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Parochial Church Council of Saint Andrews v Customs and Excise [2005] UKVAT V19061 (29 April 2005)

19061

Value added tax – zero-rating – construction of building – church and church hall – reconstruction of church hall and addition of other space – whether enlargement or extension to existing buildings – yes – whether annexe – no.

LONDON TRIBUNAL CENTRE

THE PAROCHIAL CHURCH COUNCIL OF SAINT ANDREWS Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Dr David Williams (Chairman)

John Brown CBE FCA CTA

Sitting in public in London on 15 February 2005 and in Bedford on 10 March 2005

Neil Jennings of Mazars, solicitors, for the Appellant

Jonathan Waite of counsel, instructed by the Office of the Solicitor to Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

This is an appeal by the Parochial Church Council of St Andrews, Bedford ("the PCC") against a decision of the Commissioners of 6 May 2003. The decision was that building construction work to be undertaken for the PCC on land adjoining the church was work of enlargement or extension of the church rather than the construction of an annexe to it to be used for a relevant charitable purpose. As such, the work was a supply at the standard rate for value added tax ("VAT") purposes. The PCC took the view that, while a smaller part of the work was rightly to be regarded as an extension of the church building, the larger part of the work was a supply that should be at the zero rate. This was because it would replace an existing community hall and other facilities that were not part of the church building.

The tribunal heard evidence from Bruce Deacon, RIBA, the architect responsible for the work, the Reverend Christopher Dent, vicar of the parish of St Andrews and chairman of the PCC, and Neil Jennings, who had advised the PCC on the work and who also represented it at the hearing. The tribunal, at its request, was shown the church and the works by the witnesses on 10 March 2005. The tribunal was also supplied with relevant documents, including detailed plans of the buildings on the site before the work commenced, the original planned construction work, and the actual construction work undertaken.

The law

Supplies of building work and related goods and services are generally subject to VAT at the standard rate by reason of the Value Added Tax Act 1994 ("the Act"). But section 30 of the Act provides that if the supplies of goods or services are listed in Schedule 8 to the Act then they are zero-rated. Item 2 of Group 5 (construction of buildings, etc) of Schedule 8 lists:

The supply in the course of the construction of:

(a) a building … intended for use solely for … 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.

The Notes to Group 5 contain important definitions to that listed item. Note (16) lays down that:

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

(a) …

(b) any enlargement of, or extension to, an existing building …; or

building.

Note (17) limits this as follows:

Note (16)(c) shall not apply where the whole or part of an annexe is intended for use solely for a relevant charitable purpose and -

(a) the annexe 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:

(i) the annexe is not via the existing building; and

(ii) the existing building is not via the annexe.

The application of Notes (16) and (17) of Group 5 is not easy, and has been disputed before the tribunal and on appeal to the courts on several occasions. The parties drew the attention of the tribunal to the decisions noted or listed below. In the tribunal's view the most important of these are the decisions resulting from the disputes between Mr and Mrs Cantrell and the Commissioners over work undertaken for the Cantrells on a nursing home. In Cantrell v Customs and Excise Commissioners [2000] STC 100, 103 (as corrected – see Cantrell v Customs and Excise Commissioners (No 2) [2003] STC 486, 493) Lightman J summarised the proper approach to dealing with the issues as follows:

First, the question is to be asked as at the date of the supply. It is necessary to examine the pre-existing building or buildings and the building or buildings in the course of construction when the supply is made. What is in the course of construction at the date of supply is in any ordinary case (save for example where a dramatic change is later made in the plans) what is subsequently constructed. Secondly, the answer must be given after an objective examination of the physical characters of the building or buildings at the two points in time, having regard (inter alia) to similarities and differences in appearance, the layout, the uses for which they are physically capable of being put and the functions which they are physically capable of performing. The terms of planning permissions, the motives behind undertaking the work and the intended or subsequent actual use are irrelevant, save possibly to illuminate the potential for use inherent in the building or buildings."

This statement was the subject of discussion in the second Cantrell case. In his judgment (at [2003] STC 493), the Vice Chancellor commented that these remarks were directed primarily at the issue of whether the work constituted an enlargement or extension, but that "in the case of an alleged annexe the requirement that such a construction should be an adjunct or accessory to another may require some wider enquiry." But it was unnecessary to reach a concluded view on that question. The Vice-Chancellor did comment on the term "annexe" in the Notes:

"An annexe is an adjunct or accessory to something else, such as a document. When used in relation to a building it is referring to a supplementary structure, be it a room, a wing or a separate building."

It follows that a single construction work cannot result in something that is at the same time both an enlargement or extension of an original building and an adjunct or accessory to it. But it is not clear that it necessarily follows as a matter of law that part of such a work could be viewed as an extension and part as an annexe. That, in the view of the tribunal, remains an issue of fact.

The questions for decision

It is not in dispute that all parts of the new building are at all relevant times for use solely for a relevant charitable purpose.

It is in dispute whether the new building is an annexe to, or an extension or enlargement of, the existing buildings. It is further in dispute, if the new building is properly to be treated as an annexe, that the annexe is within the terms of Note (17).

The tribunal is assisted in its examination of those questions by the decision of the tribunal in The Archdeacon of Southwark Commission for Schools and Colleges v Customs and Excise Commissioners (2004) VAT, a case which raised the same issues as here, and it follows the approach taken by that tribunal in looking at the evidence.

This appeal is by the PCC, and is not therefore related specifically to any invoice made or to be made by a taxable person. Nonetheless, the nature of the construction work is to be determined at the date of the supply of the work. Work such as this usually involves a number of potential dates of supply. In reply to a question by the tribunal, Mr Waite suggested that the date of supply should be taken as being 1 April 2004, the date on which (subject to retentions and residual works) the building was handed over to the PCC by the builders. But the tribunal also heard that the final signing off from the work by the architect had not taken place, and that the matter was not therefore fully concluded. The tribunal considers on these facts that it should for the purpose of this appeal only take 1 April 2004 as being the time at which to look at the work, without prejudice to any argument about the date of supply for any other purpose.

The facts

St Andrews Parish Church, Kimbolton Road, Bedford was built in the 1920s with later extensions including some in the 1960s. In keeping with tradition the main line of the church is from east (where the altars are situated) to west. It was built; with support buildings that were originally separate from it, on an island site, with Kimbolton Road forming its southern boundary and side roads leading on to that road providing its eastern and western boundaries. To the north is the vicarage, but that is entirely separate from any of the buildings now under consideration. It is clear from both plans and visual inspection that the site imposes tight limits on any expansion plans.

The old buildings

The church is an imposing structure built of local stone and brick, with a substantial church tower. It is not a listed building, although it is in a conservation area. Before the current works started, the nave of the church stood alone without any contiguous buildings or extensions. The main entrance was through a porch in the south-west corner of the nave. There was also a door on the north side of the nave leading outside, and a second door at the east end of the north side of the nave leading into an office. The tower was to the south of the altar at the east end of the nave. Rooms had been constructed to the north and south of the chancel (now a chapel). These included the office just mentioned on the north side of the chancel, and there were two doors giving access to the chancel from the north side. The choir vestry was to the south side and there was a door giving access to the chancel on that side also. There was also a door in the south wall adjoining the choir vestry leading out to Kimbolton Road. To the immediate east of the chancel east wall was a long, thin (and apparently somewhat insubstantial) structure including a toilet and store. There was, of course, no door in the east wall of the chancel, but there was a small door from this easternmost room that led down steps to another door leading directly into the main parish hall.

The parish hall was part of a separate building constructed on a north-south alignment to the east of the church (the second building). The plans show that the second building was originally about 2/3rds of the length of the church building, and about the same width as the nave of the church. Its southern edge was roughly in line with the southern edge of the church building. As a group the two buildings formed an "L" shape with the longer part of the L on the southern side and the point in the south east corner.

The second building comprised two halls (one extensive, the other the size of a large classroom), an office used as the parish office, a second smaller office, a kitchen, several toilets including disabled facilities, and a number of store rooms. Access to that building could be by several doors. The main doors were to the south, leading directly from Kimbolton Road, and in the middle of the west side, leading out to a car park to the north of the church nave. There was also a smaller door in the middle of the east wall and four doors in addition to the main door on the west side. One of those doors led through the long, thin room (used as a store) to the church. But to use that access one had to pass through a minimum of five doors and three rooms. It was obviously not a main or even direct access route. The tribunal suspects that it would have been quicker to leave the second building and to enter the church by another door.

The southern part of the second building was demolished ahead of the work now being considered. The line of demolition saves the walls to the north of the eastern doorway in that building and the southern wall of the parish office. As a result, more than half the second building was demolished. We could see on inspection that the northern part had been substantially refurbished as part of the construction work. This included turning the former parish office into a kitchen with serving hatches (replacing the kitchen in the southern part of the building) and a dining area, and altering internal access in that part of the building. The remaining part of the second building continues to provide another hall and a meeting room and office.

The northern part shows that the second building was a lesser structure to that of the church building, but built in sympathetic materials. So far as relevant, that building as a whole was, before the changes, clearly not an extension or enlargement of the church. It was either an annexe to it or a free-standing building with separate though related purpose – in part a typical church hall or village hall but more extensive than many such halls. Separately, there had been enlargements of the church in the form of the rooms to the north and south of the chancel. These were also demolished as part of the construction work that led to this appeal.

The new building

The new building does not interfere in any way with the internal structure of the church building and adjoining tower, save for changes to the access doors between the chancel and the new building on the north side and for abutting structures. One of the two doors in the north side of the chancel has been blocked off. Further, very little of the new building can be seen from inside the church itself. However, as noted below, the ease of communication between the church and the new structure is substantially changed and enhanced.

The new structure can be looked at, as the PCC put it to us, as a series of functional units but they comprise a structural whole. The tribunal finds it is best described as " the new building" rather than "the new buildings".

The first feature of the new building is a group of rooms built to the north of the chancel. This consists of an entrance area leading into a quiet room, a vestry for clergy use with a robing room leading from it, a larger choir vestry, and a toilet and small stores. Access to the entrance area of this group of rooms can be from the existing doors in the north side of the nave and of the chancel and by a new corridor sloping down against the outside of the north wall of the chancel to a corridor running north-south past the east end of the chancel. The PCC accept that that part of the new structure is a new extension of the church and not an annexe. It replaces the former vestries to the north and south of the chancel and also adds a quiet room and facilities. The tribunal considers that it is beyond question that this group of rooms is an extension (and factually also an enlargement) of the church.

The largest feature of the new building is a community hall with four small stores leading directly from it. This is in the south-east corner of the site. The two main entrances to the hall are in the north-west corner (as with the hall it replaces) and in the centre of the west wall. This feature would, if it stood alone, clearly be a church hall or village hall and not part of the church itself. But it does not stand alone. The doors in the north side of the hall link to the old north part of the second building by a corridor that is integral to the new building as a whole. The corridor also links to the other features of the new structure. The west doors lead directly from the entrance area, the third feature of the new building.

This third feature of the new structure is a replacement of neither the demolished church extensions nor the demolished southern part of the secondary building. It is a new entrance area that has been created with a frontage directly on to Kimbolton Road. It extends from the east side of the church tower to merge into the west side of the community hall. Its building line is noticeably nearer to Kimbolton Road than any part of the old buildings. The central feature is a large doorway, surmounted by a significant double-pitched roof with a stone-faced gable end above the doors, leading into a new entrance area. To the left (west) of the entrance area is a new consulting room designed as a place for the clergy to work and to meet with their parishioners or anyone else who wishes to see them. The entry door to the room leads directly off the entrance area. Opposite it to the right (east) is a new parish office, replacing the former parish office. Someone entering the building at that point can immediately talk to the parish office staff through a window/hatch connecting the office and entrance area. The individual can then turn either left or right. If the individual turns left, she or he climbs a short but wide staircase that leads to an antechamber. Double doors (with security locks on them) ahead lead into a further small room from which the individual can go directly into the east end of the nave of the church or into the back of the chancel. If the individual turns right, he or she sees the doors of the community hall directly ahead at the same level. Down a corridor to the left she or he can access the rooms in the old north part of the secondary building. The entrance area is wide. In the south-east corner is a room used as a store/shop for selling "fair trade" goods. Immediately to the east of the east end of the chancel are male and female multiple use toilet facilities.

The tribunal accepted the opportunity to view the development as a whole from the outside. Mr Deacon drew attention to the context of the old and new buildings in a spacious residential area that was also a conservation area, and to the need to make the new development fit in visually as well as functionally with the existing buildings. Mr Waite drew attention to the way that, in his view, the entrance area could be seen as an entity with the church tower.

From the outside it is clear that the church, the new structure, and the remaining part of the second building now form a continuous visual whole. At present it is relatively easy to see what is new and what is older, but that difference will fade in time as similar materials have been used throughout. But the most important new feature to a passing individual is the new entrance. It is constructed as a large entrance way and is clearly intended as, and is, the main access to the new part of the combined building. The tribunal visited the building on a typical morning and could not fail to notice the steady flow of people through the entrance area to take part in what was clearly a full programme of community activities in the halls and rooms.

Annexe, extension, or both?

For the PCC, Mr Jennings accepted that the group of rooms to the north of the chancel (described above as the first feature) was an extension to the original church building. Consequently, the PCC did not dispute the liability to pay VAT at the standard rate on that aspect of the building works. Mr Jennings stressed that the PCC had tried to reach an agreed position with the Commissioners about the status of the rest of the works. The builder had taken a neutral stance on whether the works attracted VAT, and awaited the outcome of the discussions and then this appeal. The PCC's view was that the building replacing the former church hall should be zero-rated. In taking that view, the PCC based its approach on the functionality of that part of the building. It is a community hall available to the whole local community but also used by the church. The Commissioners had originally challenged the purpose of the new building, but now did not dispute the question of its purpose.

He argued that the new building was not in entirety an extension to the church. The church and the new building were separate and could be entirely separated by locking certain doors. Further, it was regular practice to have them locked, for example after 5 pm on weekdays. The heating system was also independent from that of the church. He accepted that at first the PCC had argued that the part of the new building that represented the replacement of the community hall was the part that should be zero-rated. But this view had been modified on consideration of relevant cases. In the PCC's view the zero-rated work should also include the entrance area and the linking work.

Although the new structure was multi-functional, the work was undertaken in a single project, rather than in stages. The diocese had supported the work in full, and a copy of a single faculty authorising the work was produced. It was not necessary to obtain separate faculties for the different kinds of work. This had originally been challenged by the Commissioners, but that was now accepted by them.

Mr Jennings sought to support his case by reference to two decisions of the tribunal. In Grace Baptist Church v Customs and Excise Commissioners (1999) VAT Decision 16093 a new building was found to be an annexe of the adjoining chapel. In Torfaen Voluntary Alliance v Customs and Excise Commissioners (2004) VAT Decision 18797, the tribunal found that a church hall was an annexe. The tribunal in Torfaen followed the other tribunal comment that:

"It flies 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-rated was excluded from zero-rating merely 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".

He submitted that that was the proper approach in this case, bearing in mind the individual facts and also the intention of Parliament in imposing the rules.

Mr Waite, for the Commissioners, contended that the whole new structure was an extension of the church when that test was considered in the light of the authorities. He referred particularly to Cantrell, cited above. This was because of the degree of integration between the old building and the new building. Further, in his view the concession by the Appellants that part of it was an extension when properly considered meant that the appeal had been conceded by the Appellants. There was no true distinction between the different parts of the new building. If the tribunal did not agree with that, he contended in the alternative that the annexe was of a kind excluded from zero-rating by note (17).

Our decision

We first compare the old and new buildings in the light of our detailed descriptions by reference to appearance, layout and function. This is not as straightforward as in the cases cited to the tribunal as in this case there were originally two buildings, the church and the second building (which can be viewed as an annexe to the church). The new building involves an undisputed extension to the church, a replacement of part of the second building and new work that could be seen as an extension both of the church and of the second building. Nonetheless the tribunal is of the clear view that the new building is in external appearance such that it integrates with both the church and the remaining half of the second building to form a single building. Internally, the entrance area appears as an entrance to the church and to the community facilities. The previous obscure narrow link between the old two buildings has been replaced by an obvious entry to the church from the entrance area, although the tribunal would accept that the link to the church past the new vestry area on the north side is not obvious in appearance or layout. This points to the new building being an extension of the original building or buildings rather than a separate and subsidiary building to them.

Likewise, in terms of layout, the resulting structure is a single structure and not a series of structures. There are clear lines of access between all the parts of the new building and the two buildings to which it is connected. There are internal security locks on various doors, as well as fire doors breaking up the spaces, and it is clearly possible to break all links between the new building and the church to those who do not have the relevant keys. But the layout clearly and significantly enhances the links between the new structure and the church as compared with the original building while retaining the links between the remaining part of the old building and its replacement. This is significantly different to the original situation. Further, there is clear interdependence between all parts of the new building, including that which is conceded to be an extension of the church. For example, there is a common heating system for all three functional parts of the new structure. This points to the new structure being an extension to the church, or at least an extension to both the existing buildings.

It is conceded by the PCC that the function of one part of the new building is that of an extension to the church, namely the area to the north of the chancel/chapel including the vestry and choir vestry. The tribunal considers that this analysis should apply also to parts of the entrance area, in particular the office used by the clergy and to some extent also the parish office. It also applies to the entrance area link with the church. The only function of that aspect of the entrance area is to allow easy access between the church and both the offices (clergy and parish) and the community hall and other community facilities together with the exit to Kimbolton Road. The parish office also interlinks in a functional way with the rest of the building, both church and community. That is where the arrangements for the community hall and the other facilities are made. But it also interlinks with the administrative functions linked to the church. Its position - with an access hatch or window immediately inside the entrance from Kimbolton Road - ensures that it is the general enquiry point for anything to do with the whole building. This also points to the new building being an extension rather than an annexe.

One issue of doubt for the tribunal is whether it is possible to view that part of the new structure that replaces the old community hall as an annexe in some way separate from the rest of the new structure. The tribunal notes that some previous tribunals have found it possible on the facts to take a view that involves part only of a new structure being an annexe. In this case the issue is whether the part of the new structure that replaces what was previously clearly an annexe or separate building can itself be regarded in the same way rather than as an extension. That raises an issue of law not considered by the parties, but on which the tribunal has formed a clear view. In so far as the new structure is an enlarged replacement for the part of the second building, it is possible to view it as an extension to or enlargement of the annexe. But it is not possible to view it as an annexe to that annexe unless it separately meets the test for being an annexe rather than an extension. It is not enough that it is an extension or enlargement of an existing annexe. The rules set out above impose VAT liability on an enlargement of or extension to an annexe in the same way as of or to a principal building.

So it does not assist the PCC's appeal to pursue a line of reasoning that seeks to separate any extension to or enlargement of the second building from that of the church. That argument would only be of assistance if it could be shown that the part of the building involving the community hall was an annexe – and whether it was an annexe to the church or the second building would not matter on the particular facts of this case.

The tribunal does not accept that it is possible on the facts to divide up the new building for present purposes into a part or parts that should be regarded as an extension of the existing building (or buildings) and a part or parts that should be regarded as an annexe (whether to the church or to the second building or to both). The new building is in the view of the tribunal to be judged as a whole.

Judged on that basis, the criteria of appearance, layout and function all point to the new building being one that integrates both the new build and the two existing buildings into a single entity. All of it is therefore to be regarded as an enlargement or extension of the original building or buildings, and none of it is to be regarded, either as a whole or at to any part, as an annexe to either of the existing buildings.

While the tribunal accepts that the issue is not free from doubt, it nonetheless agrees with the Commissioners' view that the building work must be standard-rated for VAT purposes because it is an extension or enlargement within the terms of Note (16) to Group 5 of Schedule 8 to the Act.

If the tribunal is wrong in law in taking the view that no part of the new building could be regarded as an annexe, then the original view of the PCC, that the community hall should be regarded as an annexe, should be considered. The tribunal does not agree that the wider argument of the PCC that the entrance area and associated offices could be regarded as an annexe rather than as an extension of the church is sustainable on the facts because of the way in which both the entrance area and the two offices that lead from it are linked by both layout and function to the church.

The tribunal would have difficulty in finding that an "annexe" comprising the replacement to the community hall and the immediately adjacent parts of the new structure met the additional tests in Note (17) for qualifying for the zero rate. The tribunal's view is that that part of the new building is not capable in ordinary usage of functioning separately from the existing building if "existing building" includes both the church and the second building. As things are arranged, the hall does not function independently of the parish office. And while the parish office has itself been moved from one of the existing buildings to a part of the new building, that part is not part of the "annexe" for the purposes of this analysis. The tribunal takes the view that, for the purposes of Note (17), the reference to "existing building" in that note must include any enlargement or extension to that building included with the existing building because of Note (16). In taking that view, it also has in mind the terms of Note (18) under which a building only ceases to be an existing building if, for current purposes, it is demolished completely to ground level. Consequently the parish office is "in" the existing building for these purposes. Similarly, part of the necessary toilet facilities and all the catering facilities for the "annexe" are in the existing building. It is not enough, as was argued for the PCC, that the church itself can be and is locked off from the "annexe". Turning to means of access, the tribunal noted several means of access to the community hall "annexe". The main means of access is by the entrance on Kimbolton Road. That is in a part of the building that the tribunal had found to be an extension of the existing building rather than as part of what might be viewed as an annexe. It must follow from the tribunal's view of Note (16) that for the purposes of Note (17) the main means of access to the "annexe" is via the existing building.

DAVID WILLIAMS

CHAIRMAN

Release Date: 29 April 2005

LON/04/993