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Cite as: [2004] UKVAT V18675

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Watson & Anor v Commissioners of Customs and Excise [2004] UKVAT V18675 (01 July 2004)

18675

VAT – do-it-yourself builders' scheme – whether works in the course or furtherance of any business – original decision to occupy – subsequent decision before completion to let for some years pending hoped for use by children – time at which "business" test should be applied – test applicable to whole of construction period – initial use the primary indication of intention – relief therefore not available – comments on guidance to users of scheme

LONDON TRIBUNAL CENTRE

MR R AND MRS L WATSON Appellants

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: JOHN CLARK (Chairman)

MICHAEL SILBERT FRICS

Sitting in public in London on 23 April 2004

Mrs L Watson for the Appellants

John-Paul Waite of Counsel, instructed by the Solicitor's Office, HM Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The issue in this appeal is whether the conversion of the Appellants' barns into two residential dwellings was work carried out "otherwise than in the course or furtherance of a business" so as to qualify for a refund of VAT under the "do-it-yourself builders' scheme".

The law

Section 35 of the Value Added Tax Act 1994 provides:

"(1) Where—

(a) a person carries out works to which this section applies,

(b) his carrying out of the works is lawful and otherwise than in the course or furtherance of any business, and

(c) VAT is chargeable on the supply, acquisition or importation of any goods used by him for the purposes of the works,

the Commissioners shall, on a claim made in that behalf, refund to that person the amount of VAT so chargeable.

(1A) The works to which this section applies are—

(a) the construction of a building designed as a dwelling or number of dwellings;

(b) the construction of a building for use solely for a relevant residential purpose or relevant charitable purpose; and

(c) a residential conversion.

(1B) For the purposes of this section goods shall be treated as used for the purposes of works to which this section applies by the person carrying out the works in so far only as they are building materials which, in the course of the works, are incorporated in the building in question or its site.

(1C) Where—

(a) a person ("the relevant person") carries out a residential conversion by arranging for any of the work of the conversion to be done by another ("a contractor"),

(b) the relevant person's carrying out of the conversion is lawful and otherwise than in the course or furtherance of any business,

(c) the contractor is not acting as an architect, surveyor or consultant or in a supervisory capacity, and

(d) VAT is chargeable on services consisting in the work done by the contractor,

the Commissioners shall, on a claim made in that behalf, refund to the relevant person the amount of VAT so chargeable.

(1D) For the purposes of this section works constitute a residential conversion to the extent that they consist in the conversion of a non-residential building, or a non-residential part of a building, into—

(a) a building designed as a dwelling or a number of dwellings;

(b) a building intended for use solely for a relevant residential purpose; or

(c) anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings."

Section 94(1) of the Value Added Tax Act 1994 provides:

"(1) In this Act "business" includes any trade, profession or vocation."

Articles 2 and 4 of the EC Sixth Council Directive provide as follows:

"Article 2

The following shall be subject to value added tax:

1 the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

2 the importation of goods."

"Article 4

1 "Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2 The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity."

The facts

The evidence consisted of the Commissioners' bundle of documents, and a witness statement made by John Mills, Assistant VAT Officer. Mrs Watson gave oral evidence. From the evidence, we find the following facts.

The Appellants live on a farm in Essex. One of the farm buildings was a barn, which had become derelict. The Appellants decided to convert this detached barn into a residential unit. Their initial aim was to have a single unit, but this proposal was rejected. Instead, approval was given for the conversion of the barn into two semi-detached dwellings. The Appellants' intention initially was to move into both of the converted dwellings, because of the number of family members. If they had done so, they would have let out the existing farmhouse. The conversion produced two dwellings, each with four bedrooms and three fair-sized reception rooms, plus other accommodation. The work of conversion turned out to be very expensive, and the Appellants decided that they would need to rent the converted dwellings out. The Appellants' case, which is disputed as explained below, is that they had a conversation with the VAT office. They asked how long they needed to live in the converted barn to qualify for VAT relief. Their understanding of the response was that it would not be a problem to rent out the dwelling; it was necessary to live there, but the position would be different if the dwelling were sold. The Appellants decided that they would retain the dwellings for their children for the future, but that for a period of ten years they would let the properties. (The children were aged 9, 8, 7, 5 and 3 respectively.)

The terms of the planning consent for the conversion did not contain any conditions preventing the sale of either new dwelling independently from the main farmhouse, nor was any "section 106 agreement" entered into.

The Appellants did live in one of the converted dwellings for a short time, approximately two weeks, while there were problems with the main farmhouse. At this stage while they were living there temporarily, the new dwelling was not very habitable. Their long-term intention was for the children to live in the two new dwellings, but they agreed to let the two dwellings at rents of, respectively, £1,500 and £1,000 per month. Mrs Watson's estimate of the loan repayments on the property was in the range £1,500 to £2,000 per month, with any excess rental receipts going to pay off more of the loan. It remained the Appellants' intention to stay on the farm, although Mrs Watson indicated that they might have to move out temporarily for financial reasons. However, their long-term intention was to stay indefinitely. It was their hope that the children would remain to live in the new dwellings, although she accepted that this was only an aspiration. She did not consider that at the moment the "venture" of building the new dwellings was designed sizeably to increase the Appellants' wealth.

The first tenancy agreement for one of the dwellings commenced on 1 March 2002, initially for six months. It was dated 25 February 2002, which was three days after the date of completion subsequently notified to the Commissioners. We have not seen copies of any other tenancy agreement, but our understanding is that a tenancy agreement relating to the other dwelling was entered into within a relatively short time afterwards. The rentals had been reported as part of the Appellants' income for income tax purposes.

On 20 May 2002 the Appellants wrote to the Commissioners enclosing their VAT refund claim. They explained that they had completed this to the best of their ability after "multiple conversations with different VAT personnel". They continued:

"We live on a farm and have recently converted the derelict Essex barn into two semidetached houses for residential use. Our children will live in the barn in the future but we are currently renting them to help us pay off some of the money we have borrowed for this.

We understand, from our conversations that we have had with your department, that if we sell the barn or if it is used commercially then we will have to refund the VAT; but as we only intend to use it for residential use that we are entitled to the refund.

Please let us know if there is anything else you wish to know."

Together with the refund form, the Appellants enclosed comprehensive details of the items and services involved in the conversion.

Mr Mills responded for the Commissioners on 21 June 2002. He said that the Appellants' letter indicated several misunderstandings in relation to the way in which the legislation relating to do-it-yourself housebuilders' claims operated. The position was determined by the first occupancy of a dwelling; there were no interim arrangements whereby VAT could be repaid if the use of the dwelling changed. He considered the renting out of the two dwellings as the determining factor in judging the Appellants' ability to use the scheme. He drew attention to paragraph 2.1c) of Notice 719. He considered that the dwellings were being used for the furtherance of business, so the claim could not be accepted.

On 19 September 2002, Mrs Watson wrote to the Commissioners' Complaints Manager, referring to telephone advice. (We refer to this later.) She also appealed against the decisions. On 28 October 2002, this letter was acknowledged by the Commissioners' Appeals Team, indicating that they would be carrying out a reconsideration of the decision. On 10 January 2003 Miss Halpin, the Commissioners' Appeals Officer, wrote both to apologise for the delay and to request further documents and information. She accepted that the documents might already have been shown to the Commissioners. On 4 February 2003 she wrote again, giving a time limit for the information to be provided, failing which she would assume that the Appellants did not wish to continue their appeal. The Appellants provided the information, which had been sent earlier to the Commissioners, on 8 February 2003. On 10 February 2003 Miss Halpin requested a full copy of the planning permission, which the Appellants sent by return. On 27 February 2003 Miss Halpin requested a copy of the plans for the development, including a copy of the site plans, and asked whether there was a section 106 agreement with the local authority. The Appellants sent the copy site plans on 1 March 2003. On 11 March 2003 Miss Halpin requested two further items of information. The first was written confirmation from the local authority that the two dwellings could be sold and used independently from any other building or land on the farm, and from each other. The second was written confirmation from the local authority that the Appellants had not signed a section 106 agreement. The Appellants provided this information on 16 April 2003.

On 16 June 2003 Cheryl Jones, a Senior Officer in the Commissioners' Appeals Team, wrote to the Appellants to explain that Miss Halpin was no longer dealing with the reconsideration of the decision in this case. Ms Jones requested further information. This related to three topics; the extent to which the conversion had incorporated the existing barn, the tenancy agreements, and the future use of the buildings, including the dates of birth of the children concerned and when the Appellants anticipated them moving into the properties.

The Appellants replied on 19 June 2003, enclosing the previous correspondence and pointing out that the matter had been going on for over a year by that stage. They confirmed that the conversion was just the existing barn; nothing had been demolished or extended. On the tenancy agreements, both properties were let on the same agreements, of which the Commissioners had copies. They had not been let at the same time, as the Appellants had had to move into one of them for a time when they had had flooding in their house. Both properties were still let to the same people but the Appellants anticipated them moving out in the near future. The Appellants' intentions for the future relating to the properties hinged on whether they were able to recover the VAT. On the question when the Appellants had originally decided to let the properties out in order to help recoup some of the financing involved, the Appellants said that this had been half way through renovating the properties, having had the discussions with the VAT office, who had said that it would not affect the Appellants' VAT claim. (This had been mentioned in earlier letters.) On the future use of the properties, the children were 8 and 9 at present, so it was a long-term plan for them to move in. The Appellants had originally anticipated moving in themselves and letting their own house. As the costs had escalated and the Appellants had been advised that they could let them as long as it was not for commercial use without this affecting their VAT claim, they had stayed in the farmhouse and let the barns so that they could generate more money to help pay the loan off.

On 24 July 2003 Ms Jones wrote confirming the original decision. Although the Appellants were not property developers, it had been deemed that there was an element of business use in that the properties were being rented out and that they were for use by the Appellants' children in the future. The dispensation in the Commissioners' guidance (we refer to this below) allowing do-it-yourself builders to occupy properties at a later date was intended for those who needed to cater for their future housing needs, eg those who lived in tied accommodation, and did not apply in the present case. (She referred to separate correspondence relating to the complaint about the National Advice Service; we mention this below.)

Arguments for the Appellants

Mrs Watson explained the history of the claim. When it had been rejected, she had telephoned the officer, John Mills, to ask why. One issue was that the wrong information had been given. The second related to "business", being an issue of VAT law. The Appellants' complaint to the National Advice Service had been rejected, as the advice had been right. The problem related to the definition of "business". The Appellants had technically been the first occupants in one of the properties. On the question of intention, it had always been their intention that the family should occupy the new properties. Mrs Watson referred to the Commissioners' own internal guidance (Customs and Excise Manual Volume V1 Part 8A Section 7D Chapter 2 at paragraph 7.8), which states:

"Lettings of a person's private dwelling are not necessarily "business", and the construction of a house by a selfbuilder who later lets it is not for the "furtherance" of a business if that person is not already in business as a builder or developer, provided that the selfbuilder intends to use it as their private residence at some stage. This situation is known to arise when people such as farmworkers and others living in "tied" accommodation build a house in their spare time so that they have a home when their present employment ends.

Subject to the foregoing, a selfbuilder who by force of circumstances sells or attempts to sell his self-built dwelling soon after its completion is not regarded as having built it for their furtherance of a business if this was not their intention at the outset of the scheme."

The Commissioners had sent this guidance to Mrs Watson. This illustrated that this was a "grey area". The Appellants had moved in for a couple of weeks into one property. Their original plan had been to move in to both for an indefinite period. She referred to Hugh William Flynn v Customs and Excise Commissioners (2000) VAT Decision 16930. This referred to the perceived intention of the appellant in that case at the time when he embarked on the works. The Commissioners' counsel had conceded that if at the time of building the appellant had had no intention to further a business, then section 35 of the Value Added Tax Act 1994 would sanction the refund of VAT. [Mr Waite intervened to indicate that the Commissioners did not accept this argument.] Mrs Watson indicated that the case only related to the appellant's intention relating to a bed and breakfast facility.

Mrs Watson emphasised the Appellants' original intention to live in the two properties; as the costs had escalated, they had gone back to the VAT people and had been given the information about letting. The ten year decision was for the children, showing their long-term intention. When the claim had been refused, Mrs Watson had discussed with John Mills the effect of possibly getting rid of the tenants, but he had confirmed that this would not count.

Mrs Watson referred to the ambiguities in the legislation. She pointed out that she was not an expert on VAT. The Appellants had obtained advice. Only later had they found out about the other issues. She questioned what would be the effect of the Appellants moving into the properties now, but the Tribunal explained to her that this was not a matter within its jurisdiction. She emphasised the difficulty in finding information relating to the "course or furtherance of any business".

Arguments for the Commissioners

Mr Waite indicated that the Commissioners were not in any way challenging the Appellants' credibility. The issue was simple. However, there was a surprising lack of previous decisions. He reviewed the terms of section 35 of the Value Added Tax Act 1994. The issue was whether the conversion was carried out in the course or furtherance of a business. He referred to Commissioners of Customs and Excise v Yarburgh Children's Trust (CH/2001/APP/010465) (reported at [2002] STC 207). At [13] Patten J had reviewed the definition of "business" in section 94(1) of the Value Added Tax Act 1994 (and also considered Note 6 to Group 5 of Schedule 8 to the Act), being intended to give effect to Articles 2 and 4 of the Sixth Directive, and concluded that the letting of property was therefore expressly included if it satisfied the description of the "exploitation" of property in Article 4(2). Mr Waite argued that the conclusion to be drawn from the case was that the mere letting of a property for a rent was not enough to establish that it was in the course or furtherance of a business. However, the rent in that case had not been a commercial rent. Mr Waite argued that Yarburgh Children's Trust was fundamentally distinguishable from the present case. He referred to the final sentence of Article 4 paragraph 2, and submitted that this was what was happening in the Appellants' case.

He referred to Customs and Excise Commissioners v Lord Fisher [1981] STC 238, in which Gibson J had set out six indicia for determining whether an activity is a business. The first was whether the activity was a "serious undertaking earnestly pursued". Mr Waite argued that in the Appellants' case this was. It involved the letting of properties at a commercial rent. The Appellants were paying income tax on the rents. Secondly, was the activity "an occupation or function actively pursued with reasonable or recognisable continuity"? The Appellants' intention was to let the properties out at least until the children were old enough to live there. Thirdly, did the activity have "a certain measure of substance as measured by the quarterly or annual value of taxable supplies made"? Mr Waite considered this to be satisfied by the commercial rent being paid. Fourthly, was the activity conducted in a regular manner and on sound and recognised business principles"? In Mr Waite's view, this test was satisfied. Fifthly, was the activity "predominantly concerned with the making of taxable supplies to consumers for a consideration"? This test was also satisfied in the Appellants' case. Finally, were the taxable supplies "of a kind which, subject to differences of detail, were commonly made by those who seek to profit from them"? Again, this applied in the Appellants' case; it was common to seek a profit from the letting of property.

Mr Waite argued the importance of the relevant time for determining whether the conversion was carried out otherwise than in the course or furtherance of a business. What was the relevant date? Section 35(1)(b) of the Value Added Tax Act 1994 referred to the "carrying out of the works". The Commissioners' submission was that if, at any time before the works were completed, the person in question formed an intention to use the dwelling in the course or furtherance of a business, then that person was not entitled to a refund of the VAT. Was it correct to say that the works were carried out from commencement, without looking further, or was the position looked at right through to completion, with the intention being tested only at that stage? The Commissioners argued that the Appellants' intention had already been formed by that stage; the tenancy agreements started immediately before completion, and therefore the decision must have been taken before completion. The Commissioners' construction of the statute was that the "carrying out" of the work continued until completion, so that it was wrong to look at the intention prior to the commencement of the works. It was wrong to look at an intention that had been changed.

If the Tribunal were to take the view that the appropriate test was the intention at the commencement of the works, the Commissioners' case was that the Appellants were doing the works in the course or furtherance of a business. They had built two new buildings, which would have enabled them to let out the farmhouse. On any view, this was commercial. Mr Waite explained that the Commissioners' policy was to treat the first use as determinative. This was the general approach, a policy to give effect to the legislation. The first use could be taken as evidence of an intention not to use the property in the course or furtherance of a business. It would cause complication if the Tribunal were to decide that the appropriate test was the intention at the time of commencement of the works. He submitted that the original intention was irrelevant. It had been confirmed that the tenancy agreements were effective immediately on completion.

Mr Waite submitted that the burden of proof was on the Appellants to show, on the balance of probabilities, that the conversion was carried out otherwise than in the course or furtherance of a business; in support of this, he cited Hugh William Flynn. The evidence suggested that the conversion was carried out in the course or furtherance of a business. Both dwellings were being let at a substantial commercial rent totalling £2,500 per month (in respect of which income tax was being paid). This clearly amounted to "the exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis" for the purposes of Article 4(2) of the Sixth Directive. The question turned on the relevant date when the Appellants decided to use the properties in that way. He submitted that there was an intention to carry out the work in the course or furtherance of a business. The Commissioners' policy could not change that fact. He emphasised that in looking at the question of business intention, he was concentrating on the rental rather than a possible appreciation in value of the property. (It was confirmed to him on instructions that this corresponded to the Commissioners' general approach.) The plan that two of the children should live in the properties in the future could not be described as anything more than a long term aspiration, given that those children were aged just five and six at the time when the works were commenced and were now eight and nine. He submitted that this was not sufficient to displace the inference that the work was carried out in the course or furtherance of business. The question should be considered "in the round". If a person were to buy a farm with outbuildings and to develop those outbuildings, it would be surprising if this were not an economic activity.

Any inaccurate advice that the Appellants claimed to have received, while extremely unfortunate, was in his submission not relevant to whether the statutory test had been met. The January 1996 version of VAT Notice 719, "VAT refunds for "do-it-yourself" builders and converters", referred at paragraph 2.2 a) to private owner occupiers being unable to "use this scheme if you are constructing or converting the building with the intention to sell or let or for some other business reason". This was the Commissioners' written guidance. It was standard practice for these booklets to be given out with the repayment forms. He referred to the internal guidance which Mrs Watson had already quoted. He argued that tied cottages were not in any way analogous to the Appellants' position. It was not inevitable that the children would occupy properties converted some ten years before they became adults. He referred to Yarburgh Children's Trust at [10] to [36], dealing with the course or furtherance of a business. In relation to Hugh William Flynn, he referred to the following wording at paragraph 9 of the decision:

"We proceed on the basis that the burden of proof is on the Appellant to persuade us, on the balance of probabilities, that his intention at the time of building was other than to further the business."

He accepted that this could perhaps be read as suggesting that it was the builder's intention up to the point of commencement that mattered. However, that construction rendered the statute almost unworkable. He explained the reasons for the policy of allowing VAT relief under section 35 of the Value Added Tax Act 1994. He accepted that the January 1996 version of Notice 719 did not give a great deal of assistance on the question of what was or was not in the course or furtherance of a business. The replacement version of the booklet issued in May 2002 gave more guidance on this issue. He accepted that the Tribunal might wish to comment on the level of guidance in the later version of the Notice.

Discussion and conclusions

Before we deal with the substance of the appeal, we express our concern at the time it has taken for the refund claim to be processed, checked and reviewed. We do not think that it is satisfactory for items of information to have been requested in a piecemeal fashion. Further, a number of the items requested had already been supplied to the Commissioners on previous occasions; the Commissioners should have collected together all the information from their own files, rather than requesting the Appellants to provide it again. The Commissioners need to keep to a minimum any requests for further information; apart from collating all the information already in their possession, this is best achieved by ensuring that timely requests are made for all the information that is likely to be required for the purposes of dealing with the claim and any review. This is of particular concern for claimants of this relief, who as we indicate below are not otherwise within the VAT system.

In considering a claim to relief, we think it helpful to have in mind the reasons for the existence of the relief. The supply of a newly constructed dwelling is zero-rated, assuming that the relevant conditions are met. The policy reason is that consumers are not expected to suffer VAT on the supply to them of domestic accommodation. The do-it-yourself builder would therefore be at a disadvantage as compared with the purchaser of a zero-rated dwelling, as the former would have to suffer the cost of the VAT on all the supplies relating to the building or conversion of the property. Giving the right to recover the VAT is therefore a way of equating the do-it-yourself builder's position to that of a purchaser, as the do-it-yourself builder is not making any supply for VAT purposes and could not bring himself within the conventional rules relating to the recovery of input tax by taxable persons. The scheme provides a special form of relief, taking into account that do-it-yourself builders are not part of the normal VAT system.

If a person constructs or converts a building for the purposes of letting, the position is more complex. In the ordinary course, the letting of property is exempt for VAT purposes. The consequences are both that no VAT is charged on the rent, and that tax on supplies to the landlord, including all the cost of works on the property, cannot be recovered as input tax. Thus the VAT cost falls on the landlord. (Whether the landlord chooses to attempt to recover any of this cost by adjusting the rentals is a commercial question, depending in particular on the level of market rents for comparable properties.) Landlords do have an alternative; if the tenant agrees, the landlord can elect to waive exemption, treating the rent as taxable, and charging VAT on the rentals. (Tenants will only agree to this if they are taxable persons for VAT purposes and thus able to recover the VAT on the rents as input tax, subject to the usual conditions.) Where the landlord has made the election, the VAT incurred on the conversion should be recoverable as input tax, again subject to the usual conditions.

Thus it is not appropriate for a do-it-yourself builder who constructs or converts a property for the purposes of letting it to qualify for recovery of the VAT. If the rent is not subject to VAT, the builder is in exactly the same position as any other landlord making exempt supplies of property. It would be inappropriate for the do-it-yourself builder to be in any different position. If the rent were to be made subject to VAT, this would entail the do-it-yourself builder electing to waive exemption, thus becoming part of the normal VAT system and needing to have been registered for VAT purposes. Again, there would be no reason for the special relief under section 35 of the Value Added Tax Act 1994 to be applied.

The primary question in this case is whether it was the Appellants' intention in carrying out the conversion work to use the converted properties themselves (or for their children), or to provide the properties for rental. As the Appellants' intentions changed during the course of the project, this raises the further question of the time or times at which the intentions must be examined.

Section 35(1) refers at both (a) and (b) to the carrying out of works. Section 35(1A)(c) refers to a "residential conversion", which in turn is defined by sub-section (1D). The language used in the section is not limited in terms of time, and refers only to the carrying out of the works; it therefore contemplates the whole project. Under section 35(1)(b) the carrying out of the works must be "otherwise than in the course or furtherance of a business". The letting of property at a commercial rent is clearly in the course or furtherance of a business, even where it is exempt for VAT purposes, as it is an economic activity falling within Article 4(2) of the Sixth Directive. (The tests in Lord Fisher have to be modified to allow for the fact that the rents are exempted.) The Appellants did decide at the later stages of the project to rent the properties out, even though this had not been their intention at the outset. If their intention could be tested only at the beginning, this would mean that they would qualify for the refund whatever subsequent decision they might take as to the use of the properties. As a matter of policy, is it acceptable for relief to be based on initial intentions, without regard to any subsequent changes of intention? We doubt this, as it would enable relief to be available to a do-it-yourself builder who initially intended to occupy a property himself, but ultimately rented it out at a commercial rent, thus putting him in a better position than a normal VAT-exempt landlord. We think that the language used in section 35 requires the full project to be examined, and therefore requires the test to be applied at the point at which it is completed, or virtually so.

At the point that this project was completed, the Appellants had decided that they would not occupy the properties themselves, and that they would rent the properties out for approximately ten years until the two children were old enough to occupy them. This was a long-term decision to engage in the economic activity of letting the properties. Despite their longer-term intention that the two children should occupy the properties, we think that what matters for the purposes of the relief claim is that at the point of completion, the decision was to let the properties for an appreciable length of time. Mrs Watson accepted that their intentions relating to the children's occupation could only amount to an aspiration. The burden of proof is on the Appellants to show that the conversion was otherwise than in the course or furtherance of a business; see the passage quoted above from Hugh William Flynn. We think that the first use to which the property is put is a strong indication of the builder's intention in carrying out the conversion. Persuasive evidence would be necessary to contradict this indication. The Commissioners' policy of treating the first use as determinative is therefore an acceptable approach, as long as the possibility of admitting contrary evidence is kept open. The first use by the Appellants was to let the properties. We consider the brief period of use of one of the properties by the Appellants (at a time when it was not very habitable) to have been only incidental, and thus not to have affected their intention as at the time of completion to let the properties for ten years or so.

Thus the decision taken later in the course of the project to let the properties out resulted in it becoming one carried out in the course or furtherance of a business. This prevents the project from qualifying for relief under section 35, and thus no repayment is due.

Having arrived at this decision on the claim, we wish to comment on certain other matters. First, we do not accept Mr Waite's argument that the Appellants' original proposal to move into the converted properties and let out the farmhouse would have been commercial. We consider that the "course or furtherance of any business" test applies to the converted property only. If the do-it-yourself builder occupies the converted property, he is in the same position as a person purchasing a zero-rated dwelling, and the same policy approach that we have outlined above should apply to him. If this enables him to let his existing house, that should not affect the position.

Our second comment relates to the special position of claimants of this relief. They are not part of the normal VAT system, not being taxable persons. Their only involvement with VAT is through this relief. We regard it as very important that they should be provided with information about the relief at the earliest point at which they might be contemplating a claim. We consider it good practice for the Commissioners to supply a copy of Notice 719 when they issue the claim forms, although we comment below on the content of this Notice. However, we think that there should be some mechanism for do-it-yourself builders to be able to obtain this information at a much earlier stage, as the availability or otherwise of this relief may be crucial in assessing the viability of a project.

Thirdly, we think that the explanations contained in Notice 719 need to be expanded to make clear matters such as those covered in this decision. We note that in Hugh William Flynn the Tribunal criticised the earlier version of this Notice as "unhelpful" and in need of revision. Whether for this reason or otherwise, Notice 719 has since been revised. However, paragraph 3.1 of the revised Notice does not refer to the course or furtherance of a business, and gives no indication of what "business" entails. Persons unacquainted with VAT may well not know this, and would not necessarily regard letting property as a "business". We consider that merely referring to "landlords" among those ineligible to claim the relief is not sufficient. There needs to be a reference to letting property at a commercial rent. The Notice contains nothing to indicate the point at which the "business" test is to be applied, nor does it refer to the Commissioners' policy of taking the first use as an indication of the builder's intention. We also consider that the Commissioners' own internal guidance (quoted by Mrs Watson, see paragraph 14 above) should be revised to ensure that there is no risk of misleading advice being given to do-it-yourself builders who seek information from the Commissioners about the availability of and conditions for the repayment relief. (We can understand how the existing wording could be interpreted as indicating that the letting of the property by the Appellants might not be in the course or furtherance of a business, because the Appellants would have seen themselves as persons "not already in business as a builder or developer". They would have assumed that all that needed to be shown was that they intended to use the properties "as their private residence at some stage".)

Finally, we refer briefly to the question of the information obtained from the Commissioners' National Advice Service. The dispute as to what may or may not have been said to the Appellants is not within our jurisdiction. However, the Appellants were seeking information at an earlier stage, and appear to have changed their position as a result of what they understood to be the Commissioners' views. Clearly the Appellants were sent a copy of the extract from the Commissioners' internal guidance. Unfortunately there is no evidence of what may have been said to the Appellants in the course of whatever conversations took place. We understand that it is normal for details of telephone enquiries to be logged. In the present case no additional records could be found of the conversations. The Commissioners have acknowledged that this does not necessarily imply that no other calls were made; it simply showed that they had no evidence of them. We regard it as essential for the Commissioners to inform those making enquiries of this type that they should write to ask for written confirmation of the position as discussed in the course of the telephone conversation. Those who are within the VAT system are expected to be aware that such written confirmation is necessary; it is expecting too much of do-it-yourself builders, who are not part of the normal VAT system, to be aware of this without it being specifically pointed out to them by the Commissioners. The Appellants may have a case to put to the Adjudicator; as this is not within our jurisdiction, we cannot comment on the question. The fact that the Appellants' problems have arisen illustrates the need for full and accurate information about the relief to be available to potential claimants. In addition to further revision of Notice 719 and the Commissioners' own internal guidance, we think that a proper advisory service should be set up specifically for the purposes of this relief, designed to ensure that no inaccurate or misleading information is given to potential claimants and that no opportunities for misunderstandings are left open. (We note from Business Brief 15/2004 that the claims handling arrangements for this scheme have been centralised, but that general queries relating to the scheme continue to be addressed to the National Advice Service; what we are suggesting goes further than this.)

Despite our sympathy with the Appellants' position, the appeal must be dismissed. We make no order as to costs.

JOHN CLARK

CHAIRMAN

RELEASED 01/07/2004

LON/2003/0929