United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2004] UKVAT V18797

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Torfaen Voluntary Allliance v Customs and Excise [2004] UKVAT V18797 (15 October 2004)

18797

Zero-rating – Construction of a building – Church hall – New building capable of functioning independently – Whether annex – VATA 1994 Sch 8 Group 5, Note 16 & 17 – Appeal allowed

LONDON TRIBUNAL CENTRE

TORFAEN VOLUNTARY ALLIANCE Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: DR K KHAN (Chairman)

MRS C S de ALBUQUERQUE

Sitting in public in London on 4 June 2004

Mr C Hawkins, VAT Consultant, for the Appellant

Mr R Keller for the Respondents

© CROWN COPYRIGHT 2004


 


DECISION

A. Introduction

1. This is an appeal against a decision by the Respondents dated 23 July 2003 to uphold an earlier decision that construction work carried out at St Cadoc's Community Hall (the "Church Hall") by Torfaen Voluntary Alliance (the "Appellants") did not amount to construction of an annexe so as to bring the work within Item No. 2 of Group 5 of Schedule 8 to the Value Added Tax Act 1994 (the "VATA 1994") and render them zero rated for the purposes of value added tax.
2. The issue between the parties is whether certain building works carried out to the Church Hall are properly classified as an extension to the main building or as an annexe. It is accepted by the Respondents that the additional area constructed (the "new building") would be used for a "relevant charitable purposes".

B. Background

3. The Appellants are a registered charity involving the administration of local community activities from premises located at Portland Buildings, Commercial Street, Pontypool, Wales.
4. The Appellants are not registered for the purposes of value added tax.
5. The Appellants employed a firm of builders, Wringsland Building Contractors ("Wringsland") to carry out construction work at the Church Hall. The Diocesan Finance Board of the Church of Wales owns the premises. The Appellants occupy the premises under a long lease.
6. Wringsland wrote to Customs & Excise on 2 June 2003 to seek a ruling as to the VAT status of the construction work being undertaken asking whether they would accept a certificate of exemption issued by the Appellants and, if so, whether they could reclaim the VAT paid to date. They enclosed with their letter plans relating to the works carried out.
7. On 6 June 2003 the Commissioners wrote to Wringsland requesting clarification of the project undertaken and indicating that the Appellant would shortly be provided with copies of VAT Notice 708 "Buildings and Construction" and 700/43 "How to correct VAT errors and make adjustments or claims".
8. On 10 June 2003, Wringsland wrote to the Commissioners reiterating their request for a decision. The Commissioners replied on 17 June 2003 that the Certificate could be accepted subject to the requirements set out in VAT Notice 708 being met and that, if VAT had been mistakenly invoiced to the Appellant at the standard rate rather than the zero rate, the error could be rectified by cancelling and recovering the invoice, issuing a VAT only credit note an making the appropriate adjustment in their records.
9. On 18 June 2003, Wringsland wrote to the Appellant making clear that no mistake in invoicing had been made and reiterating that a decision as to the acceptance of the Certificate was still sought.
10. On 23 June 2003, Wringsland wrote to the Commissioners enclosing copies of correspondence relating to the premises and requesting a ruling as to the validity of the Certificate by the Appellant.
11. On 26 June 2003, the Commissioners wrote to Wringsland indicating that the Certificate would only be regarded as valid if signed by the owners of the premises. Further, the Commissioners made clear that, having examined the plans provided, the works did not comprise the construction of an annexe within the Note (17) to Item No.2 of Group 5 of Schedule 8 of the VATA 1994. The Commissioners gave reasons for their decision.
12. On 4 July 2003, the Appellants' representatives wrote to the Commissioners requesting a reconsideration of the decision. This request was acknowledged on 9 July 2003. On 18 July 2003, the Commissioners wrote to the Appellants' representatives indicating that, whilst they accepted that the Certificate was validly issued and that the new development carried out is capable of functioning independently of the existing premises, further consideration would be given to whether the entrance to the new development would become the entrance to the main hall and whether the works comprised an annexe or an extension.
13. On 23 July 2003, the Commissioners wrote to the Appellants' representatives indicating that they had carried out the reconsideration and their earlier decision would be upheld.
14. By a Notice of Appeal dated 25 July 2003 the Appellants issued an appeal against the Commissioners' decision. On 10 September 2003, the Commissioners wrote to the Appellants' representative stating they had carried out a further reconsideration of their decision but continued to uphold their earlier decision.

C. Statutory Provisions

15. Section 30(2) of the 1994 Act provides as follows:

"A supply of goods or services is zero rated by virtue of this sub-section if the goods or services are of a description for the time being supplied in Schedule 8…"

16. Schedule 8, Group 5, Item 2 to the 1994 Act, provides:

"The supply in the course of construction of –

(a) a building or part of a building designed as a dwelling or number of dwellings intended for use solely for a relevant residential purpose of a relevant charitable purpose… of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity"

17. Note (16) to Item 2 of Group 5 of Schedule 8 of the 1994 Act 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; or

(b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or

(c) subject to Note (17) below, the construction of an annexe to an existing building."

18. Note (17) to Item 2 of Group 5 of the Schedule to the 1994 Act provides:

"Note (16)(c) shall not apply [where the whole or part of an annexe is intended solely for irrelevant charitable purpose and]:

(a) [the annex] is capable of functioning independently from the existing building; and

(b) the only access or where there is more than one means of access, the main access to:

1) the annexe is not via the existing building; and

2) the existing building is not via the annex."

D. The Appellants' Case

19. The Appellants' case as disclosed by the Notice of Appeal is that "the construction constitutes an annexe and should, therefore, be zero rated". They argued that the new and old parts of the building are two separate buildings, the style and external appearance of the two parts of the building are different. There is some physical integration of the building as required for obtaining planning permission but the buildings were functionally independent and the two buildings have separate entrances and the entrance to the new building is not through the connecting double doors between the buildings, which would be locked at most times.

E. The Respondent's Case

20. The Commissioners contend that the works carried out do not amount to an annexe, the Commissioners contend that the requirements of Note (17), Item 2, Group 5, Schedule 8 1994 Act have not been met.
21. They rely on the following facts to support their view:

(a) The style and external appearance of the new construction compliments the existing building to the extent that the complete construction looks like a single building.

(b) The completed structure cannot be said to be a separate building with minimal physical connection so as to constitute an annexe.

(c) The new building is an enlargement of the existing building because the new areas are physically integrated with the existing building in a major, almost seamless, way.

(d) The works carried out have resulted in the formation of two new areas, each served by their own main entrance.

(e) If the new areas do comprise an annexe, which is not accepted, each new area is capable of functioning independently of the existing hall as required by Note (17)(a).

(f) The main entrance and existing hall at the premises is via a door in one of the new areas and, thus, does not comply with the requirements of Note (17)(b)(i) and so the works fall within the exclusion from zero-rating in Note (16)(c).

F. The Law

22. One can start at various points in looking at the law but in my view a good starting point is with the view of the Commissioners.

In their VAT Notice 708 at paragraph 2.8, which deals with annexes for a relevant charitable purpose it is provided:

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

is intended for use solely for a relevant charitable purpose;

is capable of functioning independently from the existing building;

has its own main entrance;

does not provide the main entrance to the existing building; and

is covered by the proper certificate."

The VAT Note goes on to say:

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

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

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

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

Therefore, the conditions to be satisfied for a charitable purpose annexe are clear from the Customs' Note.

23. The case of Bryan Thomas Macnamara v Commissioners of Customs and Excise (No.16039) comments on the history of the relevant provisions of the VATA 1994 and the meaning of the word "annexe" in the following terms:

"The scheme of the 1995 code is to exclude from the expression "construction of a building" a series of building works. Note (16) deals with these in descending order of their degree of integration with the existing building. Conversion, reconstruction and the alterations of the existing buildings, most closely integrated are excluded. Enlargement of existing buildings are then excluded, the word "enlargement" connotes structural work producing an overall increase in size or capacity. The word "extension" when relating to an existing building refer, we think, to building works which provide an additional section or wing to that existing building; the degree of integration is one stage less and enlargement. Then comes "annexes" which, as a matter of principle are also excluded. The term "annex" connotes something that is adjoined but either not integrated with the existing building or of tenuous integration. Annexes intended for use solely for relevant charitable purposes are reinstated into the zero rating class by Note (17) only if they are capable of functioning independently and if the main access to the annexe is not via the existing building and the main access to the existing building is not via the annex. Otherwise, all annexes are excluded from zero rating".

It seems that the construction of an annexe can qualify for zero rating. The annexe which will be connected to the existing building must have independent access and be able to "function independently". It's a two stage test – the first question is whether or not it is an annexe, and the second is can it function independently and have independent access.

24. The legislation does not provide a definition of an annexe but the case of Yeshuran Hebrew Congregation v Commissioner of Customs and Excise (No.16487) at para 23 states that an "annexe" is:

"not itself a principal building but a supplementary building, connected or associated with the main building and fulfilling a subordinate role in relation to that building."

25. The degree of linking between the buildings, old and new, should be minimal but, in the Grace Baptist Case (Man./98/798) the Tribunal states:

"It would fly in the face of logic and the obvious intent of the legislation if a building which, if it had been physically divorced from the existing building, would have been zero-rates was excluded from zero-rating solely because it had some form of link. The building fitted the Shorter Oxford English Dictionary definition of an annexe as a "supplementary building independently of it, and had its own access …" "

It should be borne in mind that the shape of the new building and the degree of connection to the old may be determined, in part, by financial constraints and, in part, by planning constraints. In some circumstances, the attachment between the old and new may be more than minimal.

G. Conclusions

26. The new building is intended for a "relevant charitable purpose".

It is accepted by Customs & Excise that this requirement is satisfied. The Appellants, a registered charity, have been granted a long lease by the owners of the existing structure, the Diocesan Finance Board of the Church of Wales (a charity in its own right). The Appellants will occupy the offices and manage the toilet block for the local community. They are totally grant funded, so the offices would be entirely used for a non-business purposes.

27. Was an annexe constructed or an enlargement or extension?

This question requires that we look to see how the main building and supplementary buildings are connected and associated and whether one is subordinate to the other. It does not exclude some link between the buildings (i.e. old and new parts). Some cases classify this link as minimal. The external appearance of the existing Church Hall and the new building is well illustrated in photographs and architect's plans. At least seven plans were presented in evidence. The wall of the new building of red brick are different in colour from the original cream coloured hall. The photographs clearly show the junction of the new brick work with the old. The line of the roof continues from the old to the new part of the building. The architect plan (67/BR/10) ("the plan") appears to show the new construction to be along part of one wall of the existing structure. This can be considered minimal. Financial and planning constraints would require some form of linking and integration between the buildings in order to create a harmony of appearance but the new building, while connected to the existing building, is not an enlargement (increase in size of an existing building) or an extension (an additional wing or section of an existing building) but an annexe (a supplementary building).

28. Is the annexe capable of functioning independently from the existing building?

It is required that the whole of the annexe must be capable of functioning independently without reliance on the existing building (excluding electricity, water and other supplies).

Customs & Excise have accepted in their letter of 23 July 2003 that the new building is capable of functioning independently of the existing hall.

The new building comprises offices, kitchen, storage and toilet facilities. It is over two floors with access on the ground and first floor level. There is nothing in the case of Customs & Excise to show that the new area is not capable of functioning independently and one would normally discount toilet and other services which, I understand, are in any event independently supplied.

The new building, while integrated structurally, can lead an independent life.

29. The new building has its own access.

The main concern is that the access to the new building should not be through the existing building and vice versa. The new building should not create access to the existing building.

In looking at the architect's plan 67/BR/10, there are three entrances to the building. The main entrance to the toilet block (used by the larger community) and to the ground floor of the new building is through the door marked D.02 on the plan. The offices, which would be on the first floor, would be accessed through the entrance identified as D.01 of the plan. The existing Church Hall would be accessed through a door identified as D.03 on the plan. This position was confirmed by Mr John Charles Taylor, Finance Officer of the Appellants, in his oral evidence to the Tribunal and in correspondence between the Appellants and Mr Jonathan Mitchell, Customs & Excise Written Team, in their letter of 4 July 2003. There was concern by Customs & Excise that the inter-connecting double door linking the new and old buildings would be used as an entrance to the new building but it was confirmed in evidence by Mr John Charles Taylor that this was not the case and that doors would be kept locked and only opened on request.

Each part of the building, therefore, has its own access.

30. Whilst physically the old and new parts of the building appear to be integrated, there is a functional independence in the new part of the building and there is separate access. The integration is minimal. One could imagine the Church Hall and the new building being used without interference by the people using each; the building can be entered and exited independently, the toilet facilities can be used separately and the connecting door can be locked so there is no human traffic by the users of each building. Occasionally, the double connecting doors may be opened, but this would not be an everyday occurrence. The offices in the new building, to be used by those running the Communities First Project of the Welsh Assembly, and the various different people including community groups, parishioners and other groups, can gain access to the new building through the entrances to that building in D.01 and D.02, as indicated earlier. Further, the Church Hall has its own access which can be locked off from the new building.

For the reasons given above, I will allow this Appeal and hold that works comprise an annexe within the requirements of Note 17(b)(ii) and should be zero-rated for the purposes of value added tax.

No order is made as to costs.

DR K KHAN CHAIRMAN RELEASED: 15 October 2004

LON/03/756