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Castle Caereinion Recreation Association v Customs & Excise [2003] UKVAT V18303 (27 August 2003)

ZERO-RATING – Construction of two additional rooms to existing `village hall' – Whether enlargement of or an extension to existing building – Whether annexe – VAT Act 1994 Schedule 8 Group 5 Notes (16) and (17) – appeal allowed in respect of one room – Appeal dismissed in respect of the other

LONDON TRIBUNAL CENTRE

CASTLE CAEREINION RECREATION ASSOCIATION Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MISS J C GORT (Chairman)

MISS S WONG CHONG FRICS

Sitting in public in Birmingham on 4 July 2003

Mr Barry Sambrook, past chairman of the Appellant Association, for the Appellant

Miss N Shaw of counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

This is an appeal against a decision of the Respondents dated 19 August 2002 that certain construction works carried out at the Castle Caereinion Community Hall did not qualify for zero-rating for value added tax.

The issue between the parties is whether two areas of building work carried out by the Appellant to its village hall are properly classified as extensions to the main building or as annexes. It was accepted by the Respondents that the additional rooms constructed by the Appellant were used for a "relevant charitable purpose".

The Appellants had originally asked for there to be a site visit, but this application was not renewed at the hearing of the appeal and no site visit took place.

Statutory provisions

Group 5 Schedule 8 to the VAT Act 1994 provides for the zero-rating of, amongst other things:

"Item 2. The supply in the course of the construction of –

(a) a building … intended for use solely for a relevant charitable purpose;

…

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.

…

Notes

…

(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 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 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."

Background

The Appellant is a registered charity responsible for running the Castle Caereinion Community Hall ("the Hall"). The Hall had been functioning for some 21 years before the new work was carried out. It was accepted on both sides that the Hall was a village hall for tax purposes, and it was used by the inhabitants of the area for meetings of various types.

The Hall was a comparatively large building and it was decided that smaller rooms were needed for meetings to take place whilst the main Hall was being used for other purposes.

The facts

We heard evidence from Mr Sambrook, who is a past chairman of the Appellant Association, and we saw the architect's plans for the building work as well as a large number of photographs. In April 2002 plans were drawn up for the building of two extra rooms; a committee room and a multi-purpose room. In addition there were to be further store-rooms and alterations or improvements to the toilet areas and the kitchens. It was accepted that these were properly standard rated for value added tax purposes, and the Tribunal is only concerned with the construction of the committee room and the multi-purpose room.

The Hall was built in 1980 in a corner of a school playground. The Hall was and is used by the school in the day-time during term-time for various activities. It was in part because there were times when the Hall was not available because of its use by the school that it was considered necessary to provide other accommodation for meetings.

The Hall is run by the Castle Caereinion Recreation Association which is a registered charity run by a committee. Local organisations are affiliated to the Recreation Association and benefit by paying nominal hiring fees for the Hall on the understanding that they elect representatives to sit on the committee of trustees and help run the Hall. There is a wide variety of local regular users, and the catchment area is wider than that of the hamlet of Castle Caereinion itself. In addition to regular users the Hall was also used for fund raising events of various sorts as well as wedding receptions and other social occasions.

The Appellant was able to obtain lottery funding to make various alterations. Seven years previously a conservatory had been added to the side of the Hall. The main entrance to the Hall was through double doors into the conservatory and then again through double doors into the Hall itself.

The original Hall was a single storey rectangular building with a stage at one end, beyond the stage there were two storerooms. The conservatory and the kitchen areas ran along one long side of the Hall, the kitchen areas protruded for a short distance beyond the end of the Hall on the same side. There was a block for the toilets and showers off the opposite long side of the Hall. The entrance to that area was via double doors in the Hall. The new committee room was similarly a rectangular building running off the far side of the Hall completing an extended rectangle when taken together with the shower and toilet block. There was an independent entrance to the committee room through an entrance foyer at the far side from the shower block i.e. in an extension to the short end of the Hall, at the same end as the stage. Beside the entrance foyer to the committee room and to its left there was a boiler room. The entrance foyer and boiler room together comprised a rectangular area. The committee room itself was shown on the original plan as having its only entrance via that entrance foyer. Subsequently the plans were altered and a doorway was put through into the Hall. This doorway was behind the curtaining of the main stage. It was put in in order that the committee room could also act as a dressing room for the performers. It was not intended to be the main entry to the committee room.

The committee room has not only its own entrance, as described but also its own independent access from its own car park. This car park is separate from the Hall car park.

We were shown a series of photographs of the partially completed works. These show that the roof to the committee room is a continuation of the sloping roof of the Hall, but the angle is less acute. It appears to be made of the same material as the pre-existing roof, although the colour is slightly different.

The multi-purpose room is not so easily described. The land on which the Hall and the new buildings are sited is not level. If the original Hall is taken as being on ground level, then the multi-purpose room might be described as being at first floor level. The room is built onto the end of the Hall opposite the stage end. It was built over the storerooms which are situated at the end of that Hall and which continue to the outer wall of the shower and toilet block. At the other end the stores abut the kitchen area. The room itself is built over the storerooms, it is a rectangular room with its own independent toilet area and kitchen facilities.

The floor level of the multi-purpose room was approximately 2.1 metres higher than that of the Hall. [All measurements have been taken from the architect's drawings.] Its roof was a continuation of the pre-existing roof and, as with the committee room, it was built of the same material but with a slightly different colour. It had a totally separate entrance which was reached via a disabled entrance ramp on one side and there was a flight of three steps to the other which gave access to its own independent car park.

There was no internal access to the Hall or any part of the Hall from the multi-purpose room. Beyond the toilet and kitchen area there was a further storeroom with an entrance beside the kitchen area. The total length of the room together with the toilet area and storeroom was 9.5 metres, which was the same length as the width of the Hall. The width of the multi-purpose room was 3.8 metres. At one end of the multi-purpose room, and similarly at the far side of the storeroom the height was only 1.4 metres. This was because the total construction was contained under a roof which was a continuation of the pre-existing roof. However, at the apex the height of the room was 4.2 metres.

The lower level back wall was a new cavity wall which was built off the existing retaining wall. At the height of 2.1 metres the wall became that of the back wall of the Hall at the opposite end to the stage.

It is apparent from the photographs we have seen and from the plans that to the outside observer the Hall has been enlarged both at one end and at one side, because the work has been done in the same style as the Hall and in the same materials.

The Appellant's case

It had originally been maintained on behalf of the Appellant that the works constituted the final phase in the construction of the original concept for the Hall, however this argument was not pursued at the hearing before us.

In respect of both rooms it was submitted that they had minimal physical connection to the Hall, and were recognisable separate buildings. They constituted the construction of annexes to the Hall and as such qualified for zero-rating under Note 17.

With regard to the committee room, it was the Appellant's case that if they had wanted this room to be used merely as an enlargement to the main hall, the original external wall of the Hall could have been removed and the room could have constituted an enlargement to the main hall in that way. If it had been wanted for the room to be used as an extension to the original building, there could have been double entrance doors between the hall and the committee room giving access to the main section of the Hall, not merely to the side of the stage behind the stage curtains.

It was not accepted on behalf of the Appellant that the users of the committee room would go via the Hall into the toilet block rather than going outside and round the building and into the external doors to the shower and toilet block. It was in fact Mr Sambrook's evidence that the users of the committee room did not in fact need to use the toilet block. The Tribunal was referred to Customs' internal guidance on annexes with reference to legal note 2.12 thereof which states:

"2.12 Legal note on connected charity annexes

This Note which was introduced with effect from 1 March 1995, extended the relief available to buildings intended solely for a relevant charitable purpose, by allowing in certain circumstances zero rating for a connected annex. Effectively the connecting door from an annex to the adjoining building can be disregarded. The result is that it is given the same treatment as a totally separate non-business charitable annex. It does not apply to extensions and enlargements of existing buildings.

The key considerations are:

the main independent access to the annex; and

the ability of both the original building and the annex to function as separate units.

Common services such as utilities and the toilets should be discounted from this consideration."

The Tribunal was directed to the fact that the committee room had its own entrance foyer and its own car park, and the use of the Hall car park would entail a long walk around the building to get to the committee room.

With regard to the multi-purpose room Mr Sambrook submitted that the Tribunal should take account of the fact that there was no interconnecting door between that room and the original building. An original proposal that there be an internal staircase linking it to the main hall was turned down because of the school use of the hall which constricted community use of the building during the day time. There was no intention to use the room in conjunction with the main Hall and one of the main objectives for wanting such a room was to have a facility away from the main Hall where there would be minimal disruption between the different users. The fact that the room has its own car park enabled it to be used independently of the school during term time. Previously the school car park had been used by users of the Hall.

Recreation fields adjacent to the building had been acquired and it was intended at some stage in the future to use the building as a clubhouse in conjunction with those fields.

The Tribunal was referred to the case of The South Molton Swimming Pool Trustees v Commissioners of Customs and Excise (Decision No.16495) at paragraph 43 where the tribunal chairman said:

"The legislation refers to the use of a building in a particular way and not to its structure. It is the use made of the building which is determinative for this purpose and, in reaching our decision, we have ignored the fact that the swimming pool does not look like a village hall."

We were also referred to VAT Notice 708 at paragraph 2.8 which states:

"2.8 ANNEXES FOR A RELEVANT CHARITABLE PURPOSE

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

is intended for use solely for a relevant charitable purpose (see paragraph 2.7);

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 (see section 3).

"The intention of this relief is to treat a charity annexe connected by a door or corridor to another building in the same way as we treat a fully independent structure separate from the existing building. As a guide, the new annexe must be capable of fulfilling the function for which it was designed if the connection or corridor were to be closed. It does not zero-rate an enlargement or extension to an existing charity building.

It does not matter if there is more than one means of access, provided:

the main access to the annexe is not via the existing building; and

the main access to the existing building is not via the annexe."

The Appellant contended that the rooms added to the Hall, which was itself a village hall for all purposes, were in themselves mini village halls, serving the same general purpose and usage criteria as the Hall. There was no basis for the Respondents differentiating between independent additions to a village hall which were used for the same charitable purpose as the main Hall.

It was not accepted that an annexe was a structure that had a minimal physical connection with the existing building. Various dictionary definitions were cited to the Tribunal and it was submitted that neither of the additions corresponded to those definitions. The appearance and shape of the new buildings had been determined in part by financial constraints, in part by planning constraints. It was not considered reasonable that in order to qualify for zero-rating there should have had to have been erected a building with only a minimal attachment to the Hall. Furthermore, if the multi-purpose room had been stipulated for use only by the disabled, then zero-rating would not have been questioned.

It was submitted that as a matter of fact it would not have been possible to have built anywhere other than in the existing positions because there was a stream immediately adjacent to the gable-end wall of the multi-purpose room which prevented any further building out in that direction. There were also restrictive covenants in place which prevented any building on the surrounding land.

We were asked to take note of the following facts:

(i) The toilet block had been built four years previously and had been built in order to service the adjoining recreation field. It itself could be closed off from the Hall when used solely in conjunction with the recreation field. Since the toilet block did not individually serve the criteria laid out in the Appellant's constitution, the committee room only in effect used one wall of the Hall.

(ii) The multi-purpose room was not supported by the storerooms below it, but the outer side wall had been built off a retaining wall which had been in existence for many years. That wall held back the recreation field and the culverted stream which was immediately adjacent to the wall. The retaining wall did not form a wall of the storerooms at lower ground level. There was another wall to the inside of the retaining wall which acted as the real wall of the storerooms.

(iii) The multi-purpose room had its own independent heating and electricity.

(iv) The storerooms serviced the main hall and were directly connected to the main Hall. There was no access to the storerooms via the multi-purpose room. There was only minimal attachment to the multi-purpose room above the storerooms.

The Tribunal was referred to the case of Yeshurun Hebrew Congregation v Commissioners of Customs and Excise (16487) at paragraph 23 where the tribunal said:

"The general intention in Note (16)(c) is to disqualify the construction of annexes as not ranking as new building works, presumably because the normal understanding of "annexe" is that it is not itself a principal building but a supplementary building, connected or associated with the main building, and fulfilling a subordinate role in relation to that building."

It was submitted that both rooms functioned separately to the Hall and were not used in conjunction with the Hall. The only occasion on which the committee had been used in conjunction with the Hall was when it was used as a restroom during concerts. It was estimated that no more than 2% of future bookings would be for the main Hall and committee room together. Such a small degree of joint usage did not substantiate the Respondents' contention that the new rooms did not function separately to the Hall.

Finally it was submitted that the rooms did not enlarge the existing Hall, they provided additional independent facilities to enable the property to classify itself as a community centre and not merely a community hall. The aim had been to provide new independent facilities to cater for the needs of smaller groups to enable them to use the community hall without disturbing each other.

The Respondents' case

It was conceded that all the buildings under consideration had the relevant charitable purpose.

The Respondents' principal argument was that the works constituted an enlargement or extension to an existing building (the Hall) and as such did not qualify for zero-rating.

The ordinary definition of an "annexe" was "a separate or added building". (No authority for this proposition was given.) It was maintained that it was implicit within Note 16 that an annexe was different from the "conversion, reconstruction or alteration" or "enlargement of, or extension to" an existing building.

An annexe was an added building which was not integrated with any original building. It involved a lesser building supplementing a greater one. It was a separate building which was not integrated with the main building and must be capable of functioning separately from the main building.

In the present case it was submitted that neither the committee room nor the multi-purpose room functioned separately from the Hall, but were used in conjunction with it and were integral parts of the community centre. It was relevant that the committee room used two walls of the existing building, the shower block being part of the existing building.

It was conceded that the multi-purpose room did not, other than the plumbing, share the facilities associated with the Hall in particular toilets and kitchen, and it was also conceded that the provision of the plumbing was de minimis.

The Respondents relied on the "ordinary man" test in that when viewing the works it would be considered that the committee room and the multi-purpose room constituted enlargements or extensions to the community centre. The rooms operated so as to enlarge the Hall and provide a bigger community centre.

The Tribunal was referred to the case of Customs and Excise Commissioners v Marchday Holdings Ltd [1997] STC 272, at page 278 where Stuart Smith LJ in the Court of Appeal said:

"Enlargement clearly involves some addition to the existing building and involves an increase in the available space. Again in my view it will be a question of fact and degree whether something could properly be described as an enlargement of an existing building. The additional works may be so extensive in comparison with the original, that it would be a misnomer."

The case of Bryan Thomas Macnamara v Commissioners of Customs and Excise (16039) was relied on as the principal authority on "annexe". In that case the tribunal chairman had set out the history of the UK provisions. At paragraph 13 he stated:

"The scheme of the 1995 code is to exclude from the expression `construction of a building' a series of building works. Note (16) deals with these in descending order of their degree of integration with the existing building. Conversions, reconstructions and the alterations of existing buildings, the most closely integrated, are excluded. Enlargements of existing buildings are then excluded, the word `enlargement' connoting structural work producing an overall increase in size or capacity. The word `extension' in relation to an existing building refers, we think, to building work which provides an additional section or wing to that existing building; the degree of integration is one stage less than with enlargements. Then come `annexes' which, as a matter of principle, are also excluded. The term annexe connotes something that is adjoined but either not integrated with the existing building or of tenuous integration. Annexes intended for use solely for relevant charitable purposes are re-instated into the zero-rated class by Note (17) only if they are capable of functioning independently from the existing building and if both the main access to the annexe is not via the existing building and the main access to the existing building is not via the annexe. Otherwise all annexes are excluded from zero-rating.

…

"The scheme of Note (16) implies that the construction works falling within paragraphs (a), (b) and (c) are mutually exclusive. Moving down the degrees of integration, if the construction works are found on the facts to produce alterations to the existing building, they will not be works of enlargement or extension; and if they produce an extension, the structure will not be an annexe. On that basis the new teaching area is not an annexe. In any event it is, we think, too closely integrated into the existing building to make it an annexe; in other words those features of the construction that make it an extension exclude it from being an annexe. …"

In the case of the Colchester Sixth Form College (16252), the tribunal chairman (who was the same as in the Macnamara case) at page 8 stated:

"It follows that the college can only get within the zero-rating provisions if it can satisfy us that the new structure is an `annexe' as distinct from an extension or enlargement and, if so, that the annexe satisfies the conditions for zero-rating in Note (17). In this connection we readily concede that in architectural or engineering language works of extension or enlargement may, as was pointed out in the Grace Baptist decision, produce an annexe. But this approach does not conform with the statutory scheme adopted by the draftsman in Note (16). It follows therefore that if the supplies in the course of construction of the new structure were, as a matter of ordinary usage of the English language, directed at the enlargement of or extension to an existing building, then it must follow that there was no construction of an annexe and Note (17) will not come into play.

…

"Finally in this connection we reject the argument advanced for the College that Note (17) defines the terms `annexe'. There is no definition of annexe; Note (17) lays down the requirements that an annexe has to fulfil if the relevant supplies of construction works are to be zero-rated.

"The correct approach, we think, is to consider the existing building as it was and then to consider the end result of the construction works and ask whether, viewed objectively and in the light of all the relevant information, the work done amounts to the enlargement of, or an extension to, the existing building, or to the construction of an annexe to it. This was the two-stage approach, recommended in relation to the earlier but comparable legislation, by McCullough J in Customs and Excise Commissioners v The London Diocesan Finance [1993] STC 369 at 380 and endorsed by the Court of Appeal in Customs and Excise Commissioners v Marchday Holdings [1997] STC 272.

…

"… Finally in this connection, from the outside it is clear to us that the new structure has been visually integrated. Apart from the glass front which is evidently different in design, the new structure blends in and looks as if it is part of the existing building.

"With those features in mind, we now turn to address the questions of classification. We should mention that we have been referred to a number of dictionary definitions of `extension', `enlargement' and `annexe'. We have found these of limited value. The relevant words are of general usage and the test, as we see it, is to determine how the ordinary reasonable man, possessed of the relevant facts, would make the classification.

"Has there been an enlargement of the existing building? `Enlargement', as was pointed out in paragraph 13 of the Macnamara decision denotes structural work producing an overall increase in the size and capacity of the existing building."