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Dart Major Works Ltd v Customs and Excise [2004] UKVAT V18781 (01October 2004)

18781

Value added tax – exempt supplies – buildings – whether an emergency demolition of a protected building can be an "approved alteration" within Schedule 8, Group 6, item 2 of the Valua Added Tax Act 1994 – whether the demolition can be a "supply in the course of construction" of the replacement to the building within Schedule 8, Group 5, item 2.

LONDON TRIBUNAL CENTRE

DART MAJOR WORKS LIMITED Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Dr David Williams (Chairman)

Miss S Wong Chong FRICS

Sitting in public in London on 1 July 2004

Mr Conrad McDonnell (instructed by Mr D Buckwell)

for the Appellant

Mr Robert Kellar (instructed by the Solicitor to H.M. Customs and Excise)

for the Respondents

© CROWN COPYRIGHT 2004

DECISION

On Friday 7 June 2002 Mrs and Mrs Buckwell completed the purchase of, and moved into, their new home, known as Upper Lodge. It was an old building, listed Grade II and built in the Sussex style vernacular. Under its former name of the Old Pest House, The Broyle, Lewes, Sussex, it had a long and well-documented local history. But it had no future. The following Tuesday night it was extensively destroyed by fire, along with all the new owners' possessions and Mrs Buckwell's office equipment and papers in the house. This was caused by a faulty oil-fired burner, made worse by the fracturing of the heating fuel pipe in the fire. We were told at the hearing that the Buckwells are just about to move into a new house built on the same site. But this case concerns VAT liabilities arising in the aftermath of the fire and the start of the rebuilding process.

Mr Buckwell is a solicitor and he and his wife had of course insured the property, acting on expert advice. Needless to say, they immediately contacted the insurers. The insurers promptly appointed Philip Goacher Associates, civil and structural engineers, (Goacher) to oversee the emergency works and repairs following the fire. After a site inspection, Goacher reported the following Monday that much of the house would have to be rebuilt from ground level and that some parts of the existing structure were unsafe and would have to be demolished. It is clear from that report that emergency work at the site had already started, carried out by Dart Major Works Ltd (DART), the appellants in this case, and that Lewes District Council's Conservation Officer had already been contacted.

The Conservation Officer later confirmed in writing, and we accept his evidence, that he was contacted immediately after the fire, that the damage caused by the fire was so serious that the house was beyond repair, and that both he and the Council's building control officer were fully satisfied that demolition of some parts of the ruin should start as soon as possible to remove the hazard of possible collapse. He also accepted that he had been notified fully about what was going on and that this was "sufficient to ensure that no prosecution for unauthorised demolition could follow, but to regularise the situation a listed building application to demolish followed, when it was possible to organise this in the aftermath of the fire".

The formal application for consent to demolish fire damaged structures was first submitted to the Council on 17 July 2002 by Goacher. The standard form includes information about new work, and the answers given to that part of the form are that the house was "to be returned to original condition." However, we find both that that information was not necessary, or even relevant, to an application to demolish part of the house, and that in any event the application was signed by Mr Goacher following his general instructions to act rather than any specific instructions about the future of the building. As noted, the Conservation Officer and the Council fully accepted that this work had to be done. But the official permission to carry out the work was only confirmed in writing in October 2003.

Mr Buckwell told us, and we accept, that at first he and his wife wanted to have their house rebuilt. That was what Goacher anticipated they would do and also, we expect, what many people in the situation of the Buckwells, looking at the ruins of a house that had been their home for just four nights, would have wanted to do. Reality dawned as the magnitude of the costs of rebuilding became clear. The Buckwells became aware that the necessary professional work would be carried out at a percentage of the total rebuilding costs and that a similar percentage would be paid as standard rate VAT on the costs. The cost of a new house would be more under control and would also be zero-rated. The Buckwells also wanted to remain on, and work from, the premises. By, at the latest, 24 July, they had decided to have the old house demolished and to arrange for a new one to be built on the site in the Sussex style vernacular. To do this, on that day they instructed Neil Holland Associates as architects to start plans for temporary accommodation at the site. The firm was chosen for its expertise in traditional design of new buildings, rather than restorative work.

Between 5 August and 21 August 2002 DART carried out demolition work on the site necessary for safety reasons, and related works. The detailed invoice records both work on demolition and site clearance and also salvaging building materials. For this DART promptly invoiced the Buckwells' insurers, the invoice including VAT at the standard rate of £3423.35. It is this VAT to which the Buckwells take exception, the appellants authorising Mr Buckwell to appeal on their behalf. The Buckwells did so because they discovered that, despite acting on expert advice, they were under-insured for both the cost of rebuilding their house and the costs of temporary accommodation while this was done. They needed to reduce their ambitions and their costs. One aspect of that was the VAT on DART's bill. That is our concern in this appeal. We were told that there is no other disagreement between the Buckwells and the respondents (the Commissioners) about the VAT payable, or not payable, on other work at the site and on the general costs of building the new house.

To complete the chronology, an application for planning permission for the new house was submitted in February 2003 and approved in May 2003. At the same time, listed building consent was sought, and granted, to demolish the remaining parts of the destroyed house. There is an obvious problem in the papers about this, as permission was given in May 2003 to carry out the final demolition of the old house, while formal written permission was given only in October 2003 to carry out the initial demolition. Clearly, the May grant of permission must have assumed that the first application had already been granted, as otherwise the February application would not make sense and the May permission would be ineffective.

The Buckwells refused to pay the VAT on the DART bill. The local VAT office, after asking for and being given details, confirmed that DART should charge VAT on the bill. It was agreed by DART that Mr Buckwell would act as their agent in an appeal, and he appealed in their name. Before us, his counsel sought to justify the refusal on two alternative grounds. First, Mr McDonnell argued that DART's bill should have been zero-rated because it was for alterations of a listed building. In the alternative, the costs should be regarded as costs preparatory to construction of the new house. Both were resisted before us by Mr Kellar on behalf of the Commissioners. Both counsel asked us to decide both issues, and we do so.

Was the work an alteration of a listed building?

It is not disputed that the old house was a listed building, and a protected building for VAT purposes. Initially, the Commissioners took the view that the work done by DART was not an alteration of a listed building. Later they might have accepted that it was an alteration. But they were unable to accept that the work was "approved". As nothing turns on whether the work was an alteration, we make no decision on that point but assume in the appellant's favour that it was an alteration for the purposes of this decision.

The Value Added Tax Act 1994, Schedule 8, Group 6 item 2 applies zero-rating to:

The supply, in the course of an approved alteration of a protected building, of any services other than the services of an architect, surveyor or any person acting as consultant or in a supervisory capacity.

Note (6) to that item provides, so far as relevant that:

"Approved alteration" means –

(c) … works of alteration which may not … be carried our unless authorised under, or under any provision of -

(i) Part I of the Planning (Listed Buildings and Conservation Areas) Act 1990 …

and for which … consent has been obtained under any provision of that Part …"

There is no definition of "consent" in the Act.

Part I of the Planning (Listed Building and Conservation Areas) Act 1990 (the 1990 Act) empowers the regime under which, in England, the Secretary of State and local councils exercise planning control over any non-ecclesiastical listed building. Section 7 of the 1990 Act forbids any works for the demolition of a listed building or for its alteration or extension unless the works are authorised. Section 9(1) makes it a criminal offence to contravene section 7. Section 38 gives local authorities powers to issue enforcement notices requiring restoration or other steps to remedy a breach of section 7. Section 44A adds a further remedy by empowering applications by local authorities to the courts to obtain injunctions to stop a breach.

Within this framework, sections 8(1) and (2) of the 1990 Act provide for applications to be made for consent to the execution of works of the kinds protected by section 7. We find that section 8(2) (works for demolition) does not apply to the work undertaken in August 2002. Leaving that aside, the following parts of section 8 are relevant:

(1) Works for the alteration of extension of a listed building are authorised if –

(a) written consent for their execution has been granted by the local planning authority or the Secretary of State; and

(b) they are executed in accordance with the terms of the consent and of any conditions attached to it.

(3) Where –

(a) works for the demolition of a listed building or for its alteration or extension are executed without such consent; and

(b) written consent is granted by the local planning authority or the Secretary of State for the retention of the works,

the works are authorised from the grant of that consent.

(7) Consent under subsection (1) … or (3) is referred to in this Act as "listed building consent".

Further detail is added to this framework in two ways. Procedures and other specific details are laid down in the Planning (Listed Buildings and Conservation Areas) Regulations 1990 (SI 1990 No 1519). A full statement of government policy for the implementation of the planning controls in England is set out in Planning Policy Guidance 15: Planning and the historic environment, known as PPG 15.

Regulation 3 of the 1990 Regulations deals with applications for listed building consent. This requires a local planning authority to give a notice of a decision on the application, or to refer it to the Secretary of State. The local planning authority is given a minimum of 8 weeks to decide or refer the application. In every case, regulation 3(5) provides that notice of decision or reference shall be in writing.

Despite the fact that there are bound to be urgent cases where 8 weeks is far too long a time to wait to make listed structures safe, there is nothing in the Act or regulations, nor any guidance in PPG 15, dealing with the need to carry out urgent demolitions of or alterations to listed buildings. In such cases, the approach of the legislation is two-fold. The application can be made and granted under section 8(3) of the 1990 Act after the event. And any prosecution under section 9, or other enforcement action, for breach of section 7 can be resisted under the terms of section 9(3) of the 1990 Act. That subsection provides:

In proceedings for an offence under this section it shall be a defence to prove the following matters –

(a) that works to the building were urgently necessary in the interest of safety or health or for the preservation of the building;

(b) that it was not practicable for secure safety or health or, as the case may be, the preservation of the building by works of repair or works for affording

temporary support or shelter;

(c) that the works carried our were limited to the minimum measures immediately necessary; and

(d) that notice in writing justifying in detail the carrying out of the works was given to the local planning authority as soon as reasonably practicable.

The local planning authority, whom we accept as being in the best position to judge, regard all those requirements as having been met in this case. There is no question that anyone did anything "wrong" in acting before written consent was obtained. Indeed, it would appear that the officers of the local authority thought the written consent something of an irrelevance to its own consideration of the later application and consents. But the Commissioners did not.

The formal procedure of written applications followed by written decisions is unambiguously imposed on all applications for listed building consent in England, even in emergency situations, by the 1990 Act and Regulations. Those acting outside that framework but within the conditions in section 9(3) have the comfort and protection of that subsection for the period until written consent is granted but clearly do not have listed building consent until the formal procedure is followed under section 8(3).

Does this mean that an alteration is an "approved alteration" for the purposes of Group 6, Item 2 only if that formal procedure is followed? Note (6), defining "approved alteration" does not say so in terms, as it refers to:

(c) works of alteration which may not … be carried out unless authorised under … [Part I of the 1990 Act] … and for which … consent has been obtained under any provision of that Part…

Nonetheless, we consider that "consent has been obtained" must refer to "listed building consent" as defined in section 8(7) of the 1990 Act in so far as it applies to a listed building in England.

Mr McDonell advanced before us an ingenious argument suggesting that "consent" for VAT purposes could be given its "ordinary" meaning, and that this could be wider than the formal procedures in the 1990 Act so as to cover situations dealt with by section 9(3) of that Act. He rested that argument in part on the recent decision of the House of Lords in Customs and Excise Commissioners v Zielinski Baker & partners Ltd [2004] UKHL 7. In that case a majority of their Lordships decided that two separate buildings could not be "a building" for VAT purposes notwithstanding that two buildings could be treated as one for listed building purposes. We are not persuaded by the analogy. In that case there were competing definitions of "building" in the planning and VAT laws such that, with full respect to the binding decision of the majority of their lordships in that case, there was clearly ground for some to doubt before their decision which of the definitions should prevail. There is no such conflict of language here, and we see no basis to invent one.

Mr McDonnell also advanced an argument that would give retrospective effect to the approval for current purposes because it was an effective retrospective approval for listed building purposes. He advanced the argument notwithstanding the words "has been obtained" in note (6). Before us he accepted that the VAT Tribunal in Alan Roper & Sons Ltd v Commissioners of Customs and Excise, decision no 15260 of 5 December 1997 expressly rejected such an argument, following the authority of two other decisions of tribunals in doing so, while reserving his right to argue the point elsewhere. We see no basis for not following the decision in Roper and echo the words of the chairman of that tribunal: like the other tribunals we can see no grounds for reading the words of Note (6) as incorporating retrospective approvals.

In a case such as this any reasonable individual would start to act without prospective written consent. He or she therefore has to pay the additional cost of standard rate VAT in so doing. (It would of course not be of concern to a fully taxable person). Counsel for the Commissioners reminded us that it is for parliament to set policy, not tribunals. We of course agree. But we can understand why the appellants fail to perceive any clear reason why individuals should pay VAT for acting in a timely way rather than leaving dangerous structures in place until the issue of the written approval necessary to meet the terms of this item for zero-rating.

Was the work preparatory to construction of a new building?

The Buckwells came to the decision that they would have to build a new house rather than rebuild the old one. It is not disputed that the new house is a building designed as a dwelling. The Commissioners also accept that the Value Added Tax Act 1994, Schedule 8, Group 5, Item 2 provides for zero-rating of certain supplies in the course of construction of the new house, and much of the cost of the new house has been zero-rated. The Buckwells claim that if the VAT paid on the DART bills in 2002 is not zero-rated as incurred on as approved alterations of the old house, then it should nonetheless be zero-rated as works related to the new house. The Commissioners did not agree. This is in part because the Commissioners consider that the time between the works carried out by DART and the full construction of the new house is too great.

The Value Added Tax Act 1994, Schedule 8, Group 5, Item 2 applies zero-rating to:

The supply in the course of construction of –

(a) a building designed as a dwelling …

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.

Note (11) provides that where a service that is partly within Item 2 and partly not, there is to be an apportionment to determine the part within Item 2.

Note (16) relevantly provides that:

For the purposes of this Group, the construction of a building does not include –

(a) the conversion, reconstruction or alteration of an existing building …

Note (18) relevantly provides that:

A building only ceases to be an existing building when:

(a) demolished completely to ground level …

To be within this item, it must be shown that supplies are "related to the construction" and are supplied "in the course of construction". Those words have been examined in a number of previous cases. In Customs and Excise Commissioners v Rannoch School Ltd [1993] STC 389 the Court of Exchequer in Scotland considered item 2. The main concern of the Court was with the extent of services within the item. The Lord Justice Clerk, giving the judgment of the court, also observed (page 393) that:

"Counsel were agreed that "in the course of" refers to services done contemporaneously or consecutively in relation to a new building, and that in addition the services supplies must have a substantial connection with the new building. It is plainly a question of degree."

The Court considered that the tribunal in that case had not erred in law in reaching the decision that sewage works were within the terms of the item.

Jowitt J looked at the item again in Customs and Excise Commissioners v St Mary's RC High School [1996] STC 1091, although he was not referred to Rannoch School. In St Mary's High School there was a ten year time gap between the construction of the building and the works that it was sought to link to that construction. Commenting on the terms of item 2, Jowitt J (page 1094) commented:

The services covered by that item are not restricted to those of constructing the building itself, and it is not suggested by Mrs Hall, on behalf of the Commissioners, that they are. The phrase "the course of construction of a building" gives a wider scope to the services included in this item. The scope is perhaps more easily recognised when one turns to the facts of a case than defined in the abstract.

Where the services are not those of constructing the building itself there has in my judgment to be a relation between them and the construction of the building …

Firstly, the services must be connected with the construction of the building in that they either facilitate its construction or produce in their finished result one whole with the building …

Secondly, there has to be a temporal connection between the construction of the building and the provision of the other services if those other services can be said to have been provided in the course of construction of the building. Usually those services will be provided contemporaneously with the construction of the building or nearly so, but that may not always be the case. When it is not, it will be necessary to consider both the reasons for and the length of the delay before deciding whether or not the temporal connection is established. Questions of degree may be involved and the facts of a case may permit of two different views.

We respectfully note that these decisions separately decide that the existence of a link between a service said to be related to the construction of a building and that construction is a question of degree.

What is the link in this case? First, work on the new house could not start unless the old house was demolished, at least to the extent of making it safe. Second, given the specific nature of this house and its listed status, it was clearly appropriate to attempt to salvage materials from the old house to incorporate them in the new house. Third, it was necessary to demolish the old building fully before the new one could be constructed as the approved plan was to build the new house on the footprint of the old house. The Commissioners accepted, rightly in our view, that had all the demolition taken place at the start of the construction, then the work would have been zero-rated. But, it was argued, there was too long a delay here.

Is there a sufficient temporal link? Mr McDonnell argued that there was on the facts. Mr Kellar sought to resist this, again on the facts. We note that the two cases cited above are both cases of works done after the construction of a building – in one case ten years after. So the construction was finished without these particular services having been supplied. But in this case the services were supplied before the main construction of the house had started. We think it important to bear in mind, in establishing a link, that the new house could not have been started unless those works had been carried out.

Mr Kellar submitted that there was, nonetheless, no temporal link because when DART carried out the work the Buckwells had no intention of building a new house. They intended to rebuild the old one. He pointed to a number of documents as establishing that the intention at the time of the supplies in August 2002 was to repair and restore the original building. He also submitted that as a matter of fact the building contract was not put out to tender until July 2003 – a year after the works had been completed.

We find the application of a test of "intention" to the problem of linking the first round of demolition to the construction of the new house problematic. Whose intention are we considering? Mr Kellar based his comments on the alleged intentions of several people, none of whom were the suppliers of the services or the persons whom the suppliers thought were paying the bill (the insurers). DART, as suppliers, had, we consider, no relevant intention. Nor did Goacher, who instructed DART. Nor was it necessary for Lewes District Council to have a particular intention in mind to authorise the demolition work. And no one has presented any evidence of the views, if any, of the insurers.

The existence of the temporal link is a question of fact. In our assessment of the facts, we find little assistance in working out who decided to do what or when. What matters more is what actually happened and when. We consider, in particular, that in the case of advance work, the important issue is whether the works are "consecutive" as was agreed before the Court in Rannoch School. In so far as intention does weigh as a factor, we accept Mr Buckwell's evidence that he and his wife had decided to build a new house, rather than rebuild the old one, before DART undertook its work. Nor do we consider it would have been unreasonable for them to take some time to decide positively what they wanted to do and perhaps to change their minds more than once in so doing. That is in part why we find intention to be of limited assistance. Fortunately, few people are faced with such decisions just days after moving into a new home. It is not something that even the most careful people can be expected to have thought out in advance.

We therefore considered if there was a consecutive flow of events, relying in part as we are entitled to do on the tribunal's own expert knowledge of the processes involved. The starting point is the rightful acceptance by the respondents that demolition work ahead of the construction of the new house is functionally connected with it. But is there a temporal connection with both stages of demolition in this case? In our expert view there was no undue time lag at any stage between the necessary stabilisation and demolition works immediately after the fire, in August, 2002, and the subsequent process of developing the concept of, designing, securing permission for, writing and issuing the tender for, and then carrying through the construction of, the new house. What happened was "consecutive". In so finding, we take into account as a background factor the booming property market in that part of the country at that time and that professionals such as architects and builder could therefore be expected to be very busy. We also note that both the Buckwells were also busy professional people, and that key aspects of the work took place across the summer and Christmas holiday periods when some short delay might be expected.

It will have been – assuming the final stages go to plan – two years from the work in August 2002 to the move to the new house. The works in question themselves were authorised in July 2002, and were carried out over three weeks in August. The brief to the architect went out in September, after an initial brief in July. The draft plans were ready in November. The main applications for consents, including the consent to the second stage of demolition, were made in February 2003 and granted in May 2003. Building regulation approval occurred in June 2003. The tender document went out in July and replies were received in September. Construction work started in November. It is not, in the tribunal's view, appropriate just to stand back, as the Commissioners did in this case, and say that the link must have broken because this process took a long time from beginning to end. If the link fails in a process like this, then it must be shown where it broke. We see no break. This timetable, we anticipate, would be much the same in any other similar set of circumstances. The facts are completely different to those in St Mary's School case. As a matter of fact, the events following from the initial demolition by DART to the completion of the new house are consecutive.

No point was taken before us by the Commissioners that the DART bill should be apportioned in accordance with Note (11) to item 2. We accordingly find that the work undertaken by DART is work within item 2 of Group 5 and is zero-rated in full.

There is a final point before we conclude our reasons. Are our decisions on the two issues consistent? Does our decision that item 2 of Group 6 cannot as a matter of law apply prevent us from finding on the facts that item 2 of Group 5 does apply? We consider not, although this involves an overlap between the two items. This is because the listed building remains in existence, under note (18) of item 2 of Group 5 and under the planning rules, until demolished to ground level. But in this case the works linked with the construction of the new building must start with the demolition of the old building. That is why we consider demolition is part of construction in this case. So services related to construction of a new building may start while the old listed building is still in existence. It is therefore entirely proper to consider both item 2 of Group 5 and item 2 of Group 6 concurrently on these unusual facts.

We therefore find that the appeal fails on the first ground as a matter of law but succeeds on the second ground on the facts of this case.

DR DAVID WILLIAMS

CHAIRMAN

RELEASED: 1 October 2004

LON/03/1133