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David Hugh Carr and Marten Propereties (In Liquidation) v Her Majesty's Revenue and Customs [2005] UKVAT V19267 (30 September 2005)

19267

REGISTRATION – Intending trader – First Appellant purchasing listed building and restoring – Whether Appellant established intention to make business supply – No – Transfer to second Appellant – Whether transfer of going concern – No because first Appellant not a taxable person – Whether second Appellant established intention to make business supply – No on facts – VATA 1994 s.30(1)(b) Sch 1 para 9(1)(b) Sch 8 Grp 6 item 1 – VAT (Special Provisions) Order 1995 (1985/1268) reg 5 – Appeals dismissed

ZERO-RATING – Protected buildings – Alteration – New damp insulation and drainage system – Work to fabric – Fixing of specialised membrane to inside of external walls with drainage channels – Whether excluded as "works of repair and maintenance" – No – VATA 1994 Sch 8 Grp 6 item 3 Note (6) – Appeal allowed

LONDON TRIBUNAL CENTRE

DAVID HUGH CARR Appellant

and –

COMMISSIONERS FOR REVENUE AND CUSTOMS Respondents

MARTEN PROPERTIES LTD (IN LIQUIDATION) Appellant

and –

COMMISSIONERS FOR REVENUE AND CUSTOMS Respondents

Tribunal: THEODORE WALLACE (Chairman)

MICHAEL SILBERT FRICS

Sitting in public in London on 19-21 July 2005

Mrs Penny Hamilton, counsel, instructed by Boorman Botham Ltd, chartered tax advisers, for the Appellants

Tim Eicke, counsel, instructed by the Acting Solicitor for Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

These are three separate appeals. Two of the appeals concern registration and are linked. The third which is quite separate concerns zero-rating of damp-proofing and insulation work to Marrick Park, a protected building near Richmond, Yorkshire.

Mr Carr appeals against a decision by Customs refusing his application to be registered under Schedule 1, paragraph 9(b) of the VAT Act 1994 on the basis that he intended to make taxable supplies. The supplies in question were the purchase, restoration and sale of Marrick Park.

Marten Properties Ltd ("MPL"), now in liquidation, appeals against decisions that it was not entitled to be registered. It applied to be registered on the grounds that it intended to continue the restoration of Marrick Park which had been transferred to it by Mr Carr and to sell it. It also contended that Mr Carr was entitled to be registered and that the transfer by him was a transfer of a going concern.

Both Appellants as recipients of the damp roofing and insulation supplies appeal against a decision that the damp-proofing and insulation work to the property did not qualify for zero-rating under Schedule 8, Group 6, item 3. Customs decided that the work was excluded under Note (6) being repair or maintenance or incidental alteration resulting from repair or maintenance work.

Basic facts

In December 2000 Mr Carr bought Marrick Park with 300 acres of farmland in Swaledale for £590,000. There is a house and two barns set at 225 metres above sea level on an exposed hillside, overlooking the river Swale. The external walls are constructed in random local stone and are 500mm thick and without cavities.

The house is a Grade 2 listed building, part being seventeenth century. Part of the house had been occupied by tenants, the other part had been used to store farm equipment and machinery including a tractor. Much of the external rendering on the stone had fallen off.

Mr Carr, who lived in Oxfordshire, let the surrounding land to two local farmers in 2001 at an annual rent of £8,950, retaining the house and barns and also three acres.

In November 2001 he applied for listed building consent to renovate and alter Marrick Park for use as a dwelling. On 13 July 2002 the Yorkshire Dales National Park, the Planning Authority, granted listed building consent. A schedule of works with quantities was prepared by quantity surveyors dated August 2002.

On 20 May 2002 Mr Carr's architect had written to Customs seeking to establish the VAT treatment of the various elements of the proposed work. The letter stated that his clients were Mr and Mrs Carr, that the restoration was "for use as a permanent family home" and that the capital expenditure was likely to exceed £3,000,000.

On 22 October 2002 Boorman Niven Botham Ltd ("BNB"), tax consultants, submitted an application by Mr Carr dated 29 September 2002 to be registered for VAT ("VAT 1") with effect from 1 October 2001. The application gave the following as his intended business activity,

"The purchase, restoration and sale of a semi-derelict Grade 2 listed farm estate in North Yorkshire, to be used as a family home."

In November 2002 Mr Carr was advised by BNB that once the work was completed he should transfer Marrick Park into a trust for his family.

On 13 November 2002 Marten Properties Ltd was incorporated.

On 28 November 2002 BNB wrote that Mr Carr had purchased Marrick Park "which he will restore and sell as a family home."

On 20 December BNB responded on behalf of Mr Carr to a letter from Customs dated 4 December, enquiring as to whom the property was intended to be sold. BNB's letter included the following,

"There is no current intention for the property to be sold to an unconnected third party. Mr Carr purchased the property in his own name, and the intention was to transfer a major interest in the completed property to him and his wife as joint owners, or to transfer it into another legal entity controlled by him and/or his family, once the work has been completed."

The letter went on to state,

"Since applying for registration and in order to protect his personal position through limited liability, Mr Carr has decided to transfer the property and the development works into a company, Marten Properties Ltd, which is within his control."

The letter stated that the transfer of the ongoing development would take place in approximately two weeks and that the work would take at least 18 months more. MPL would complete the work "and intends to grant a major interest in the substantially reconstructed listed dwelling." The letter stated,

"The grant may or may not be made to a connected party, depending on a variety of circumstances at the time when the works have been completed."

On 3 January 2003 Customs wrote stating that the sale of a dwelling to a connected party does not constitute a business activity for VAT purposes and that he was not eligible to be registered. A further letter on 9 January stated that as Mr Carr was not eligible to be registered there could be no transfer of his registration to MPL and requested further information as to the transfer to MPL and the intentions of MPL.

On 29 January BNB wrote to Customs stating that at this stage only the beneficial interest in Marrick Park would be transferred to MPL and "the transfer will rest on contract for the foreseeable future." The letter continued,

"At this point in time, the company has no definite intention in respect of the property. It may be sold, or retained for letting under a lease capable of running for 21 years and a day or longer. This will depend on various circumstances, which will not become apparent until completion, which is not expected to occur for some 18 months at least. In either event, there is an intended taxable supply."

On 7 February 2003 the beneficial interest in Marrick Park excluding the farmland was transferred by Mr Carr to MPL in which he was the sole shareholder. In a report dated 16 January 2003 Savills valued the property as at 10 December 2002 at £550,000: the report stated that at 10 December 2002 the main house had been fully scaffolded, and the roof and the majority of windows and doors had been removed; the interior was in the process of significant alteration. A valuation by the quantity surveyors on 12 February 2003 valued the work to date at £497,456 before retentions. The purchase price of £550,000 was satisfied by the issue of 550,000 £1 ordinary shares at par.

On 27 February MPL submitted an application for registration (VAT 1) from 7 February 2003 giving the intended business as,

"The continued restoration and sale of a semi derelict grade II listed farm estate in Yorkshire, for use as a family home."

At the same time Form VAT 68 was submitted "in order that the transferee company can take over the VAT registration number to be issued to David Carr."

On 12 March Customs refused the application by MPL. MPL appealed.

On 4 March Customs had ruled that the installation of damp-proof courses and membranes, the first time installation of wall linings and insulation and waterproofing of the walls to the house and Range Barn was repair and maintenance and did not qualify for zero-rating. Both Appellants appealed.

In outline the disallowed work involved the removal of the remaining plaster, the excavation of drainage channels below ground level inside the building against the external walls and some of the internal walls, the installation of sumps and drainage pumps, fixing a specialised membrane on the inside faces of the external walls, hanging high performance insulation over the membrance, erecting 60mm metal studs to form a metal cage, fixing 13mm plasterboard and finishing with a plaster skim. It appears that the new floor with membrane and floor surfacing has been disallowed. The chamber for the pump was disallowed. The holes through the stone walls for drainage channels were disallowed.

Mr Carr subscribed a further £3.8 million for ordinary shares in MPL which was liquidated in 2004 after the appeals were lodged. The financial statements of MPL at 31 March 2004 showed stock at £3,254,015. Marrick Park was distributed to Mr Carr as sole shareholder on 30 July 2004 at a valuation by Savills of £1.9 million; at that time there was still substantial finishing work to be done. The statement of assets by the liquidator on 23 June 2004 showed £1,148,361 cash at bank and accrued liabilities of £500,000 excluding liquidation expenses. The total certified value of the work at 31 January 2005 excluding professional fees and VAT was £2,221,263.

The liquidator applied to be substituted for MPL as Appellant. No formal direction having been made by the Tribunal, we directed during the hearing that the liquidator be substituted under Rule 13.

The witnesses

Mr Carr confirmed and amplified two witness statements dated 28 February 2004 and 11 July 2005 and was cross-examined. He was engaged in two successful businesses in the life and pensions industry, a partnership to train actuaries and a company, Hazell Carr plc, which employed 800 people and performed services outsourced by life assurance companies.

He said that he had known Marrick Park since his childhood: his parents live at Richmond and have a cottage at Marrick. Two brothers who were living in the house and farming Marrick Park had given notice to give up their tenancy in 2000 and he considered this to be a unique opportunity to buy the property. When he bought the property in December 2000 he had no fixed plans but the options included sale with or without planning permission and development for sale, for his own occupation or for rent. He applied for planning permission to renovate or convert the property intending to decide what to do once permission had been granted.

Once planning permission had been granted he entered into a standard form building contract with A R Calvert Ltd in August 2002. The initial work was largely clearance and stabilisation because of the poor condition of the property.

Mr Carr signed the VAT 1 on 29 September 2002. In his second witness statement he said that at that point he had no firm view on who would own Marrick Park following its renovation, nor on who would live there. "It seemed highly likely to me and to my advisers at that time that there would be a grant of a major interest to someone, either to a third party purchasing the property, or to a family trust should he decide to live in the property permanently and follow the advice of BNB in setting up a family trust." He told the Tribunal that he hoped that the property would be suitable for his family. He said that there might have been an advantage in transferring it to his wife or to a trust and there was the possibility of selling it. He saw the letter of 20 December 2002 (see paragraph 13) and was comfortable with it; the outcome was not certain at that stage.

He stated that the redevelopment was a large-scale project with large financial risks. After considering various options he set up MPL in December 2002 to undertake the development so limiting his own financial risks. He stated that VAT registration did not form any part of the motivation for setting up MPL but that he was advised at the time of its formation "that MPL was entitled to register and that because of the size of its operations was arguably forced to register."

Mr Carr stated that the beneficial interest was transferred to MPL on 7 February 2003 at a valuation of £550,000. The contract was not exhibited. He stated that on the advice of BNB he retained the legal interest in order to minimise transaction costs on transferring the property to the ultimate owner.

He stated that his contract with A R Calvert Ltd was novated to MPL in January 2003 and that MPL entered into a further contract with A L Calvert Ltd. He stated that other parties involved in the refurbishment had contracts directly with MPL; those included architects and a structural engineer. From January 2003 invoices were directed to MPL and were paid by that company.

Mr Carr stated that from January 2003 the renovation was undertaken by MPL. The work was financed by the cash subscribed by Mr Carr for shares.

He said that the sale envisaged in MPL's registration application did not happen because a transfer in specie proved to be the best way of moving the property out of MPL.

He said that by May 2004 he and his family had decided to move from Oxfordshire to Marrick Park. He and his wife were pleased with the result of the work and satisfied with the schools in the area. He had agreed with a local farmer for the track to Marrick Park to be tarmacked. In his second witness statement he said that until then they were considering using Marrick Park as a holiday home and letting it for other periods; his children were settled in schools in Oxfordshire at that time. The family actually moved in August 2004 before the September term.

Mr Carr said that the development resulted in a loss, costing over £2.2 million before VAT and professional fees, compared with Savill's valuation of £1.9 million.

Mr Michael Smee, BA, B Arch, the project administrator then employed by the architects, confirmed a witness statement. He stated that when purchased by Mr Carr the condition of the buildings varied from extremely poor to semi ruined. Mr Carr wanted the external cement rendering to the house removed. Four rooms of the western wing had lath and plaster wall linings fixed to timber battens which did not possess the required damp proofing or insulating properties. The remainder of the house was plastered directly to the stonework. The Range Barn was not plastered or lined.

He stated that it was necessary to bring the performance of the external walls up to modern standards including compliance with Building Regulations. This involved resistance to rising damp, penetrating damp and ground water and provision of thermal insulation. It was decided to use the Delta 500/Waterguard system to provide complete protection against penetrating and rising damp while at the same forming a tanking for retaining walls. He stated that "Tanking" describes the prevention of penetration, by ground water under pressure, of the walls and floor of a structure wholly or partly below ground.

Mr Smee's statement gave the final specifications for wall linings to the house and Range Barn as follows,

"House Existing External Walls –

Remove existing plaster.

Drape Delta 500 membrane down the faces of walls and fix where required. Line around door and window openings with the same material. Tape all joints to provide an impervious barrier to moisture.

At the base of the external walls, below ground floor level, provide a proprietary plastic drainage channel and dress the Delta 500 into it. The channel is intended to discharge to drains any water penetrating the external stone wall, using a pumped system where required (all this work by specialists). Because the existing structure has not been altered in any way, any moisture or water which penetrates the external walls and which reaches the back of the delta membrane will run downwards to the ground floor level and has to be removed from the building. If the drainage channel were not provided there would be a build-up of water and, eventually, this would appear within the accommodation. The floor has been dug out to a depth of about eighteen inches. This area is then filled with broken stone, where appropriate under floor heating and the plastic drainage channel is put into the floor, before the floor surface is laid down. Thus a drainage channel is inserted into the floor where there was no drainage channel before.

Hang high performance 'Actis Tri-Iso Super 9' insulation over the face of the Delta 500 and erect 60mm metal studs.

Apply an additional vapour barrier to the face of the studs, taping all joints.

Fix 13mm plasterboard and skim with plaster.

House Existing Internal Walls –

Remove existing plaster

Drape Delta 500 membrane down the faces of walls in the positions required by the specialists and fix where required. Line into door openings using the same material. Tape all joints to provide an impervious barrier to moisture.

Erect a framework of 20mm metal studs – intermediate fixings being permitted for internal walls.

Fix 13mm plasterboard and skim with plaster.

Range Barn Existing External Walls –

Drape Delta 500 membrane down the faces of walls and fix where required. Line around door and window openings with the same material. Tape all joints to provide an impervious barrier to moisture.

At the base of the external walls, below ground floor level, provide a proprietary plastic drainage channel and dress the Delta 500 into it. The channel is intended to discharge to drains any water penetrating the external stone wall, using a pumped system where required (all this work by specialists).

Hang high performance 'Actis Tri-Iso Super 9' insulation over the face of the Delta 500 and erect 60mm metal studs.

Apply an additional vapour barrier to the face of the studs, taping all joints.

Fix 13mm plasterboard and skim with plaster.

Range Barn Existing Internal Walls –

Drape Delta 500 membrane down the faces of walls in the positions required by the specialists and fix where required. Line into door openings using the same material. Tape all joints to provide an impervious barrier to moisture.

Erect a framework of 20mm metal studs – intermediate fixings being permitted for internal walls.

Fix 13mm plasterboard and skim with plaster."

He estimated the loss of area as being in excess of 7 per cent of the original floorspace.

Mr Smee produced an architect's drawing which showed the drainage system around all of the external walls of the house, with the exception of the new porch and store, and some of the internal walls in particular the boot room where the drainage pump was to be situated. The drainage channels were on the inside of the external walls. There were five drainage holes from the channels through the external walls.

He produced 30 photographs some before the work and some during the course of the work. They show that almost all stone slates were removed from the roof. Some of the roof timbers were also removed and the area below the ground floor was dug out. He said that overall on average 18 inches of earth had to be removed from inside the building. He said that his firm were not very involved with the foundations.

In cross-examination Mr Smee said that the rationale was that a ruin was to be brought up to the standard of a family used to living in good accommodation. The building inspector insisted on thermal insulation up to current standards in spite of the fact that there was no double glazing. Due to the building being listed, although rendering would have been allowed on the external walls, consent would not have been granted for painted rendering.

He said some of the buildings as seen were very damp. The readings on a moisture meter would have been off the scale. Since there were very thick stone walls, rising damp would have been very difficult to counter by injection. He said that the method of damp-proofing used was less intrusive on the existing buildings than other methods. He told Mr Eicke that the work did not involve any change to the structure of the buildings.

In re-examination he said that by structure he meant the things that hold the buildings up without which they would collapse.

Four witness statements by Customs officers were taken as read. None of the officers had visited the property.

THE REGISTRATION APPEALS

Appellant's Submissions

Mrs Hamilton for the Appellants said that Mr Carr was entitled to be registered under paragraph 9(b) of Schedule 1 on the basis that when he applied to be registered he was carrying on a business and intended to make taxable supplies in the course of that business: he intended to develop Marrick Park and to make a taxable supply although it was not certain to whom and it was quite possibly to a connected entity. He intended to make a grant of a major interest which is treated as a taxable supply under section 30(1)(b) and Schedule 8, Group 6, item 1.

She said that, since Customs accepted that the building was substantially reconstructed and that Mr Carr could grant a major interest, the issue was whether Mr Carr intended to make a taxable supply.

Mrs Hamilton said that there is no comprehensive definition of business in the 1994 Act. In Institute of Chartered Accountants in England and Wales ("ICAEW") v Customs and Excise Commissioners [1998] STC 398 it was held that "business" in section 4 has the same meaning as "economic activity" in Article 4 of the Sixth Directive, see Lord Slynn who applied the tests in Customs and Excise Commissioners v Lord Fisher [1981] STC 238. In Stichting Uitvoering Financiële Acties (SUFA) v Staatssecretaris van Financien (Case 348/87) [1989] ECR 1737 the Court of Justice confirmed the wide scope of economic activity. She said that all the tests in Lord Fisher were satisfied. The reconstruction was a serious undertaking earnestly pursued; there was reasonable continuity in respect of the work done; it was substantial in amount; Mr Carr's approach was very businesslike; Mr Carr was predominantly concerned with making a taxable supply in the form of the grant of a major interest; the supplies were of a type commonly undertaken by those seeking to profit.

She said that Customs' sole argument was that it was a private transaction because there was no intention to sell to an unconnected third party. She accepted that the preferred option was use by Mr Carr's family with the title vested in a trust but said that a grant of a major interest to a trust would have been a taxable supply and that sale to an unconnected third party was a real possibility. In Floridienne SA v Belgium (Case C-142/99) [2000] STC 1044 the Court of Justice recognised that there can be economic activities between connected persons, see also Staatssecretaris van Financiën v Heerma (Case C-23/98) [2001] STC 1437 and Finanzamt Bergisch Gladbach v Skripalle (Case C-63/96) [1997] STC 1035. There is no requirement that to constitute a business an activity must involve an unconnected third party.

Mrs Hamilton said that Mr Carr had applied for registration with effect from 12 October 2001 which was just before he applied for planning permission. He was entitled to be registered from that date because he was undertaking acts preparatory to an economic activity, see Rompelman v Minister van Financiën (Case 268/83) [1985] ECR 665. He supplied evidence of his intended activity with his application and was entitled to be registered. His entitlement to be registered was not affected by the fact that the intended supply was not made, see Finanzamt Goslar v Breitsohl (Case C-400/98) [2001] STC 355 at paragraphs 35 to 42. There had been no suggestion by Customs of any abuse or fraud.

She submitted that, although at the time of the transfer to MPL there was insufficient reconstruction to satisfy Note (4) to Group 6 of Schedule 8, the test in Note (4) should be applied when the work was completed so that the supply by Mr Carr was zero-rated.

She submitted that, if the grant to MPL of a beneficial interest in the freehold did not constitute the grant of a major interest within section 96(1), then there was a transfer of a going concern within Article 5 of the VAT (Special Provisions) Order 1995 (S.I. 1995, No. 1268) see The Golden Oak Partnership v Customs and Excise Commissioners (1992) Decision No. 7212. The costs incurred for services to effect the transfer formed part of Mr Carr's business overheads prior to transfer and were deductible as input tax, see Abbey National plc v Customs and Excise Commissioners (Case C-408/98) [2001] STC 297.

Mrs Hamilton said that regardless of whether there had been a transfer by Mr Carr of a going concern, MPL was entitled to be registered under Schedule 1, paragraph 9(b). The intentions of Mr Carr as the directing mind were relevant. MPL was entitled to be registered as soon as the beneficial interest was transferred. It was immaterial that the legal interest "rested on contract": preparatory acts could take various legal forms, see Rompelman at [23]. Furthermore, under Schedule 10, paragraph 8, MPL would be the person treated as making the onwards grant if it was entitled to the benefit of the consideration.

She said that one of the possibilities was that MPL would grant a lease back to Mr Carr. There is no doubt that letting of intangible property is an economic activity, see Rompleman. She said that MPL satisfied the tests in Lord Fisher. The predominant concern test was of particular importance, see Customs and Excise Commissioners v St Paul's Community Trust Ltd [2005] STC 95 : the predominant concern of MPL was to reconstruct the building in order to grant a major interest.

She said that Customs had not relied on the tests in Lord Fisher but on the contention that the activities were private, non-business activities. It was however difficult to see how MPL itself could have a private benefit. MPL was a separate legal person from Mr Carr. All of the activities of MPL were to further the purpose for which it was formed, see Cumbrae Properties (1963) Ltd v Customs and Excise Commissioners [1981] STC 799. The fact that the purpose of MPL was not to make a profit did not prevent its activities being economic activities, see Customs and Excise Commissioners v Morrison's Academy Boarding Houses Assn [1978] STC 1 and Article 4.2.

Customs Submissions

Mr Eicke, for the Respondents, accepted for the purposes of these appeals that the Tribunal has a full appellate jurisdiction as to whether the Appellants were entitled to be registered under paragraph 9(b) of Schedule 1 as opposed to a supervisory jurisdiction.

Mr Eicke submitted that for a supply to be taxable it must be effected by "a taxable person acting as such", see Article 2.1 of the Directive. As to "taxable person" within Article 4, he said that the reference in the second sentence of Article 4.2 to "a continuing basis" was also relevant to the first sentence; the "occasional basis" under Article 4.3 will normally be more than once.

He said that there is a clear distinction between an economic purpose and a private purpose which is to be decided by objective evidence. The distinction was drawn in Enkler v Finanzamt Homburg (Case C-230/94) [1996] ECR I-4517, where the Court said at [24] that it is for the person seeking the deduction of input tax to show that he satisfied the criteria to be a taxable person by objective evidence. He submitted that a one-off supply to a connected person is unlikely to be an economic activity, although there may be circumstances where it is. The decision in Heerma [2001] STC 1437, concerning a lease by an owner to a partnership between himself and his wife, was directed to the word "independently" in Article 4.1; the Court said at [19] that the circumstance that a partner was letting to a partnership may have a bearing on whether there was a economic activity at all.

He submitted that all the indicia in Lord Fisher are relevant but that none is decisive.

He said that the decision in Intercommnale voor Zeewateroutzilting ("INZO") v Belgium (Case C-110/94) [1996] STC 569 which concerned preparatory work had to be read in the context that the intention had been accepted. In Breitsohl [2001] STC 355 the need for objective evidence of the intended activity was reaffirmed, see at [39]. In Van Tiem v Staatsseccetaris van Financiën (Case C-186/89) [1993] STC 91 there was clear evidence of an intention to obtain income on a continuing basis within Article 4.2. None of those cases was concerned with a supply to a connected person as in Heerma.

Mr Eicke said that the VAT 1 submitted by Mr Carr gave as the intended business the purchase, restoration and sale of a single property in fact owned by Mr Carr. The registration application by MPL referred to "continued restoration" referring to the same property. There was no stated intention of making regular supplies. On 20 December 2002 BNB wrote on behalf of Mr Carr that there was no current intention to sell to an unconnected third party and that MPL "may or may not" make a grant to a connected party. On 29 January 2003 BNB wrote that MPL "has no definite intention in respect of the property."

He said that Mr Carr had given evidence of a series of options but of no clear intention. The possibility of granting a 21 year lease was not the same as the intention to do so. His hope was to make Marrick Park his home. The evidence of intention to reconstruct the building was not in doubt, but not that this was for an economic as opposed to a private purpose. Mr Carr had not discharged the burden of showing an intention to carry out a continuing business.

Mr Eicke submitted that the facts were not significantly different from Kelly v Customs and Excise Commissioners (1978) Decision 598; it was not relevant that Mr Carr did not do the work himself or that he created MPL. He also referred to Sawyer v Customs and Excise Commissioners (2004) Decision 18872, where the criteria in Lord Fisher were applied.

Appellant's reply

Mrs Hamilton in reply submitted that it is not correct that a continuing basis is needed for a supply under the first sentence in Article 4.2: it is clear that a single supply may be taxable. In Wellcome Trust Ltd v Customs and Excise Commissioners (Case C-155/94) [1996] STC 945 the Advocate General said at [32] that neither the scope nor the duration of an activity is conclusive; it might be completed in a single day. She said that if there is evidence of an intention to make a taxable supply, it is irrelevant whether it is one supply or several if otherwise it is an economic activity.

She said that in determining whether goods were acquired for economic activities the nature of the goods is relevant; in Enkler it was a caravan. MPL being a company could not use the house apart from exploiting it commercially.

Customs had contended that a singly supply to a connected person is unlikely to be an economic activity, however the VAT Act contains a series of provisions covering transactions between connected persons. She emphasised the word "at most" in paragraph [19] in Heerma. She submitted that it is irrelevant that Mr Carr's family might live in the house if the intention was to make a supply of a major interest. INZO and Breitsohl show that if the intention is originally present, it is immaterial that it is not carried out.

Mrs Hamilton said that it would be sufficient for a grant of a major interest if it was transferred to the transferor and another as tenants in common with the transferor having a 95 per cent share or to a trust of which he is life tenant provided there is an economic activity. She said that part of the conditions for the taxable supply here was that there should be an approved alteration; that was a preparatory act within Rompelman.

Conclusions on registration appeals

The statutory provisions concerning the entitlement of an intending trader to register are contained in Schedule 1, paragraph 9 of the VAT Act 1994 which provides,

"9 Where a person who is not liable to be registered under this Act and is not already so registered satisfies the Commissioners that he –

(a) makes taxable supplies; or

(b) is carrying on a business and intends to make such supplies in the course or furtherance of that business,

they shall, if he so requests, register him with effect from the day on which the request is made or from such earlier date as may be agreed between them and him."

By section 30(1)(b) a zero-rated supply is treated as a taxable supply. Schedule 8, Group 6, item 1 zero-rates

"The first grant by a person substantially reconstructing a protected building, of a major interest in, or in any part of, the building or its site."

In the judgment of this Tribunal the jurisdiction as to whether the Appellant was entitled to be registered from the day of the request is an appellate jurisdiction and not a supervisory jurisdiction, in spite of the words in paragraph 9 "satisfies the Commissioners." The decision as to entitlement to register is not discretionary but a decision on the facts and on the evidence. We consider Source Enterprise Ltd v Customs and Excise Commissioners (1992) Decision No. 7881 which is cited in De Voil at V2.144 Note (15) to be correctly decided.

Back dating the registration however is another matter, since under paragraph 9 that is a matter of agreement which does assume a power not to agree and this may involve at least an element of discretion.

In any event the question of back dating only arises if we conclude that Mr Carr was entitled to be registered on the day on which he applied for registration which was 22 October 2002.

In order to succeed Mr Carr must satisfy the Tribunal on the balance of probabilities that on 22 October 2002 he was carrying on a business and intended to make taxable supplies. The supply specified in the application was the restoration and sale of the property. The dispute before us was as to what he intended and as to whether any intended grant of a major interest would have been in the course of business. If the Appellant succeeds on those issues there is no doubt that he was engaged in preparatory activities.

A particular problem in this case is to ascertain the inventions of Mr Carr at the relevant time. The burden of proof is on him.

At the time of purchase his evidence was that he had no fixed plans and that the options included sale and his own occupation, see paragraph 25 above. At the time when he signed the VAT 1, which was some weeks before it was submitted, he told the Tribunal that he had no firm view as to who would own Marrick Park or who would live there. It seems clear to the Tribunal that he hoped to live there with his family which is what has happened. The option of a sale appears to have been confined to the situation if he concluded that the property was not suitable for his family or if he was not pleased with the result of the work. There was no evidence before the Tribunal of any assessment of what a possible purchaser might want, of any consideration of the potential market for the property or of any comparison of what sale price might be realised as compared with the reconstruction costs.

Although the transfer to MPL constituted a sale there was no evidence or suggestion that at the time when the registration application was made any thought had been given by Mr Carr to transferring the property to a company controlled by him. Although he referred in his second statement to the likelihood of a sale or a grant to a family trust and to advice by BNB (see paragraph 27), this statement was nearly three years after the registration application and there is no material to suggest that a trust was contemplated before December 2004. That statement furthermore reads that "it seemed highly likely" which is not the same as a clear intention. Leaving aside the issue whether the transfer to MPL did, or the grant of a major interest to a family trust would, constitute a supply in the course of a business or economic activity, we hold that in order to come within paragraph 9(b) a person must have a clear intention to make a supply in the course of a business. It is not necessary that a sale to a specific person should be intended or even that a specific type of supply be intended. It is however necessary that there should be a clear intention to make some supply or supplies and that such supply should be in the course or furtherance of a business.

We are not satisfied that Mr Carr did intend to make a supply when the registration application was made. The intended activity was stated in the form VAT 1 as "the purchase, restoration and sale …" of the property. Given that the cost of the work was expected to exceed £3 million apart from the purchase cost in December 2000, in the absence of any consideration as to what the market would be we are unable to accept that a sale was intended. We note that the VAT 1 contained no hint of a possible transfer to a family trust.

We do not consider that a grant to a family trust would constitute a supply in the course of a business activity within the tests in Lord Fisher. The decision to transfer the property to MPL was taken well after the application. We are not satisfied that that transfer was carried out in the course of a business..

The appeal by Mr Carr against the decision refusing registration is dismissed.

Since Mr Carr was neither registered nor required to be registered he was not a taxable person within section 3 when he transferred the property to MPL.

The provisions in the VAT (Special Provisions) Order 1995, regulation 5 only apply where the transferor is a taxable person. It follows that they do not apply in this case.

That brings us to the question whether MPL was entitled to be registered in its own right in February 2003. This of course concerns the intentions of MPL in February 2003 as opposed to those of Mr Carr several months earlier.

We accept Mrs Hamilton's submission that it was the intentions of Mr Carr being the directing mind of MPL which are relevant. We also accept her submission that it was immaterial that MPL only had a beneficial interest.

It is clear that transactions between connected persons can be economic activities and that there is no requirement that to constitute a business an activity must involve an unconnected third party, see Heerma [2001] STC 1437.

That case concerned the lease of a cattle shed by Mr Heerma to a farming partnership with his wife at a rent of 12,000 florins a year. The Court of Justice said this at [19],

"… contrary to what the Netherlands government claims, it is irrelevant that the partner confines his activity to letting an item of tangible property to the partnership of which he is a member. That circumstance is of no consequence for the purpose of determining whether the partner is acting independently, within the meaning of Article 4.1 of the Sixth Directive, in carrying on the economic activity concerned but may, at most, have a bearing on the question whether there can be said to be an economic activity at all, within the meaning of that article. In that respect, however, … it is clear from the judgment in Enkler [1996] STC 1316 at [22] that the letting of tangible property constitutes exploitation of such property which must be classified as an 'economic activity' within the meaning of Article 4(2) … if it is done for the purpose of obtaining income therefrom on a continuing basis."

We can see no distinction in principle between a transaction between a partner and a partnership of which he is the manager, as was Mr Heerma, and a transaction between a company and its sole shareholder and director. It is important however to note that in Heerma it was not disputed that Mr Heerma granted the lease for the purpose of obtaining income therefrom on a continuing basis, see at [11].

Enkler concerned a caravan purchased by Mrs Enkler which was used over a three year period for hiring to third parties for 18 days, for hiring to her husband on 40 days and for private purposes on 79 days. The Court of Justice said this at [24],

"… it is for the person seeking deduction of VAT to establish that he meets the conditions for eligibility and, in particular, to prove that he satisfies the criteria for being considered a taxable person. Therefore Article 4 … does not preclude the revenue authorities from requiring the declared intention to be supported by objective evidence (see Rompleman [24]). It follows that the administrative or judicial authorities … must evaluate all the specific circumstances of a given case in order to determine whether the purpose of the activity in question, in the present case the exploitation of property in the form of hiring it out, is to obtain income on a continuing basis."

In our judgment the same approach must be adopted by the Tribunal in determining whether MPL was an intending supplier within paragraph 9(b) of Schedule 1.

The objective circumstances were as follows. MPL acquired the property which was in the course of reconstruction from its sole shareholder and director on the basis of a valuation by Savills for £550,000 which was satisfied by the issue of shares to that shareholder. Only a small proportion of the work the cost of which was expected to exceed £3 million had been carried out. The shareholder intended to live in the property if the reconstruction proved successful and other matters such as his children's schools and the access road were resolved. No evidence was provided of any consideration being given as to what might be realised on sale of the reconstructed property.

On 20 December 2002 BNB wrote to Customs that there was no current intention to sell to an unconnected third party and that the property was to be transferred to MPL to protect Mr Carr's personal position through limited liability. Just over a month later BNB wrote that MPL had no definite intention in respect of the property which might be sold or retained for letting under a lease capable of running for 21 years.

The registration application dated 27 February 2002 gave the intended business as "the continued restoration and sale" of the property. The application therefore made no mention of the lease mentioned as a possibility in the January letter.

Mr Carr gave no evidence that either he or MPL departed from his original wish that he and his family would live in the property on completion. We are unable to see what business purpose would be achieved by MPL selling the property back to him, either by MPL or by himself. The grant of a lease otherwise than for a term exceeding 21 years would not have been a grant of a major interest. The grant of a lease at a rack rent would have involved corporation tax. We do not consider that the grant of a lease at a peppercorn rent would have been a business transaction. We do not accept the submission by Mrs Hamilton that MPL could not use the property apart from exploiting it commercially. There would have been nothing to prevent MPL allowing Mr Carr to use the property rent-free.

We have concluded, therefore, that MPL has not established that it intended to make taxable supplies in the course of a business so as to be entitled to register under paragraph 9(b).

THE ZERO-RATING APPEAL

Appellant's Submissions

Mrs Hamilton said that the damp-proofing and insulation work was not excluded from zero-rating under Group 6, item 2 as being "works of repair or maintenance" within Note (6). The phrase "repair or maintenance" is a composite phrase, see per Lord Roskill at page 29 in ACT Construction Ltd v Customs and Excise Commissioners [1982] STC 25. The work in question was entirely new work as was that in ACT. The work here was not to obviate the need for future repair as the work in Customs and Excise Commissioners v Sutton Housing Trust [1984] STC 352; the work went well beyond the ordinary course of managing the property and substantially improved the building.

She said that the work did affect the fabric : it was not necessary that it should affect the structure in the sense of support. The floor was dug out to 18 inches and a mebrane inserted between the floor screed and the concrete. She stressed that the overall size of the rooms was affected, one being reduced by almost two square metres. She submitted that the works involved a top of the market system of disposing of water and damp which substantially improved the property.

She invited the Tribunal to follow the approach of Judge Medd in All Saints PCC v Customs and Excise Commissioners (1993) Decision No. 10490 at pages 5-7.

Customs' Submission

Mr Eicke for Customs said that zero-rating under Group 6, item 2 involves alteration to the fabric of the building. Here the existing walls were left intact although the system of damp-prevention was less intrusive than other options. The work was to preserve and protect the existing walls. It left the structure and design of the building essentially as it had been before.

He relied on the Tribunal decision in St Petroc Minor PCC v Customs and Excise Commissioners (1999) No. 16450, citing Lord Diplock in Customs and Excise Commissioners v Viva Gas Appliances Ltd [1983] STC 819, where the test applied was whether there was alteration to the fabric of the building. He also relied on Customs and Excise Commissioners v Windflower Housing Association [1995] STC 860 where the old roof was replaced by a new roof structure of higher specification but the work was held to be repair or maintenance. He submitted that if the work constituted alterations because of the reduction in room size that was incidental to the work on the existing walls. He said that there is no distinction between keeping damp out of the building and keeping the walls dry. He submitted that the work to the floors was repair work since it did not affect the foundations.

Appellant's Reply

Mrs Hamilton in reply said that the listed building consent involved the character of the building being retained.

She said that Customs posed the question whether the structure was substantially as before relying on St Petroc Minor citing Viva Gas. In the latter case which concerned the installation of gas fires it sufficed that there was some alteration to the fabric which was not trivial. Here there was some alteration to the fabric. In the present case, unlike Sutton Housing Trust, there was substantial improvement.

Conclusions on zero-rating

Item 2 of Schedule 8, Group 6 provides:

"2. 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 a consultant or in a supervisory capacity."

Under Note (6) "approved alteration" is defined as meaning (in circumstances such as these) works of alteration which require authorisation under the Planning (Listed Buildings and Conservation Areas) Act 1990,

"but does not include any works of repair or maintenance, or any incidental alteration to the fabric of the building which results from the carrying out of repairs or maintenance work."

The decision under appeal was by reference to work specified in a bill of quantities and in particular to items 3/3 E to H, items 4/20 A to K and items 4/26 A to D. The Appellants do not now contest the disallowance of woodworm treatment to the timbers.

Customs accepted that the greater part of the work to Marrick Park did qualify for zero-rating under item 2. The dispute only covered a small proportion of the work. Mrs Hamilton told us that the VAT involved was £29,181.07.

Our task was made substantially more difficult by the fact that the decision by Customs was made entirely on correspondence without any visit to the site. This made it difficult to be certain as to exactly what work was disallowed, since items 3/3 E-H were very general, being "Damp proofing systems to Main House" and "Damp Proofing Systems to Range Barn."

Much of the hearing was directed to the insulation and drainage system on the inside of the walls but the appeal was also concerned with what was new flooring with a membrane.

The appeal raises two issues: whether the disallowed work constituted alterations and if so whether they were excluded as being works of repair and maintenance. These are not necessarily mutually exclusive which is why Note (6) contains a specific exclusion for repair and maintenance.

In ACT Construction Ltd [1982] STC 25, which concerned whether underpinning of defective foundations qualified for zero-rating as an alteration and was not excluded as repair or maintenance, Lord Roskill agreed with Neill J that the alteration must be an alteration of the building involving some structural alteration. Dismissing the appeal by Customs he said that the underpinning was new work involving "the installation of a new structure on which the buildings thereafter rested."

The same provision was considered again by the House of Lords in Viva Gas Appliances Ltd [1983] STC 819 which concerned the installation of domestic gas fires where there had been none before; the work involved breaking out existing fireclay fire backs and laying pipes through walls and under floors. The contention of Customs that the work was not alteration because it was not structural was rejected by the House of Lords. Lord Diplock said this at page 822-3,

"If the alteration to the fabric of the building satisfies the de minimis rule I can see no reason why it should not fall within the statutory description 'alteration … of any building' whether the extent to which it falls outside that rule be great or small."

Earlier he pointed out that the word "structural" did not appear in the statutory words to be construed.

We have no hesitation in holding that the disputed work did involve the fabric of the buildings and was not de minimis. Indeed we did not understand Mr Eicke to submit otherwise. We find that it did constitute alterations to the building.

That leaves the question whether the work was nevertheless repair and maintenance.

We do not accept the contention by Mr Eicke that the work was to preserve and protect the existing walls. The damp emanates from the outside of the building and from the ground. The work was inside the external walls and did not involve insertion of a damp course in the walls. The work was to keep the inside of the buildings dry. The only effect on the external walls was to provide a method of disposal of the damp coming through those walls.

In our judgment this was entirely new work resulting in improvement to the buildings and unlike the work in Sutton Housing Trust [1984] STC 352 was not undertaken in the ordinary course of property management to keep up the building.

We find as a fact that the work to the walls adding some 73mm to the inside of the walls was not repair or maintenance.

It is not clear whether Customs dispute the drainage channels, however in any event we find that those were not repair and maintenance. We also find that the work to the floor was not repair and maintenance.

The appeal against the zero-rating decision of 4 March 2003 is allowed.

Both sides applied for costs in the event of succeeding. In the event Customs succeeded on the registration appeals and the Appellant succeeded as to zero-rating. We judge that two-thirds of the hearing was taken up on the registration appeals and one-third on zero-rating. We direct that the Appellants pay to Customs two-thirds of their costs of the appeals and Customs pay to the Appellants one-third of the Appellants' costs of the appeals to be assessed by a Taxing Master of the Supreme Court under Rule 29(1)(b) if not agreed. The parties are at liberty to appeal for further directions as to costs within 28 days.

THEODORE WALLACE

CHAIRMAN

RELEASED: 30 September 2005

LON/03/715