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PJG Developments Ltd v Revenue and Customs [2005] UKVAT V19097 (12 May 2005)

19097

LAND AND BUILDINGS – Exemption – Election to waive exemption – Public House – Vendor had elected to waive exemption – Vendor obtained planning permission for conversion to two residences – Sale of building to purchaser who intended to convert building into dwelling houses – Whether building "intended for use as a dwelling or number of dwellings" – Appellant as purchaser had not specifically communicated its intention to vendor – Whether vendor aware of intention – Yes – Election to waive exemption disapplied – Appeal allowed – VAT Act 1994 Schedule 10 para 2(2)(a)

LONDON TRIBUNAL CENTRE

P J G DEVELOPMENTS LIMITED Appellant

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

- and -

RED DEVELOPMENTS (LONDON) LIMITED Third Party

- and -

Tribunal: STEPHEN OLIVER QC (Chairman)

Sitting in public in London on 4 and 5 April 2005

Roger Thomas, counsel, for the Appellant

Nicola Shaw, counsel, for the Respondents

Conrad McDonnell, counsel, for the Third Party

© CROWN COPYRIGHT 2005

DECISION

PJG Developments Ltd ("PJG") appeals against a decision in a letter from the Customs of 26 April 2004. The effect of the decision is that PJG had been rightly charged VAT in the sum of £91,350 on the sale to it by Red Developments Ltd ("Red") of the Fox and Goose Public House ("the Property") in Richmond. Red had charged output VAT on the sale and is affected if the Tribunal should rule that the sale should have been an exempt supply. Red has therefore been joined as a third party to the appeal proceedings.

Shortly summarized the position is this. Red had elected to waive exemption from taxation of the Property, two semi-detached "houses" occupied for many years as a public house until Red's purchase. Red sold the property to PJG which intended to convert it back into dwelling houses for onward sale. The main issue is whether Red's election to waive exemption is disapplied by VAT Act 1994 Schedule 10 paragraph 2(2)(a) in relation to Red's sale to PJG because the Property was "intended for use as a dwelling or a number of dwellings". The secondary issue is whether the election was kept in being by operation of paragraph 2(2A) and (2B).

Schedule 10 paragraph 2, so far as is material, reads as follows:

"2(1) Subject to sub-paragraphs (2), (3) and (3A) and paragraph 3 below where an election under this paragraph has effect in relation to any land, if and to the extent that any grant made in relation to it at a time when the election has the effect by the person who made the election … would (apart from this sub-paragraph) fall within Group 1 of Schedule 9, the grant shall not fall within that Group."

(Group 1 of Schedule 9 contains the provisions whereby grants of interests in land are exempt from VAT.)

Schedule 10 paragraph 2 continues –

"(2) Sub-paragraph (1) shall not apply in relation to a grant if the grant is made in relation to –

(a) a building or part of a building intended for use as a dwelling or number of dwellings or solely for a relevant residential purpose; or

(b)-(d) … .

(2A) Subject to the following provisions of this paragraph, where –

(a) an election has been made for the purposes of this paragraph in relation to any land, and

(b) a supply is made that would fall, but for subparagraph (2)(a) above, to) be treated as excluded by virtue of that election from Group 1 of Schedule 9,

then, notwithstanding subparagraph (2)(a) above, that supply shall be treated as so excluded if the conditions in subparagraph (2B) below are satisfied.

(2B) The conditions mentioned in subparagraph (2A) are that –

(a) that an agreement in writing made, at or before the time of the grant, between –

(i) the person making the grant, and

(ii) the person to whom it is made,

declares that the election is to apply in relation to the grant; and

(b) that the person to whom the supply is made intends, at the time when it is made, to use the land for the purpose only of making a supply which is zero-rated by virtue of paragraph (b) of item 1 of Group 5 of Schedule 8."

(Paragraph (g) of item 1 of group 5 refers to the first grant by person converting a non-residential building (or part of one) into a building designed as a dwelling.)

I heard evidence from Martin Finnerty, director of PJG, and from Martin Richards, director of Red.

The facts

The Property had originally been built and used as two semi-detached houses. At some stage in the first half of the 20^th Century the ground floor and basement of the whole building had been converted into the bar and public area of the Fox and Goose Public House. The basement was adapted for and used as the public house's cellar.

In December 2001 Red acquired the Property from the brewers who had previously owned it. At or by the time of Red's purchase the public house activity was closed down.

Red had been formed in 2001 as a property development and investment company. Martin Richards stated in evidence that he had been engaged in that business as a sole trader and through Red for over eleven years. He had carried out earlier purchases and sales of public houses in various parts of the country. Neither he nor Red had ever redeveloped a public house. Typically they would obtain planning permission for conversion from public house to residential premises and sell the properties on to third parties; on some occasions they might resell with no prior grant of planning permission. Mr Richards' and Red's business concern was to achieve the best possible return within the shortest passage of time.

Some time in 2001 Red instructed architects to draw up plans for the change of use of the Property from public house to reinstatement of the original two houses, each with ground level and basement extensions and first floor side extensions. On 22 October 2001 the planning application was submitted to the local planning authority. On 31 January 2002 conditional planning permission was granted.

On 29 January 2002 the Commissioners acknowledged Red's election (in a letter dated 5 December 2001) under Schedule 10 paragraph 2 to waive exemption on the Property.

Red then instructed estate agents (Featherstone Leigh) to market the Property. The Estate Agent's Particulars state on the first page:

"A delightful residential opportunity with planning to refurbish, convert and extend the existing property to create two four bedroom houses, situated approximately 100 yards from Ham Common".

The plans on the first page of the Estate Agents' Particulars show the Property (which appears as two semi-detached houses with a space, apparently occupied by an outbuilding, of roughly the same width as the two houses).

The description (in the Particulars) of the Property's location draws attention to its proximity to "shopping, schooling, transport and recreational facilities". The Particulars also state:

"Planning permission has been granted for the reversion of the existing Public House to form two individual four bedroom houses.

HOUSE 1

Accommodation is set over three floors and provides four bedrooms, two bathrooms (one en suite) shower room, dining room, living room, sitting room, kitchen and separate WC, and garage, west facing garden.

…

HOUSE 2

Accommodation is set over three floors and comprises four bedrooms, two bathrooms, one shower room and WC, living room, kitchen/dining room. The property also benefits from one space provided for off-street parking a close leading on to garden area beyond."

The Particulars came into the hands of Martin Finnerty, director of PJG. PJG's business is to acquire and refurbish properties. It currently owns some 50/60 properties which are all let. Over the years it has sold some 10-15 properties, most of which have been residential. Martin Finnerty stated (and we accept this so far as is relevant) that the particular attraction to "him" in buying the Property was the fact of existing planning permission and a possibility of getting planning permission to build a third town house on the space at the side. At all material times that had been PJG's sole intention. We accept that, while recognizing that as things turned out PJG has neither obtained planning permission for the third house nor been able to sell either of the two dwelling houses following the conversion work. Both dwelling houses are currently let to third parties by PJG.

PJG, through Martin Finnerty, carried on negotiations with Red's agents. By 15 April 2002 the stage had been reached for Red's production of its "Seller's Property Information Form". These, signed by Martin Richards of Red, stated, in response to the question, – "Is the Property used only as a private house?", "Public House – planning permission now granted for conversion into two houses".

On 15 July 2002 Featherstone Leigh wrote to Wedlake Saint, solicitors for Red, informing them that the sale of the Property had been agreed for £580,000 plus VAT subject to contract. The purchaser was stated to be Mr Mark Gurney. The purchaser's solicitors responded identifying a company called Crownterm Ltd as the purchaser.

Wedlake Saint wrote to the purchaser's solicitors (Tibber Beauchamp Ward) on 16 July 2002 enclosing a draft contract, a copy of the planning consent and a copy of the Customs' receipt of Red's election to waive exemption. The draft Contract included the following words – "On completion the Buyer shall pay to the Seller Value Added Tax on 90% of the purchase price". Tibber Beauchamp Ward wrote back on 22 July stating that PJG was to be the purchaser; in the same communication Tibber Beauchamp Ward enquired – "Why is VAT chargeable on 90% of the purchase price and not 100%?" Wedlake Saint's answer to that query (in a letter of 30 July 2002) was "We understand that this is the usual way Customs and Excise deal with VAT on public houses – a portion is deemed to be residential. We will ask our client for confirmation." Asked why Wedlake Saint's response had not referred to the fact that there had been an election to waive exemption, Martin Richards (when giving evidence) explained that the purchaser's question had related only to the apportionment between residential and public house use. Martin Richards stressed that he had neither held any discussion about VAT with PJG. Asked whether he had agreed with PJG that the election to waive exemption would apply, his response was – "I had no contract with PJG". Experience of an early public house transaction had, he said, made him aware that VAT had to be charged on the sale.

Included with the draft contract was a set of Standard Conditions of Sale (Third Edition) which provide in Condition 1.4

"1. An obligation to pay money included an obligation to pay any

value added tax chargeable in respect of that payment.

2. All sums made payable by the contract are exclusive of value

added tax."

The draft contract provided – "Purchase Price: £580,000 (plus VAT)"

Attached to Wedlake Saint's letter 30 July 2002 were some "General Enquires". Enquiry 14 refers to "Value Added Tax. It asks certain questions.

Question 14.1 reads:

"Has an election been made to waive exemption from VAT in relation to the Property? If so, please supply evidence of notification of the election to HM Customs & Excise and their acknowledgment."

(That question has been crossed out. However, as already noted, Wedlake Saint had included the letter from Customs of 29 January 2002 acknowledging the receipt of the election to waive exemption.)

Question 14.2(a) asks - "Does the Seller intend to charge VAT on this transaction?" The question has been crossed out but the answer given is – "Yes".

Question 14.2(b) also crossed out asks – "If not, may we amend the contract to provide that the Vendor will not elect to waive exemption from VAT" No answer is given to this Question.

Question 14.2(c) asks - "If the Seller does intend to charge VAT on this transaction will a receipted notice be handed over on completion? The answer is "Yes"

On 1 August 2002 contracts were exchanged. The terms of the draft contract set out in paragraphs 15 and 17 above were contained in the contract itself.

Red issued an invoice dated 1 August 2002. This refers to the VAT charged "VAT @ 17.5% on 90% of purchase price - £91,350." An invoice had been sent by Red's Solicitors to PJG's Solicitors (Tibber Beauchamp Ward) on 3 September. Completion date was 4 September. Tibber Beauchamp Ward wrote requiring an original VAT invoice "with the correct date, ie date exchange of contracts". On 11 September Wedlake Saint wrote to Tibber Beauchamp Ward enclosing the VAT invoice dated 1 August.

PJG's concerned to get a back-dated invoice is explained by a record of enquiry made of the Customs' Contact Centre 0n 6 April 2002 by a person described as the "Company Accountant". The note of enquiry reads as follows:

"Client has bought a pub and wanting to claim back the VAT

now, how do he do this? Established that the pub was bought

before the end of July, advised that he should include input tax on

07/02 return."

The First Issue: was the Property intended for use as a dwelling or a number of dwellings?

To resolve this I need to make further findings of fact and draw certain inferences from the evidence. Looking first at PJG's intension as regards to Property, I accept Martin Finnerty's evidence that his sole intention (accordingly that of PJG) at the time of the purchase of the Property was to convert the Property into two, or three if extended planning permission were granted residential dwellings and to sell them as freehold properties.

Turning on to the intention of Red. Martin Richards spoke for Red. As a property dealer its aim was to achieve from the Property the best possible return within the shortest possible time. To achieve this Red, in anticipation of the purchase of the Property, drew up plans for reinstatement of the Property into its original form of two dwelling houses and submitted its application for planning permission in October 2001, i.e. two months before completing the purchase of the Property.

At or about the time of completion of Red's purchase, the public house activity was closed down and the licences was allowed to lapse. The Property was then marketed as "a delightful residential opportunity".

Martin Richards' evidence was that, in the course of marketing, one enquiry had been made by a potential public house user but nothing had come of that. The use to which the purchaser, whoever that might be, intended to make of the property was not, he said, of concern to him. He had encountered purchasers who had bought properties from him and sold them on before doing any work on them. On one more recent) occasion he had received an offer, for another public house that he had bought, from a veterinary practice for their own use. Martin Richards pointed out that most of the public house plant in the Property was still in working state and the public house business could therefore have been revived. I accept that. I accept also that Red did not much mind what use the Property was to be put to so long as a quick and profitable sale could be struck. I should also mention that another public house stands quite close to the Property.

Nevertheless I am satisfied that Red's intention for the Property was that it should be sold to a buyer whose intention was that it should be used as dwellings. It had originally been two dwellings; the public house business had been closed down and the licence allowed to lapse. Planning permission had been obtained for residential use and Red had marketed it as a residential opportunity. The natural consequence of those actions must, I think, have been for the property to be sold for use as dwellings by the buyer or, following conversion, by some third party ; Red must be taken as having intended that.

If it be right to deal with the question as an objective matter, I ask this rhetorical question – "What would the interested and informed passer-by have said?" The passer-by at the time of the supply to PJG would have seen two adjourning houses on the first floors of which there had evidently been a public house now shut down. Had the passer-by gone to enquire of the selling agents, he would have learnt that they were being marketed with planning permission as residential opportunities. I had no evidence from such a person, but I would expect his reaction to have been – "There goes another pub to be turned back into private houses".

With those features in mind I am satisfied that at the time of Red's supply of the Property to PJG, it was a building intended for use as a dwelling. Red's election was therefore disapplied by operation of paragraph 2 (2).

Does it matter that PJG did not specifically communicate to Red a statement of its intention to convert the Property into dwelling houses and to sell these to third parties. Martin Richards said, and I accept this, that Martin Finnerty never disclosed to him what his intention was with regard to the use of the Property. Martin Finnerty said he recalled having approached Featherstone Leigh, Red's estate agents and surveyor, to discuss the prospects of getting a third dwelling house out of the site of the Property. Featherstone Leigh had, he said, provided a report to be sent to PJG's bank. I mention this but add that I would need clearer evidence to support this recollection if I were to accept it. I therefore proceed on the basis that there was no formal communication of intention by PJG to Red.

On the question of whether the Act requires communication of purchaser's intention to a vendor, the Customs and Red relied on the decision of the VAT and Duties Tribunal in SEH Holdings Ltd the Customs and Excise Commissioners (2000) VAT Dec 16777 as requiring that, for paragraph 2(2) to apply, the vendor in question must know of the intended use at the time of sale. I have two points to make about the SEH decision. First, it was reached on significantly different facts from the present. Second, it does not go so far as to require that a purchaser's intention to use a building as a dwelling or dwellings must inevitably and always be notified to the vendor/supplier.

SEH was a case where two parties had been interested in converting a disused public house complex owned by a third party into living accommodation. There is no suggestion in the findings of fact that the building had ever been anything other than a public house. The second of the two parties obtained planning permission and the requisites statutory notice had been sent to the owner. About one year later the owner contracted to sell the public house complex to a construction company. The contract contained a restrictive covenant by the construction company that the property would not be used as a public house. The same day that the construction company constructed to buy the public house it contracted conditionally to on-sell the same property, as two parcels, to the two original parties. The condition was that those two parties should enter into building agreements with the construction company to convert the public house and out- buildings into residential units. The Tribunal proceeded on the basis that, in the absence of evidence that the owner/vendor knew that the intended use was for the public house complex to be reinstated, the owner/vendor's election to tax had not been displaced by paragraph 2(2). Here by contrast Red, as vendor, must be taken to have known that the Property was intended for use as dwellings. That, as I have already concluded, was what it intended all along. And here the Property had originally been built as two houses and was being marketed by Red as a delightful residential opportunity. I, unlike the Tribunal in SEH (see paragraph 46), am satisfied that on balance of probabilities Red was aware of the intention that the whole building was to be used as dwellings.

Red argues that for paragraph 2(2)(a) to apply the intention of the purchaser, for the use of the property in question, must be to occupy it himself. The Customs argue that the intention of the purchaser who is not going to occupy it himself must be to convert or adapt it into a dwelling and then sell it on to a third party who himself intends to occupy it as a dwelling. In both situations the purchasers must, according to the SEH decision, have communicated their intentions to the vendors at the time of sale; unless the purchaser in question does so, the vendor will be unaware that his election to waive the exemption has been superseded by paragraph 2(2)(a). Here, it is said, PJG's intended use of the property was not known to Red at the relevant time, i.e. the time of the sale.

Is it necessary for a vendor (such as Red) to know not just that the property is intended for use as a dwelling but that (as Red argues) the purchaser itself intends to use the building as a dwelling? I shall come back to the first feature in a moment. The answer to the second is - I think not. The words of paragraph 2(2)(a) do not bear such a restricted meaning; a building is intended for use as a dwelling whether it is to be lived in by the grantee, let out as a dwelling by the grantee or converted into and sold on as a dwelling by the grantee to a third party. Moreover Red's approach leaves no scope for the application of paragraph 2(2A) and (2B). Paragraphs 2(2A) is predicated on the basis that paragraph 2(2)(a) would operate to prevent the vendor's election to waive exemption from having effect in the circumstances set out in paragraph 2(2B)(b). Those circumstances are:

"… that the person to whom the supply is made intends, at the time when it is made, to use the land for the purpose only of making a supply which is zero-rated by virtue of paragraph (b) of item 1 of Group 5 of Schedule 8".

Item 1(b) covers:

"The first grant by a person … (b) converting a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings or a building intended for use solely for a relevant residential purpose, … of a major interest in, or in any part of, the building, dwelling or its site."

This undermines Red's contention that the purchaser must intend to occupy either as a resident or as a landlord. It is inconceivable that paragraph 2(2)(a) would apply where the purchaser intended to grant a 25 year lease or 999 year lease – but not where he intended to sell the freehold. Because in those cases the ultimate sale will be zero-rated, the Legislature has allowed the parties to take such transactions back into the chain of standard-rated supplies. But such cases must first be found to be within the scope of paragraph 2(2)(a) in order that they may (at the discretion of the parties) be removed.

Regarding the Commissioners' contention that the purchaser's intention must (if he is not to be occupied personally) be to convert or adapt it into a dwelling and then sell it on to a third party who intends himself to occupy it as a dwelling, the answer advanced for PJG is, I think, correct. Once it is accepted that the purchaser need not himself use the building as a dwelling, there is no reason why paragraph 2(2)(a) should be restricted to use as a dwelling by the next purchaser in the chain of transactions. The mischief at which paragraph 2(2)(a) is directed is the inclusion in the price paid by the final consumer of an element of VAT relating to the purchase of land intended for use as a private dwelling house. There is a range of circumstances which may apply here on an onward sale of the building, in some of which the onward sale will be zero-rated and in others of which the supply will be exempt. Those cases where the onward sale is zero-rated (so that the imposition of tax is not a burden) are dealt with by enabling the parties deliberately to contract out of paragraph 2(2)(a). PJG refers to the fact that in cases where there is a risk that the onward supply will be exempt, then the legislature has taken steps to ensure that no more VAT than is necessary is built in to the final purchase price. The purpose is only achieved if the option to tax is disapplied as early as possible in the chain of transactions. I agree. It would appear that this advantage to the consumer is lost, or at least reduced, if , where there is a chain of sales, VAT is charged on each sale of a property intended for use as a dwelling until that immediately prior to the purchase by the consumer.

I return now to SEH and its guidance on the construction of paragraph 2(2)(a). Both Red and the Commissioners placed reliance on SEH as indicating that ,for paragraph 2(2)(a) to apply, actual notice should be given by purchaser to vendor of the former's intention for the building to be regarded as intended "for use as a dwelling or number of dwellings".

In the context of the SEH circumstances, the seller had (as I have already noted) had no reliable indication of the buyer's intention as to how the public house in that case was to be used. The Tribunal decided the case (in favour of the Customs who claimed that the supply was covered by the seller's election to tax) on the basis that, for paragraph 2(2)(a) to apply, a vendor must know or be aware of the intended use at the time of the sale (see paragraphs 41 and 47(2) of the Decision); at the end of paragraph 28 the Tribunal observed that "the intention must be part of the transaction between the vendor and the purchaser". I do not have to express a view whether I agree with that approach and with the reasoning on which it is based. This is because of my finding that Red was aware of the intention that the whole of the Property was to be used as dwellings. Having said that I do not read the decision in SEH as laying down a universal requirement that the purchaser's intention that the building be used as a dwelling must, for paragraph 2(2)(a) to apply, be specifically communicated to the supplier (the vendor). There will be occasions where the purchaser's intention is so self-evidently obvious, such as the present, that specific communication may be unnecessary. There will be occasions where communication may be impossible; a sale at auction or by way of sealed bids of a property with planning permission for residential use and advertised as "a delightful residential opportunity" may present no opportunity for communication of the purchaser's intention. The legislator has, I think used a robust all-purpose form of words. Their purpose is to ensure that, unless the parties knowingly contract out of this, supplies of residential accommodation are not burdened with VAT.

So far I have approached the paragraph 2(2)(a) issue on the basis that the expression "intended for use as a dwelling" imposes a subjective rather than an objective approach? Red has argued in the alternative that the word "intended" has been used in a passive and objective sense and might be paraphrased as "suitable or apt". That had been the approach of the Court (the Queen's Bench Division) in Burns v Currell [1963] 2 All ER 297 where the Court had had to determine whether a go-kart was a "mechanically propelled vehicle intended or adapted for use on roads" for purposes of the definition in the Road Traffic Act 1960. Here, argued Red, the physical state of the Property was that of a disused public house which, with minor fittings, could have been brought back into use as a public house; to convert it back into dwellings would, by contrast, have taken many months.

The subjective approach is, I think, correct in the context to paragraph 2(2). Paragraph 2(2) and (2A) and (2B) are looking at the intended use of the grantee. The words "intended" were "intends" taken into conjunction with "for use as" or "to be used" connotes something more than what the building in question is actually used for or what the informed passer-by would say it was used for. Those words, and in particular the expression "for use as" are forward-looking and, as the Tribunal observed in paragraphs 27 and 28 of the SEH decision, directed at the intention of the grantee.

For that reason I do not accept Red's argument for the adoption of the objective approach. The decision in Burns v Currell was concerned with a definition that was essentially objective and backward-looking. Returning, however, to the reaction of the informed passer-by, he will have noted that the property was built as two houses; its long-standing but temporary use as a pub has been discontinued and the public house licence has been surrendered. Instead the building has planning permission for reinstatement for residential use. His objective conclusion would, as observed in paragraph 24 above, have been that the Property was intended for use as two houses.

Red sought support for its contention that the Property was not "intended for use as a dwelling" within paragraph 2(2)(a) by referring to comparable provisions in Schedule 8 Group 5 (the zero-rating Schedule). The expression "a building … intended for use as a dwelling or number of dwellings or solely for a relevant residential purpose" (in paragraph 2(2)(a) of Schedule 10 is, observed Mr McDonnell for Red, remarkably similar to the expression found in Schedule 8 Group 5 paragraph 1(b). Paragraph 1 reads:

"1. The first grant by a person –

(a) constructing a building –

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

(ii) intended for use solely for a relevant residential or a relevant charitable purpose; or

(b) converting a non-residential building or non-residential part of a building into a building designed as a dwelling or number of dwellings or a building intended for use solely for a relevant residential purpose,

of a major interest in, or in any part of , the building, dwelling or its site."

Referring to the words in paragraph (b), i.e. "a building designed as a dwelling or number of dwellings or a building intended for use solely for a relevant residential purpose", Mr McDonnell referred to Schedule 10 paragraph 9 which provides that –

"Notes (1)-(6), (10), (12) and (19) to Group 5 of Schedule 8 … apply in relation to this Schedule as they apply in relation to their respective Groups but subject to any appropriate modifications."

Note (10) apply to the present case. That Note provides –

"(10) Where –

(a) Part of a building … is designed as a dwelling or number of dwellings or is intended for use solely for a relevant residential purpose or relevant charitable purpose (and part is not) …

then in the case of –

(i) a grant or other supply relating only the parts so designated or intended for that use (or its site) shall be treated as relating to a building so designated or intended for such use;

(ii) a grant or other supply relating only to the part neither so designed nor intended for such use (or its site) shall not be so treated; and

(iii) any other grant or other supply relating to, or to any part of, the building (or its site),

an apportionment shall be made to determine the extent to which it is to be so treated."

That, argues Mr McDonnell for Red, is conclusive of the issue. The supply by Red fell within subparagraph (iii) and an apportionment was made between the commercial and the residential parts of the Property. The commercial part is not to be treated as intended for use as a dwelling within the meaning of paragraph 2(2)(a).