United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2004] UKVAT V18638

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Beco Products Ltd and BAG Building Contractors v Customs and Excise [2004] UK V18638 (04 June 2004)

18638

VALUE ADDED TAX — reduced rates of tax —energy-saving materials — "Wallform" method of insulating buildings — how far reduced rate applies to contracts for installation — whether separate supplies of materials necessary to benefit from reduction — reduced rate inapplicable to entire contracts — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

(1) BECO PRODUCTS LTD

(2) B A G BUILDING CONTRACTORS Appellants

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Mr M S Johnson (Chairman)

Sitting in public in York on 21 April 2004

Mr R E Miller, director of the first Appellant, for the Appellants

Mr C Sephton, QC, of counsel, instructed by the Solicitor for Customs and Excise, for the Respondents

DECISION

This appeal concerns the treatment for value added tax of supplies consisting of the installation of products marketed as the "Beco Wallform Permanent Insulated Formwork System" ("the system").

There are two sets of legislation with which this appeal is concerned. Section 2(1A) and Schedule A1 of the Value Added Tax Act 1994 ("the VATA") were inserted into the VATA by the Finance Act 1995 in relation to supplies made after 31 March 1995. Those provisions ("the repealed legislation") were repealed by the Finance Act 2001 in relation to supplies made after 31 October 2001. At the same time, that Act inserted section 29A and Schedule 7A into the VATA with regard to those supplies ("the current legislation"). Both the repealed legislation and the current legislation are relevant to this appeal.

Until repealed, section 2(1A) of the VATA provided that VAT charged on any supply for the time being falling within paragraph 1 of Schedule A1 should be charged at the rate of 5 per cent ("the reduced rate"). Section 29A of the VATA now provides that VAT charged on any supply that is of a description for the time being specified in Schedule 7A shall be charged at the reduced rate.

The Finance Act 2000 inserted inter alia sub-paragraphs 1(1)(aa) and (ab) into Schedule A1. Those sub-paragraphs had effect in relation to supplies made after 31 March 2000. Those sub-paragraphs were repealed along with the rest of Schedule A1.

Sub-paragraphs 1(1)(aa) and (ab) included in supplies charged at the reduced rate –

aa) supplies of services of installing "List A" energy-saving materials in residential accommodation or in a building intended for use solely for a relevant charitable purpose;

ab) supplies of "List A" energy-saving materials by a person who installs those materials in residential accommodation or in a building intended for use solely for a relevant charitable purpose.

"List A" was defined in paragraph 5(4) of Schedule A1. It included inter alia –

a) insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings;

b) draught stripping for windows and doors.

These matters are now dealt with as Items 1 and 2 respectively in Group 2 of Schedule 7A. The Notes to that group define what is meant by "energy-saving materials", "residential accommodation" and "use for a relevant charitable purpose" respectively. There is now no longer a "List A" – Note 1 of group 2 reproduces the repealed paragraph 5(4) in order to define the energy-saving materials concerned.

At the time that sub-paragraphs 1(1)(aa) and (ab) were added to Schedule A1, the Commissioners of Customs and Excise ("Customs") issued VAT Information Sheet 1/00 (March 2000) ("the Information Sheet"). That explained what Customs regarded as the scope of those sub-paragraphs. Following the replacement of the repealed legislation by the current legislation, Customs issued Notice 708/6/02 (February 2002) ("the Notice").

The Notice explains when the installation of energy-saving materials is treated by Customs as subject to a reduced rate of value added tax. It says that the reduced rate applies in the case of the installation of certain energy-saving materials in residential accommodation or buildings used solely for a relevant charitable purpose. Such supplies in the course of construction of new dwellings will anyway be zero-rated, but the reduced rate is relevant in various other construction situations, e.g. the building of extensions to existing dwellings.

Under the heading "Incidental Work", in paragraph 2.1.2 of the Notice, the Notice states as follows –

"Any work that you undertake as part of the installation process is eligible for the reduced rate.

"This includes minor building works, such as planing doors or windows, enlarging loft hatches, and painting or plastering to make good.

"But if the installation of energy-saving materials is incidental to another supply you are making – such as the building of an extension or the replacement of a roof – you are making a single supply of construction services (see Notice 708 'Buildings and construction')".

In opening the case to the tribunal, Mr Miller, director of the first appellant ("Beco"), outlined the basis of the appeal. He explained how, in April 2000, Beco, as a manufacturer of energy-saving materials, had received a copy of Budget Notice 39/00 and the Information Sheet, describing the new reduced rate of VAT for the installation of energy-saving materials. He discussed these with Customs and corresponded with Customs about them. Differences of opinion arose between Beco and Customs as to the interpretation of the VATA and as to the situations in which VAT at the reduced rate should be charged in respect of products manufactured by Beco.

Mr Miller gave evidence to the tribunal as to Beco's trading activities and the nature of the system. I find that Beco is in the business of manufacturing and supplying energy-saving materials for installation in buildings. It supplies a product called "Wallform". As its name suggests, this product is used to form walls. It consists of lightweight hollow building blocks made of moulded expanded polystyrene. A standard block weighs 800g in its smallest size. The blocks, when fitted together, using tongues and grooves, provide the basis for a wall which can be extended, using corners, curved blocks, edge blocks and lintels, all of moulded expanded polystyrene, to form the frame of, for example, an extension to a house up to roof level.

I find that "Wallform" blocks are not used for the purpose of giving structural permanency to an extension or other building. Rather they are used to provide a high degree of insulation to the building, improving upon the level of insulation that might, according to traditional building methods, be provided by structures of (say) stone, wood or brick, and making unnecessary supplemental insulation such as cavity wall insulation. The system depends for its integrity upon concrete being poured into and around the polystyrene blocks, to give strength to the building and resistance to the elements. External surfaces can be finished by rendering or cladding, internal surfaces by plastering, or by applying wall finishes, such as tiles, directly to the "Wallform". The roof is then attached to the tops of the walls as with a building of traditional construction.

Floors can be formed using lightweight steel beams and insulation infill panels, with a concrete overlay; staircases can be formed by setting stair trays into the walls and concreting these when the rest of the structure is concreted.

Windows and doors can be installed in such a way as to incorporate draught proofing. This is done by trimming back the polystyrene of the window-frames and door-frames to produce a snug fit for the window or door when inserted in place.

The above method of construction initially gave rise to the following issues between the parties:

Whether a supply of the installation of "Wallform" blocks in residential accommodation or for a building intended for a relevant charitable purpose attracts VAT at the reduced rate, assuming that the supply does not qualify for zero-rating;

Whether the construction of such an extension or building using "Wallform" blocks means that the entire construction attracts VAT at the reduced rate.

The first of these issues has since been resolved between the parties, in that it is now accepted by Customs that, if the "Wallform" blocks have been supplied in isolation from any other building work undertaken by the contractor by whom they are supplied, the service of installing the blocks, if separate from other building work, attracts VAT at the reduced rate. Say, for example, that one contractor obtains and installs "Wallform" blocks, performing the construction of the blocks on site, and another contractor adds the concrete and finishes off the building. In that case, the supply of services by the first contractor attracts the reduced rate. Otherwise, Customs say, the project does not benefit from the reduced rate.

The remaining issue is thus whether the supply of the system, so far as the blocks are not installed separately from other materials purchased for or work done to the building, can attract the reduced rate. Customs say that, in that case, the system does not attract the reduced rate. Beco says that the rest of the construction is so secondary to or incidental to the system that the whole should attract VAT at the reduced rate.

When Mr Miller put the last-mentioned proposition, I mentioned that the tribunal could not pre-determine every factual situation that might arise. In some cases, a contractor will quote for an entire contract, and perhaps sub-contract part of it, if he obtains the contract. In other cases, the employer will directly engage different contractors for different parts of the project. Again, at one extreme, materials may all be bought in separately from a labour-only contract; at the other extreme, the project may be "design and build".

Mr Miller therefore elected to call evidence as to specific factual situations that had arisen. The tribunal heard about the following:

1) The construction of an extension for a Mr & Mrs Clegg of St Annes-on-Sea, Lancashire, carried out in 2002 by the second appellants B A G Building Contractors, of Wakefield, West Yorkshire ("B A G"). Mr Derek Preston, the Joinery Manager of that firm, gave evidence to the tribunal. He told the tribunal, and I accept, that he personally was involved in the building of that extension, in which his firm had had to take over a project abandoned by another contractor. That contractor had put in the footings but could not handle the installation. B A G's invoice for that job was for a total of £3,698.21, including VAT @ 17.5%. Of that sum, only £235.00 plus VAT was expressed to relate to supplies of goods or services apart from the supply and erection of "Wallform" components. However I find that the concreting was included in the figure for supply and erection of the blocks. I find that the sum of £235.00 was intended to cover only the scaffolding and other building materials employed. Nevertheless, I note that less than 10 per cent of the cost of the project, before VAT, was attributed to supplies other than those relating to "Wallform".

2) The construction of an extension for a Mr Capps of Netherton, Wakefield, West Yorkshire, again carried out by B A G in 2002/3. The invoice was for £5,307.48, including VAT @ 17.5%. That was also a contract to build an extension. Unfortunately Mr Preston lacked personal knowledge of that project. It is not clear to what extent, if at all, the "Wallform" blocks may have been supplied separately from their erection. The supply and erection are separately billed in the invoice, but then that was the case also with the invoice for the St Annes project, which Mr Preston confirmed was an entire contract. The Netherton project appears to have been just as much a "package" as was that at St Annes.