United Kingdom VAT & Duties Tribunals Decisions

Wellcome Trust v Customs & Excise [2003] UKVAT V18417 (08 December 2003)

VAT – REDUCED RATE – Dwellings – Changed number of dwellings conversion – Whether part of premises contains same number of dwellings – "Part of the premises being converted" – VAT 1994 Sch 7A Grp 7 Note (3) – Appeal dismissed

LONDON TRIBUNAL CENTRE

WELLCOME TRUST Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: THEODORE WALLACE (Chairman)

PRAFUL DAVDA FCA

SHEILA WONG CHONG FRICS

Sitting in public in London on 30 September 2003

Philippa Whipple, counsel, instructed by Haysmacintyre, Chartered Accountants, for the Appellant

Andrew O'Connor, counsel, instructed by the Solicitors of the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003


 


DECISION

1. This appeal concerns the reduced rate of 5 per cent for certain residential conversions introduced by the Finance Act 2001, more specifically for changed number of dwellings conversions.
2. The Appellant which is a medical research charity owns the freehold of 10/11 Egerton Gardens, London SW3, as an investment property. The property comprised two inter-connecting terraced houses with six storeys including a basement in the front and four floors at the rear all of which were at different levels (mezzanines).
3. The work which started in 2002 involved converting six or seven flats into four. The Commissioners agreed that the work to the basement, ground, first, third and fourth floors was eligible for the reduced rate but in a letter dated 7 October 2002 ruled that the works to the second floor apartment did not qualify for the reduced rate, because "the second floor forms part of the whole building and that floor remains the same 'a single household dwelling' before and after the conversion."
4. The Appellant appealed against the decision in the letter.
5. The dispute is over the meaning and application of Note (3) to Group 6 of Schedule 7A to the VAT Act 1994.
6. The relevant provisions of Group 6 are as follows:

"Item No.

1. The supply, in the course of a qualifying conversion, of qualifying services related to the conversion.

2. The supply of building materials if –

(a) the materials are supplied by a person who, in the course of a qualifying conversion, is supplying qualifying services related to the conversion, and

(b) those services include the incorporation of the materials in the building concerned or its immediate site.

…

NOTES:

1(1) Sub-paragraph (2) applies where a supply of services is only in part a supply to which item 1 applies.

(2) The supply, to the extent that it is one to which item 1 applies, is to be taken to be a supply to which item 1 applies.

(3) An apportionment may be made to determine that extent.

. 2(1) A qualifying conversion means –

(a) a changed number of dwellings conversion (see paragraph 3);

(b) a house in multiple occupation conversion (see paragraph 5); or

(c) a special residential conversion (see paragraph 7).

(2) …

3(1) A changed number of dwellings conversion is –

(a) a conversion of premises consisting of a building where the conditions specified in this paragraph are satisfied, or

(b) a conversion of premises consisting of a part of a building where those conditions are satisfied.

(2) The first condition is that after the conversion the premises being converted contain a number of single household dwellings that is –

(a) different from the number (if any) that the premises contain before the conversion, and

(b) greater than, or equal to, one.

(3) The second condition is that there is no part of the premises being converted that is a part that after the conversion contains the same number of single household dwellings (whether zero, one, two or more) as before.

4(1) For the purposes of this Group "single household dwelling" means a dwelling –

(a) that is designed for occupation by a single household, and

(b) in relation to which the conditions set out in sub-paragraph (3) are satisfied.

(2) …

(3) The conditions are –

(a) that the dwelling consists of self-contained living accommodation;

(b) that there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

(c) that the separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision, and

(d) that the separate disposal of the dwelling is not prohibited by any such terms."

Under Note 4 "single household dwelling" means a dwelling that is designed for occupation by a single household that consists of self-contained living accommodation with no direct internal access to any other dwelling.

Note 11 covers the meaning of "supply of qualifying services". Paragraph (1) covers conversion of a building and paragraph (2) conversion of part of a building. Paragraphs (2) and (3) provide,

"(2) In the case of the conversion of part of a building, 'supply of qualifying services' means a supply of services that consists in –

(a) the carrying out of works to the fabric of the part, or

(b) the carrying out of works to the fabric of the building, or within the immediate site of the building, that are in connection with –

(i) the means of providing water, power, heat or access to the part,

(ii) the means of providing drainage or security to the part, or

(iii) the provision of means of waste disposal for the part.

(3) In this paragraph –

(a) …

(b) references to the carrying out of works to the fabric of a part of a building do not include the incorporation, or installation of fittings, in the part of any goods that are not building materials."

Note 12 gives "building materials" the same meaning as in Note (22) and (23) to Schedule 8, Group 5.

7. The only witness was Mark Hindley, RIBA, formerly of Litman Goddard Hogarth Ltd, who were responsible for the design and who produced the plans. He confirmed a witness statement and was cross-examined. There was no challenge to his evidence which we accept.
8. 10/11 Egerton Gardens was originally two terraced houses occupied by separate households with six floors each at the front and fully integrated rear mezzanine floors on four floors.
9. Several decades ago the houses were converted laterally, apart from the third and fourth floors which comprised two vertical flats, so that there was one flat on each of the ground, first and second floors, including the mezzanine floors, and one or two flats in the basement. There were thus six or seven flats in all. There was a centrally positioned set of stairs, which were common parts, giving access to each flat via a door. The load bearing party walls were largely retained at that stage. The building had no lift.
10. The second floor was occupied as a single flat with the whole of the mezzanine floor to its rear and above it. Access between what were Nos 10 and 11 was gained on the mezzanine floor where it abutted the front part of the property. There were nine steps up to the mezzanine floor which was 1535mm (just over 5 feet) above the floor level of the front part. The ceiling of the front part was shown on the plan as 3205mm high and that of the mezzanine floor as 2520mm. He told us that here were six storage cupboards having headroom of about 11 feet (which is 3352mm) at the front and about 6 feet (1828mm) at the rear which jutted into the common parts area but with doors opening into the flat. The second floor was a single household dwelling.
11. The planning permission required for the building which is within a conservation area had to be considered as a whole.
12. The conversion work with which we are now concerned involved significant re-engineering of the internal structure of the building, removing 4 metres of the load bearing wall in the main part and 3 metres in the mezzanine part on all floors, leaving approximately 1.5 to 2 metres of the original party wall in the centre; this opened up large reception rooms. The ground floor was converted into one apartment including the two basements and rear mezzanine floor. The first floor apartment has two mezzanine floors, upper and lower. The second floor has the same upper mezzanine floor as before and the third and fourth floors are combined into a single apartment with no mezzanine floor. There are now four apartments.
13. Before the conversion work the staircase was not in exactly the same position on all floors and took up considerable space. There were only thin partition walls between the staircases and the apartments. A vertical boxed stairwell was created in reinforced concrete with a lift going to all floors apart from the fourth floor. This boxed stairwell provided the building with the bracing needed once the load bearing party walls were lost. This meets modern standards of fire retardant and soundproofing of the common parts from the demised areas.
14. The lift does not access to the fourth floor. In order to provide sufficient safety clearance for BSS requirements at the top of the lift shaft, the point at which it opens onto the third floor is slightly lower than the original level of the third floor. The third floor landing is therefore lower than before. The front door to the third and fourth floors is at second floor level opening onto the stairs up in the common parts area. In order to accommodate the changed stairs structure for the third floor, the ceiling height in the lobby area of the original second floor flat has been lowered by about two feet which is 610mm. This was and is outside the common parts.
15. , The six storage cupboards on the second floor which jutted into the common parts area have been eliminated.
16. Mr Hindley said that part of the old hall or lobby on the second floor was incorporated into the large reception room, part went to the lift, part to a new storage cupboard and part to the new lobby. Two small storage cupboards became part of a new bathroom. Two cupboards were lost to the lift and two were lost to the stairs.
17. He agreed with Mr O'Connor that the volume of the second floor apartment after the conversion was around 95 per cent of that before; the internal floor area was 154.2 square metres against 153.2, a slight increase which included the removal of 7 metres of load bearing wall.
18. Mr Hindley produced scale drawings and a transparency of the second floor before the conversion which could be superimposed on the plan after the work to show the changes apart from the ceiling height.

Submissions

19. Both counsel served skeleton arguments which they expanded orally.
20. Miss Whipple put her case in two ways. Her primary argument was that the second floor had given up some of its space to the third and fourth floors and should be viewed together with them as a part of the premises within Note 3(3) in which the number of single household dwellings has changed from three to two. Her alternative argument was that the second floor cannot be viewed as a separate part within Note 3(3) and that the building must be viewed as a whole, in which case the number of dwellings had changed to four.
21. On her primary submission, she said that the premises being converted can consist of part of a building and that it is possible for part only to qualify. She said that since Note 3(1)(b) specifically contemplates the reduced rate applying to part of a building only, it must be possible for part of a building to satisfy the conditions even if another part does not. There is no definition of "part" in Note 3(3) so that it must have its normal meaning and covers any part. In applying Note 3(3) it is necessary to compare the position before with that after. Here part of what was the second floor flat became part of the apartment above : what was a cupboard in the second floor flat was now part of the exclusive stairs up to the third and fourth floor apartment and the floor of the third floor had been partly lowered encroaching on the ceiling of part of the second floor flat; around 5 per cent of what was the second floor flat now formed part of the apartment above. She submitted that the second floor should be viewed together with the third and fourth floors as a part of the premises where there was a changed number of dwellings; the first floor had been viewed as a part together with the ground floor and basement; the same logic applied to the second floor together with the third and fourth floors. She said that the legislation contains no de minimis exception.
22. Miss Whipple relied on the examples in paragraph 2.4 of VAT Information Sheet 4/01 [2001] STI 819 published by the Commissioners in May 2001 before the Finance Bill 2001 was enacted. She said that the footprint of the second floor flat was changed to add to the upper apartment.
23. Alternatively, she said that the work involved the building as a whole, with the removal of load bearing party walls and the installation of the lift. The work was not designed on a floor by floor basis and no part of the building had been left untouched. The totality should qualify for the reduced rate.
24. Mr O'Connor, for the Commissioners, said that it was necessary under Note 3(3) to look first at the position after the work and to compare that with the position before.
25. He said that although the second to fourth floors together were capable of constituting part of the premises within Note 3(3), the second floor flat on its own also constituted a part. The submission that, once part of the second floor flat was transferred to the floors above, the second floor had to be viewed as a part of the premises together with the upper floors was not supported by the wording of Note 3(3).
26. He said that the negative condition in Note 3(3) eliminated a claim under Note 3(1)(a) for the whole building This left Note 3(1)(b) which applied to a conversion of part of a building. The upper maisonette satisfied the negative condition so also did the lower floors. The work on the part now comprising the upper maisonette was also allowed as was the lift. Only the works within the area of the converted second floor apartment were disallowed. The small items of work to the peripheral areas where space was taken from that flat by the converted maisonette above were allowed, see paragraph 8 of his skeleton argument. This was a revised ruling, apparently on 22 May 2003 some months after the notice of appeal. We observe that the work to the stairwell and the lift and also the new stairs to the upper maisonette all fell within Note 11(2)(b)(i) being in connection with the access to the upper maisonette, as was the lowering of the third floor to accommodate the lift opening.
27. Mr O'Connor said that this was the first case on Note 3. The Appellant had to show that it qualified for the reduced rate which like exemptions must be construed narrowly, see SUFA (Case 348/97) [1989] ECR 1737 and Monoprio v Customs and Excise Commissioners (2002) Decision No.17806.
28. He said that Note 1 providing for apportionment applied. The fact that the work was carried out as a whole does not prevent apportionment. Under Note 3(1)(b) it is possible to look at any part of the building comprising a premises. The second floor was such a part. That part satisfied Note 3(2) but did not satisfy Note 3(3). The premises being converted under Note 3(1)(b) was the part of the building on the second floor. Note 3(3) was directed at part of that part; the first reference to "part" refers to the same "part" as the second reference. That part after the conversion contained one single household dwelling which was the same number as before the conversion.
29. Mr O'Connor agreed with Miss Whipple that a part could be any part of the building, whether a floor, part of a floor, several floors, or parts of several floors taken together. He said that he did not need to answer the question whether it must be big enough to be capable of containing a single household dwelling, but here the second floor was. He identified the relevant part as the flat as it was after the conversion.
30. He accepted that it is necessary to consider all three dimensions not just the horizontal foot print. He said that it is not relevant however that there was a small change (here 5%) in what the second floor apartment consisted of. There had to be an element of degree. Here the converted second floor apartment contained sufficient of the old flat to contain the same number of dwellings. It does not matter that the dwelling after is 5 per cent smaller: it would be different if it was 50 per cent smaller.
31. Mr O'Connor said that the Commissioners' interpretation of the reliefs was set out in Information Sheet 4/01 but that the examples in the Information Sheet were helpful but not determinative. In Example 2, 20 per cent of each flat was given up : that sufficed. He said that 5 per cent was not enough. However the increase in the first floor apartment here sufficed.
32. Miss Whipple said that Mr O'Connor was advancing a de minimis approach which was not in the Statement of Case and was incorrect. In any event the change here was far from de minimis. Note 3(3) had no hint of a proportionality test: it simply required a change in the number of single household dwellings. A change from 19 to 20 dwellings where each flat was affected would suffice.
33. She said that SUFA which was cited by the Tribunal in Monoprio was concerned with exemptions. A permissive reduced rate under Annex H Category 9 was quite different and should be given its proper interpretation.
34. She said that it is not easy to see what the need is for Note 3(3) in the light of Note 3(2). She submitted that the "same number" must mean the same whole number; if after the conversion a part contained one single household dwelling but before it contained 1.05 or 0.95, they were not the same number. The parts of the premises involved in a transfer of space must be viewed together. Here looking at the second and upper floors together the change was 3 to 2; viewed alone, the change in the second floor apartment was 1.05 to 1.

Conclusions

35. This is the first appeal concerning Note 3(3) and shows clearly the difficulty of interpreting and applying it, in particular in determining to what a "part of the premises being converted" can refer.
36. The reduced rates were introduced by the Finance Act 2001 under the powers conferred on Member States by Article 12(3)(a) of the EC Sixth Directive and Annex H. Category 9 of the Annex H covers, "Supply, construction, renovation and alteration of housing provided as part of a social policy." Beyond the fact that Group 6 applies to changed number of dwellings conversions, multiple occupation conversions and special residential conversions, it is not apparent from the statute what the social policy is. It is not confined to an increase in housing provision.
37. The provisions of Group 6, which were originally in Schedule A1, did not receive any debate in Parliament due to the early General Election. Information Sheet 4/01 although published in May 2001 clearly preceded enactment of the Finance Bill since it annexed the legislation in a draft form, including clause 95 which became section 99 of the Act, and was presumably before Parliament; however it gives no real assistance in interpreting Note 3(3). Budget Notice 85/01 outlining the measures was headed "Urban Regeneration Measures," [2001] STI 472; again this does not assist.
38. Mr O'Connor submitted that the reduced rate provision must be interpreted narrowly, citing SUFA in the Court of Justice and the Tribunal decision in Monoprio. As a general proposition we accept that the reduced rate provisions like exemptions must be interpreted strictly as departures from the basic or full liability to tax. It is however the duty of the Tribunal to interpret them in any way which is workable and does not deprive them of their intended effect. Furthermore the legislation must be interpreted if at all possible in a way which is predictable.
39. The problem here arises out of the word "part" in Note 3(3), in the phrase "no part of the premises being converted." On a literal interpretation the words "no part" apply to any part, however small. A bathroom or even a storage cupboard is a part of the premises; if any part however small can be identified as "part" for Note 3(3) the negative condition could never be satisfied since it would always be possible to identify a part so small that it could not contain a single household dwelling either after the conversion or before. This would deprive the reduced rate for a "changed number of dwellings conversion" of any effect. It follows that there must be some limitation on the meaning of "part" in that it must have some minimum size. Mr O'Connor did not suggest that "part" could be any part however small, however he did not advance any test by which we could determine what constitutes a "part" in any case. If no test can be extracted or inferred from the statute, it seems to us that the application of Note 3(3) is wholly unpredictable. The need for legal certainty is a principle of Community law. In Germany v EC Commission (Case 332/85) [1987] ECR 5143 the Court said this at paragraph 23,

"Moreover, as the Court has repeatedly held, Community legislation must be certain and its application foreseeable by those subject to it. That requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the obligations which they impose on them."

In our judgment that principle applies to legislation implementing a Directive.

40. It is clear from the provision for apportionment in Note 1 and from the reference in Note 3(1)(b) to "premises consisting of part of a building where those conditions are satisfied", which is alternative to (1)(a), that premises consisting of part of a building can qualify. In order for the negative condition in Note 3(3) to be rationally workable it seems to us that the "part" referred to must be large enough to be capable of containing a single household dwelling (which for convenience we call a "dwelling"), since if it was not large enough the number of dwellings would always be zero after and zero before; a dwelling must consist of self-contained living accommodation, see Note 4. Furthermore Note 3(3) contemplates that the part may contain zero, one, two or more dwellings. A single dwelling may constitute a part for the purposes of the test, but a part may also contain more than two dwellings either before or after. "Contain" is not the same as comprise, so that the part in question may clearly contain more than one dwelling. Thus a floor may constitute a part of a building or indeed part of a floor, a wing of a house or more than one floor, or an apartment or two together may constitute a part of the premises.
41. It is also necessary to be able to ascertain in a particular case what is capable of constituting a "part of the premises being converted" so that the condition can be applied with legal certainty. If it is impossible to determine what is a potential "part", the test in Note 3(3) cannot be rationally applied. A trader's task in establishing the negative condition under Note (3) would be impossible.
42. In our judgment it is necessary that any relevant part of the premises must be capable of being identified by reference to physical boundaries, normally walls, floors and ceilings after the conversion; a notional line in the middle of a room would not suffice.
43. Here Mr O'Connor identified the second floor apartment after the conversion as a part. Mr O'Connor accepted that the two references to "part" in Note 3(3) must grammatically be to the same part. Miss Whipple's primary submission was based on the premise that the part being compared before and after must occupy the same space, not only in their footprint but in all dimensions. We accept this premise. The condition in Note 3(3) requires a comparison of what is contained in the part after with what was contained before.
44. The physical boundaries of the converted flat were not of course identical to the boundaries of the previous flat. The differences were not great but the horizontal footprint shows clear differences. Part of the former hall and two cupboards were taken for the lift, two were taken for the reinforced stairwell box and two cupboards were taken for the new bathroom and the ceiling in the new hall was lower. A bathroom was gained from what were two cupboards. A cupboard was built on space partly occupied by a common wall and the removal of four metres of load bearing wall all added to the apartment. There was a net increase of one square metre in the internal floor area (see paragraph 17 above).
45. The Commissioners identify the new apartment as a part for Note 3(3), although the physical boundaries of that part after the conversion did not contain the totality of the previous dwelling but only around 95 per cent of it.
46. Miss Whipple's primary contention has the logical advantage that in viewing the second floor together with the upper floors, to which the second floor has yielded a part, the parts being compared are identical. Part of the work within what is now the second floor apartment was unavoidable in view of the work to the floor above and the access to that floor both by stairs and by lift.
47. However notwithstanding Miss Whipple's argument, we do not see how the Appellant can avoid the identification of the second floor apartment after the conversion as a relevant part. While it may be logical to regard the second floor and the upper floors as a part of the building, that does not preclude the new second floor apartment from being identified as a part also unless any transfer of space to or from a part prevents that part from being viewed on its own. We do not see why it should do so.
48. Once the second floor apartment after the conversion is identified as a relevant part within Note 3(3), the issue is simply whether that part contained a single dwelling before the conversion. That part undoubtedly did contain a single household dwelling after the conversion. The area or part comprising that apartment after the work contained around 95 per cent in volume of the single household dwelling before the work and a higher proportion of the floor space. After some hesitation we have concluded that the elements of the previous second floor apartment which were contained in the area covered by the new apartment contained all the essential elements of a single household dwelling. Put another way, the elements of the previous dwelling which were not contained in the physical space occupied by the converted apartment namely some cupboards and ceiling space were not substantial enough to deprive the remainder of the previous apartment of the character of a single household dwelling. That part of the premises converted which comprised the apartment after the conversion contains one single household dwelling after which is the same number as before the conversion. The appeal is therefore dismissed.

THEODORE WALLACE

CHAIRMAN

RELEASED:

LON/02/975