating. The Appellant asked for the decision to be reviewed, and it was upheld.

The Appellant's grounds of appeal were set out in detail, and are as follows. In general terms, the Appellant says that the works carried out in creating an annex to an existing building for charitable purposes matched both the spirit and letter of Notice 701/1, paragraph 20(b). The detailed grounds of appeal were:

"1. We proceeded with our work on the basis of information given by Customs and Excise themselves. The wording of the act is obviously insufficiently clear as so many individuals have different interpretations. We believed we had received a definitive ruling and at no time were we advised to obtain ratification of this information from a VAT office.

In different circumstances - as Lionel Hitchen themselves were carrying out substantial renovation works elsewhere on site - we may have discussed the possibility of them undertaking the work themselves as presumably their VAT charges could have been offset in the normal way. As trustees of a children's charity we have to act as good stewards of our money and this may have been a more economical alternative.

We believe granting this appeal would be in line with the spirit of the law. Although I believe Notice 708 (Building and Construction) was revised in July 02, the clause following 708b Para 2.8 previously read 'The intention of this relief is to treat a charity annex connected by a door or corridor to another building in the same way as we treat a fully independent structure separate from an existing building. As a guide, the new annex must be capable of fulfilling the function for which it was designed if the connection or corridor were to be closed.'

We take this to mean that it was the intention to extend zero-rated supplies to cases which would not otherwise qualify and we believe this would probably be true in our situation.

We propose to write to the chancellor to enquire whether it was the intention of the government to deliberately exclude cases such as ours where VAT charges can be incurred in the course of converting part of an unusable and almost derelict building into a self-contained unit for charitable purposes."

Mr Fortune added that he had contacted the Advisory Service yet again, on 13 May 2002, and was advised that the building work was within the scope of Notice 701/1 paragraph 12(b), but the representative to whom he spoke qualified that statement by saying that it would be advisable to get a ruling from the local VAT office since it might be that only certain of the supplies might qualify for zero rating. Mr Fortune also stated that the appeal was pursued not on the narrow definition of what constituted an annex but on the particular extenuating circumstances of this case.

Mr Fortune also gave oral evidence. He said that the Appellant had to make sure that the Premises was totally separate from the rest of the warehouse, first, so that it was an independent operation; and secondly so as to provide a safe and secure place for children, which the warehouse was not. It was necessary to have a proper fire-wall, which was why the cost was so high. There had been no intention to have a connecting door, but Mr Fortune understood from the Advisory Service that there had to be one. All the requirements of legislation were met, and neither of the places of access to the Premises depended upon the other parts of the building. Mr Fortune said that he had asked more than once whether zero rating applied to an internal annex, and was told on each occasion that it did. He had, he said, made a point of asking about an internal annex, because he was not sure that you could have an internal annex. On the strength of that advice, the Appellant went ahead.

Mr Fortune produced a site plan. This shewed the whole of the warehouse with the Premises marked as a very small area within the walls of the warehouse. We were told that there were two entrances to the Premises from the car park outside and a third which gave on to a passageway outside the Premises and outside the warehouse. The unwanted door, which was on the sided farther from the car park, gave into the warehouse itself. It was always kept padlocked, and had, so far as Mr Fortune knew, never been opened since its construction.

Correspondence took place between the Appellant and the Commissioners. This began with a letter from Mr Nick Linton, the Appellant's project leader, to the Southampton office, which was received by the Commissioners on 21 February 2002. That letter described the proposed works, and mentioned that the Appellant had issued certificates to contractors that the supplies were zero-rated and asking for written confirmation. That letter was answered by the Poole VAT office on 5 March 2002. Instead of providing confirmation, the letter said,

"The information contained in your letter make it clear that the nature of the supplies to be made is that of services to renovate and alter an existing non-residential building. The resultant building will remain a non-residential building and so the supply of services in the course of carrying out the alterations is a taxable supply at the standard rate."

Mr Ian Burnahm, another trustee, replied to that letter on 4 April 2002, referring to Notice 701/1 paragraph 12(b) and contending that that paragraph fitted the Appellant's circumstances "as we have constructed an annexe which gives internal access to an existing building, has its own primary access and is capable of functioning independently of the existing building." The Commissioners replied on 23 April 2002. The significant part of their letter stated:

"The supply of construction services in the course of the construction of a new building which is to be used for a relevant charitable purpose is zero rated under Schedule 8, Group 5, Item 2(a) of the VAT Act, but the law specifically excludes the conversion, reconstruction or alteration of an existing building. An exception to this is the construction of an annexe to an existing building if certain conditions are met, but this is restricted to when the annexe is built onto an existing building. Paragraph 2.1 and 2.8 of the enclosed Notice 708 help to qualify this further."

No evidence was adduced by the Commissioners.

The law

The relevant law is contained in Group 5 of Schedule 8 to the 1994 Act. So far as bears upon this appeal, it provides as follows:

"Item No

. . .

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) . . .

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."

Certain relevant definitions are contained in the notes to the Group:

"(6) Use for a relevant charitable purpose means use by a charity in either or both the following ways, namely—

(a) otherwise than in the course or furtherance of a business;

(b) as a village hall or similarly in providing social or recreational facilities for a local community.

. . .

(16) For the purposes 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...;

(c) subject to Note (17) below, the construction of an annex to an existing building.

(17) Note 16(c) above shall not apply where an annexe is intended for use solely for a relevant charitable purpose and—

(a) 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."

Since the Commissioners referred to, and apparently relied upon, parts of Notices 701 and 708, we set out the relevant parts of those Notices. Paragraph 20(b) of Notice 701 has already been set out in paragraph 5 above. In paragraph 20(d), a relevant charitable purpose is defined as "for charitable non-business purposes or as a village hall or similar community building". But this is dealt with also, and at greater length, in Notice 708. The relevant parts are as follows:

"2.7 Relevant charitable buildings

A relevant charitable building is a building that will be used solely by a charity in one or both of the following ways:

For the non-business use of a charity....

As a village hall or similar community hall providing social or recreational facilities for the benefit of the local community. In order to qualify, the building must be owned, organised and administered by the community for the benefit of the community. In addition, the facilities on offer must be multi-purpose, be available for use by a local community at large (rather than just particular sections of it), and be used for a variety of public and private purposes....

. . .

8 Annexes for a relevant charitable purpose

Where such an annex is added to an existing building, you may still zero-rate your supplies of construction services provided the annex:

Is intended for use solely for a relevant charitable purpose;

Is capable of functioning independently from the existing building;

Has its own main entrance;

Does not provide the main entrance to the existing building; and

Is covered by the proper certificate.

. . ."

The following passage in paragraph 2.8 is set out in paragraph 2 of the grounds of appeal, in paragraph 9 of this decision.

The Commissioners' contentions

Miss Shaw, for the Commissioners, conceded that the works had been carried out for a relevant charitable purpose. She also referred to Note 18(a) to Group 5, which provides that a building only ceases to be "an existing building" when it is demolished completely. Miss Shaw referred to Customs and Excise Commissioners v Marchday Holdings Ltd [1997] STC 272 at 278g, which was a case involving Note (1A)(a) to Group 8 of Schedule 5 to the Value Added Tax Act 1983, in which the expression "construction of any building" excluded "the conversion, reconstruction, alteration or enlargement of any existing building". She referred to the two-stage test which was referred to by Lightman J to be the proper approach in Cantrell v Customs and Excise Commissioners [2000] STC 100, 103, requiring a comparison of the building as it was before the works were carried out with the building as it is or will be after the works are completed. The question that must then be asked, as at the date of supply, is whether the completed works amount to, in the present case, the construction of an annexe to the original building. Miss Shaw referred to Macnamara v Customs and Excise Commissioners (1999) (Decision No 16039) for a definition of "annexe". The Tribunal in that case said in paragraph 13 that

"The term annexe connotes something that is adjoined but either not integrated with the existing building or of tenuous integration."

The Tribunal pointed out that all annexes are excluded from zero rating except those which fall within Notes 16 and 17. In Yeshurun Hebrew Congregation v Customs and Excise Commissioners (1999) (Decision No 16487), the Tribunal said that

"the normal understanding of 'annexe' is that it is not itself a principal building but a supplementary building, connected or associated with a main building, and fulfilling a subordinate role in relation to that building."

The last of the decisions to which Miss Shaw referred us was Colchester Sixth Form College v Customs and Excise Commissioners (1999) (Decision No 16252). This also dealt with the nature of an annexe. In that case, the new construction had been built within one half of an existing building which was shaped like the letter H, and was described by the Tribunal as having been made physically and functionally a part of the single college building, and was therefore so closely integrated with that building as not to be an annexe. It was stressed in a number of these decisions that the term "annexe" should be given the meaning which an ordinary reasonable man possessed of the relevant facts would give it.

Miss Shaw's primary submission was that the construction was a conversion, reconstruction or alteration of the existing building, and therefore could not be an annexe, the categories being mutually exclusive. The plans shewed that the warehouse, the existing building, had been converted to provide a self-contained area for the Appellant's use. The plans described the work as "conversion", and while that was not determinative it was an accurate description, and indicated how an ordinary person would view the work. There could hardly be a greater degree of integration (see Macnamara) than the segregation of a small corner of the interior of a building. Under Note (16), to qualify for zero rating, the construction must be an annexe, which the works clearly were not. It was still part of the existing building, and therefore an alteration or conversion; nor was it in any way adjoined to the existing building. But even if the construction were an annexe, the access was via the existing building, being through its walls, and therefore within Note (16)(c) but not taken out by Note (17).

The issue in this case, Miss Shaw contended, is, what is an annexe? There is no general rule that works carried out for charities are zero rated, and the legislation, since zero rating is an exception, has to be construed strictly. As to the advice given to the Appellant by the Advisory Service, it was clearly not possible to produce a witness to give evidence of that advice. The expression "internal annexe" had been used, and the person on the helpline may well have assumed that what was to be constructed was an annexe. If so, the advice was largely correct. In any event, even if it had been wrong, that cannot affect the tax classification of the works or their VAT status.

The Appellant's contentions

Mr Fortune contended that "access through the existing building" meant that you enter the existing building and then go on to the access to the "annexe". That was not the case with the Premises. Mr Fortune said that he had been very precise in making the Advisory Service understand what the situation was, and had repeated it more than once. He said that he had been advised that the Appellant should get a ruling, since possibly only a part of the work might be zero rated. Mr Fortune pointed out that the Appellant had not been in control of the whole of the warehouse building, but only with a very small portion within it, and they were not dealing with the warehouse, simply making a construction within it. He did not see that the fact that the Premises had the same roof as the warehouse affected the position.

Conclusions

Although Mr Fortune stressed that this appeal was not on the narrow issue of what constitutes an annexe, the reality is that that is the principal issue. When he referred to the extenuating circumstances, we take him to mean the fact that he received advice that appeared, in the end, to have been incorrect, from the Commissioners themselves. There seem to us to have been two reasons for this. The first is, that Mr Fortune himself used the word "annexe", and in the context of construction work for a charity that would have had a particular meaning to the officer to whom he spoke. "Annexe" is not strictly a technical term, it is an ordinary English word that is to be understood in the ordinary way. But it is used in the legislation, and crops up in the work of Customs very often, usually attached to the question, as in this case, what is an "annexe"? It appears to us to be probable that the officer, or officers on other occasions as well, assumed that when Mr Fortune said "annexe", that was precisely what he meant. If so, the advice which he received was basically correct, but perhaps lacking in the details of Note (17). The other reason is, that Notice 701, as is the case with many Customs Notices, is an attempt to set out in laymen's language what the law is. It is not always entirely accurate, and never sets out the references to the legislation. This may give a mistaken impression to the layman reading the Notice, as it appears to have done in this case. Mr Fortune clearly did not understand the position relating to access, for instance, believing that there had to be access to the existing building. What the advising officer thought was meant was not clear. However, unfortunately for the Appellant, there appears to have been a degree of misunderstanding. The question also arises, even if the Appellant had been advised that their proposed construction was not eligible for zero rating, would they have abandoned it altogether or have gone on with it? Lastly, it is correct, that even if the advice was bad and wrong, that would not affect the fact that the supplies were properly standard rated.

Apart from the definition of annexe, the statute is clear. The supply of goods and services in the construction of a building intended for use solely for a relevant charitable purpose is zero rated. "Use for a relevant charitable purpose" is defined in Note (6): the purpose must be otherwise than in the course or furtherance of a business, and/or it must be use as a village hall or similarly in providing social or recreational facilities for a local community. It was not suggested in this case that there was any business element in the activities of the Appellant, so that condition (a) is satisfied. But the first stumbling block is found in (b). In our view, it cannot be said that the Premises are intended for use, or actually used, as a village hall or similarly. No doubt the Appellant's activities would come within the expression "social or recreational". But the Premises are neither intended to be for use, nor used, by the local community in any way in which a village hall would be used. Usually a village hall is owned by trustees for the local community, and all sorts of activities go on in it, such as parish council meetings, political meetings, the local village fête (if the weather is bad), the local cricket team's annual supper, and many others. That is not the intention for the Premises at all.

But if that were wrong, we look at Note (16). All three categories in (a), (b), and (c) are excluded from "construction", except for the qualification in the case of an annexe provided by Note (17). The conditions imposed by Note (17) must all be satisfied before the annexe can be rescued from being standard rated by Note (17). Therefore, it must be determined whether the work done on the Premises falls into one of the three categories, and if so which one. If it falls within either subparagraph (a) or (b) it cannot be zero rated. If it falls within (c), it can only be zero rated if it is also within both of subparagraphs (a) and (b) of Note (17). To be rescued at all, it must fall within (c) as an annexe. That is why it is essential to determine whether the Premises is an annexe to the warehouse.

We adopt the two-stage approach: see Cantrell (supra). In paragraph 4, Lightman J said,

"It requires an examination and comparison of the building as it was or (if more than one) the buildings as they were 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 extension or the construction of an annexe to the original building (see Marchday Holdings Ltd).... First the question is to be asked as at the date of the supply. It is necessary to examine the pre-existing building or buildings and the building or buildings in course of construction when the supply is made. What is in the course of construction at the date of supply is in any ordinary case ... the building 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 of time, having regard (inter alia) to similarities and differences in appearance, the layout and how the building or buildings are equipped to function. The terms of planning permissions, the motives behind undertaking the works and the intended or subsequent actual use are irrelevant, save possibly to illuminate the potentials for use inherent in the building or buildings."

Before the works began, there was nothing but a disused, nearly derelict, and probably dangerous warehouse. After the works were completed, there was still the warehouse, but within its walls there was a small area which was partitioned off by firewalls, to which access was obtained by three doorways which went through the walls of the warehouse, and a fourth through one of the new walls into the warehouse itself. Within the partitioned area the Premises were further partitioned, divided into a theatre area and a sports area, with a number of smaller compartments, including male and female lavatories. The roof of the Premises was the roof of the warehouse. It seems clear that the answer to the question cannot be that the Premises are an enlargement of the existing building, nor an extension to the existing building. The other possibilities are conversion, reconstruction or alteration of the building, or the construction of an annexe. Reconstruction, again, appears not to be what was done, since the warehouse was left as it was, and would remain the same if the Premises were deconstructed and removed.

We therefore consider whether the Premises amounts to an annexe. To begin with, it is wholly inside the existing building. We know of no case in which an annexe to a building has been enclosed within the walls of that building. The cases referred to by Miss Shaw, starting with Macnamara, suggest that an annexe is not integrated with the building to which it is an annexe, or has only a tenuous integration. We agree with Miss Shaw's contention that there can hardly be closer integration that to be wholly within another building. But in this case also, the relationship of the Premises to the warehouse is purely one of physical presence. There is no relationship between them as to their use, as was considered to be part of the nature of an annexe by the Tribunal in Yeshurun (see paragraph 15 above). Looking at the Premises in the way that an ordinary man, possessed of the relevant facts, would (see Colchester Sixth Form College, page 9, first and third paragraphs). We feel bound to conclude that the Premises do not amount to an annexe. In our view, the Premises would fall within subparagraph (a) as a conversion or reconstruction, and the supplies are properly standard rated.

But if we are wrong about that, and the Premises should be categorised as an annexe, it falls foul of Note (17). Even if we disregard the never used doorway into the warehouse, all the means of access into the Premises pass through the walls of the warehouse. Indeed, in our view, the Premises has always remained part of the warehouse. But, that being the case, the main access to the Premises is via the existing building. That would be fatal to the appeal, even were the Premises an annexe.

We have considerable sympathy for the Appellant. We readily appreciate that for such a project money is a commodity in short supply, and the incidence of some £7,000 of VAT must be something of a blow. Unhappily, the law is against the Appellant. For the above reasons, this appeal must be dismissed. We give no direction as to costs.

ANGUS NICOL

CHAIRMAN

RELEASED:

LON/2002/448