United Kingdom VAT & Duties Tribunals Decisions

Nicholson v Revenue and Customs [2006] UKVAT V19412 (5 January 2006)

19412

VAT – refund – conversion of listed and unlisted farm buildings to residential building – whether taxpayer entitled to refund of VAT on conversion of unlisted buildings into part of new building described as annex – appeal allowed - VATA 1994 s 35 (1A)(c), (1D)(a), Sch 8 Group 5 note 2(c )

LONDON TRIBUNAL CENTRE

DR ROBERT WILLIAM NICHOLSON Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

Tribunal: MALCOLM J F PALMER (Chairman)

SHEILA WONG CHONG FRICS

Sitting in public in London on 30 September 2005

The Appellant in person

Tim Ward, Counsel, instructed by the Acting Solicitor for Her Majesty's Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal

1. This is an appeal by Dr Nicholson against the decision of Miss C Jones, an Officer of Customs and Excise, in a letter dated 20 January 2005 confirming her earlier decision that Dr Nicholson was not entitled under the DIY provisions of section 35 of the Value Added Tax Act 1994 to a refund of VAT incurred by him when carrying out certain works on a derelict unlisted building.
2. We were given a 177 page bundle of agreed documents and at the hearing we were also given copies of drawings for earlier proposed works at the site, some photos of the works and original architects drawings for the works carried out by Dr Nicholson.
3. Immediately prior to the hearing Dr Nicholson helpfully gave us a 13 page document described as "Statement of Appellant's Case". Mr Ward had given the tribunal a three page skeleton argument.

The Facts

4. On 26 September 1995 Dr Nicholson completed the purchase of a site of approximately one acre known as Turners Farm Barn. The property consisted of a 17^th century listed barn which had on its south side two later lean-to additions which were also listed. To the south of the listed buildings were derelict unlisted farm buildings. These were mostly described in an architect's site drawing dated March 1995 as open fronted cattle yard. Neither the barn nor any of the other buildings had been used as residential buildings.
5. Although the site already had existing planning permission for the conversion of the barn to a dwelling house with an attached self contained wing, Dr Nicholson got on 10 October 1995 both an amended listed building consent and a planning permission for conversion of the listed barn and the unlisted derelict farm buildings.
6. The approved works in the listed building consent were described as

"Alterations and repairs and conversion of barn and out buildings to form dwelling and annexe."

The approved development in the planning consent was described as

"Conversion of existing barn and out buildings to form dwelling and annexe, Turners Farm."

The listed building consent and the planning permission each contained, amongst others, the following condition

"The annexe hereby approved shall be used only for purposes incidental to the enjoyment of the dwellinghouse as such and shall not be used for any business, commercial or industrial purposes whatsoever."

7. The Transfer of 26 September 1995 of the site to Dr Nicholson included a covenant by him to observe the covenants contained in a previous conveyance of the site made in December 1989. These covenants included the following restrictive covenants

"(3) Not to use the property or any part thereof for any purpose other than private residential occupation with garden and usual outbuildings.

(4) Not to erect any building upon the property other than a private dwellinghouse with separate granny annexe with the usual outbuildings."

8. The development for which listed building consent and planning permission was given, and which was eventually completed by Dr Nicholson, was the construction by conversion, alteration or building of residential accommodation around a central courtyard and vehicle turning circle. The accommodation had a southern and a northern wing connected by a relatively narrow structure.
9. The southern wing was completed first. This was built on the site which had consisted of the unlisted open fronted cattle yard and other farm out buildings. It was a single storey structure with living room, dining area, three bedrooms, kitchen and two bathrooms, one of which is en-suite with a bedroom. Also attached, but without internal access is a garage. This garage and the turning circle and courtyard have direct access from a public road on the west of the site. This wing is the part of the development which is described in the listed building consent, the planning permission and much of the correspondence we have seen as "the annexe".
10. The northern wing was built by conversion of the listed barn. It is a two storey structure. On the ground floor there is an entrance lobby on the north side, living room, dining room, kitchen, sun room and bedroom with en-suite bathroom. On the upper floor there is another en-suite bedroom, another living room, a sun room and balcony.
11. The structure that connects the two wings is single floor. The north end, which abuts the north wing, is a garage with external access from the courtyard and from a parking area on the north side of the development. The south end of the connecting structure is the kitchen for the south wing with internal access to the rest of that wing. Between the kitchen and the garage is a narrow open walk through passage way from the court yard to the east side of the development. The whole connecting structure and walk through passage is covered by a single ridged roof. There is no internal access between the rooms in the north and south wings. Access is across the courtyard.
12. The north wing has its own separate vehicle access from the same road on the west of the site. Additionally, in accordance with listed building consent given on 8 November 2000, a third and detached garage was built to the north east of the rest of the development with similar access.
13. Work on the development started on or before 5 July 1996. That was the date the general building contractor used by Dr Nicholson started work on the conversion of the unlisted cattle yard to construct the single storey south wing. The interim invoices from that contractor to Dr Nicholson for labour and materials on this wing throughout the period July 1996 to January 1997 were all submitted as subject to VAT at 17.5% totalling some £11,400. Work on this wing was sufficiently completed for Dr Nicholson to move in to it as his residence in September 2001. At that point, although work had started on alterations to the barn to convert it into residential accommodation, the south wing was not an annexe to any existing or previous residence.
14. Work on the alteration of the listed barn and second phase of the development started around June 1997 when the builder submitted his demand for a first interim payment for ground work on the barn. This second phase continued using the same builder for much of the work until November 2002. Some, but not all, invoices submitted by the builder for work on the north wing were submitted as subject to VAT. Rectifications after that delayed the issue of the completion certificate for the whole development until 22 May 2003. Much of the work on the development was done by Dr Nicholson himself. The length of time taken to complete the development was also due to the limited funds available to Dr Nicholson. He had to fund the works out of his income.
15. Dr Nicholson had hoped that the house could be a home for his mother. However, unfortunately she died in 2001 before the alterations to the listed barn were completed. Dr Nicholson had also wanted to design the development so that in the future, if planning permission conditions and the restrictive covenants accepted by him in the transfer of the site to him were ever relaxed, he would be able to put the south wing on the market as a separate building.
16. Before completing the purchase in 1995 Dr Nicholson contacted Norwich Local VAT Office giving them an extract from the existing listed building consent. This was the listed building consent that had been obtained by a previous owner of the site for a development with a somewhat different layout, including internal access between the wings. On 7 July 1995 Mr V Clarke of that office wrote to Dr Nicholson giving him general advice on the zero rating of work on listed buildings and a copy of Information Sheet 10/95. We accept Dr Nicholson's evidence that he understood that invoices for work on the listed Barn and its immediate listed sheds could generally be issued free of VAT and that work on the unlisted cow sheds would initially bear VAT which would be recoverable under the DIY regime. On 8 July Mr Clarke of Norwich LVO sent to Dr Nicholson a DIY pack with Notice 719.
17. Over the next several years Dr Nicholson received a number of rulings or responses from Customs officers on his claims and requests for VAT relief on his expenditure on the development. He was told that he should wait to make his claim for DIY relief on the conversion of the cow sheds until he had completed the full development and received a Completion Certificate. He received the Completion Certificate on 22 May 2003. When he submitted his claim under section 35 for DIY relief he was told that the work should have been zero-rated as alterations to a listed building. He was also told that it was too late for any recovery of the VAT paid on the work to the cow sheds because the errors were earlier than in accounting periods ending in the last three years.
18. Following a review of this decision that the work on the cow sheds should have been zero rated he was informed by a letter dated 26 March 2004 from Miss C Jones of Central Region Appeals Team that Customs accepted that the cow sheds were not listed. The claim was, nevertheless, rejected on the grounds that the conversion of the cows sheds was to self contained living accommodation that is not designed as a dwelling in its own right because there is a restrictive covenant prohibiting its separate disposal, that the development consisted of two separate buildings and that relief for zero rating for alterations to listed buildings and DIY relief under section 35 only apply to a single building designed as a dwelling. Dr Nicholson has in effect appealed against that decision.
19. There is a further twist to the tale. On 20 January 2005, after further correspondence between Customs and Dr Nicholson and Customs and the relevant planning authority, Miss Jones confirmed her decision that VAT incurred on the conversion of the cow sheds was not eligible for DIY relief, but this time on the grounds that what we have called the south wing is not designed as a dwelling because its separate disposal is prohibited by statutory planning consent. The appeal is thus in effect against the decision of Miss Jones in her letter of 26 March 2004 as amended by her letter of 20 January 2005.
20. There is another issue raised by the letter of 26 March 2004. In error Dr Nicholson paid VAT on the invoice dated 28 May 1999 for the thatching of the listed barn in place of the corrugated roof it had when he purchased it. This VAT was included on Dr Nicholson's DIY claim that he first submitted on 30 June 2003. The letter of 26 March 2004 confirms that this work should have been zero rated as part of the approved alterations, that no claim under section 35 can be made for this work as this relief only applies to correctly charged VAT and that due to the three year cap this work, the VAT of £2,437.75 is not now recoverable by the thatchers.

The relevant legislation

21. Section 35 of the 1994 Act provides a special VAT refund scheme for DIY builders and converters by refunding them the VAT on their main construction or conversion invoices. Section 35 provides in so far as relevant as follows

"(1) Where-

(a) a person carries out works to which this section applies,

(b) his carrying out of the works is lawful and otherwise than in the course or furtherance of any business, and

(c) VAT is chargeable on the supply, acquisition or importation of any goods used by him for the purposes of the works,

the Commissioners shall, on a claim made in that behalf, refund to that person the amount of VAT so chargeable.

(1A) The works to which this section applies are-

(a) the construction of a building designed as a dwelling or number of dwellings;

(b) the construction of a building for use solely for a relevant residential purpose or relevant charitable purpose; and

(c) a residential conversion.

(1C) Where-

(a) a person …….

(1D) For the purposes of this section works constitute a residential conversion to the extent that they consist in the conversion of a non-residential building or a non-residential part of a building, into-

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

(b) …; or

(c) anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings.

…

(4) The notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group …

The notes to Group 5, in so far as relevant, provide as follows

(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied-

(a) the dwelling consists of self-contained living accommodation;

(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

(c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and

(d) statutory planning consent has been granted in respect of that dwelling and the construction or conversion has been carried out in accordance with that consent."

22. The extension of the DIY refund provisions to conversions was introduced by section 30 of the Finance Act 1996 with effect for repayment claims made on or after 29 April 1996. The provisions of Group 5 in the above form were introduced by The Value Added Tax (Construction of Buildings) Order, SI 1995/280 with effect from 1 March 1995. VAT Information Sheet 10/95 given to Dr Nicholson on 7 July 1995, therefore predates the extension of the DIY relief to conversions by the Finance Act 1996. It does however describe a statutory concession relating to conversions introduced with effect from 1 March 1995.

Information Sheet 10/95

23. So far as relevant VAT Information Sheet 10/95 reads as follows

"New Extra Statutory Concession

A new ESC effective from 1 March 1995 has been granted in the following terms: 'With effect from midnight on 28 February 1995 persons converting a building which is not a dwelling … but which following conversion becomes a dwelling … for the first time, shall on submitting a claim be eligible for a refund of the VAT chargeable under Schedule 8 Group 5 Items 2 and 4 of the VAT Act 1994 (as amended by SI 280/95).

The effect of this is to give the benefits of the new conversion relief (see paragraph) to DIY converters. … It is expected that proposals for an appropriate amendment to section 35 of the VAT Act 1994 will be made in the 1995 Budget.

B. SI 280/95 (CONSTRUCTION OF BUILDINGS) – THE CHANGES

…

Apportionment

8. New provisions at notes (10) and (11) are introduced for apportionment of supplies of services relating to a mixed development of zero-rated and standard-rated elements …

Definition of a dwelling

A new note (2) provides a legal definition of a dwelling for VAT purposes. The conditions that have to be met in order to qualify for zero-rating are listed. These new conditions mean that so-called granny annexes and similar new homes, flats and flatlets etc belonging to an existing dwelling will not qualify for zero-rating."

The submissions of Dr Nicholson

24. The principal submissions made by Dr Nicholson in his written statement of his case and at the hearing in summary included the following

(1) He bought the property with a view to a conversion to two residences;

(2) No emphasis or reliance is put on the restrictive covenants attaching to the property and the planning condition does not prevent the disposal of the south wing separately;

(3) He understood the initial advice given to him before he started work on the alterations and conversions to be that all the work would in effect have relief from VAT either under the relief for alterations to listed buildings or under the DIY relief provisions.

(4) He understood that this advice reflected the views of Customs set out in Information 10/95.

(5) The south wing was not built as an extension to an existing dwelling.

(6) The issues in Simon Whiteley v Customs and Excise Commissioners [1993] VATTR 248 (VTD 11292) were very different from the issues in this appeal.

(7) The several different rulings and advice given by Customs on the VAT treatment of his works means that no confidence can be placed by him in any ruling or decision of Customs.

The submissions of Mr Ward

25. The principal submissions made by Mr Ward in his skeleton and at the hearing included in summary the following

(1) The annex (which we have described as the south wing) and the main house (which we have described as the north wing) are two separate buildings. As a matter of ordinary language they are not a single dwelling house.

(2) Following Whiteley the reference to "a building" in Note (2) to Group 5 means a single building.

(3) The annex cannot be treated as a separate building because it fails to satisfy the requirements of condition (c) of Note (2). The terms of the planning consent prohibit its use except "for purposes incidental to the enjoyment of the dwelling house as such".

(4) In practice the prohibition of the separate use of the annex also prevents its separate disposal.

(5) Condition (c) of Note (2) is included to ensure that the works that benefit from the tax advantage of the DIY scheme result in another dwelling house that is able to enter into free circulation. The annex is not like a second flat in a block of flats. As a result of the planning condition the annex is not able to enter into free circulation.

Mr Ward requested that if our decision rested on some conclusion that he had not covered in his skeleton that we allow further written submissions from the parties before issuing a final decision. He clearly was concerned that his instructions had not extended to some of the areas raised by us in our questions to him.

Our conclusions and the reasons for them

26. In our findings of the facts we have deliberately tried to use neutral expressions such as "development" and "wing".
27. The principal issue for us is whether the VAT paid by Dr Nicholson on the conversion works in relation to the south wing or annex are recoverable by him under the DIY provisions in section 35 of the VAT Act 1994. We accept that the cow sheds and other outbuildings converted by him for this purpose were not listed buildings and that, therefore, this work was not on the face of it eligible for zero rating as alterations to listed buildings. This is notwithstanding the broad ambit of the amended listed building consent given on 10 October 1995.

How many buildings are there in the development?

28. We conclude that the development should in common parlance be regarded as one building. We exclude from this the third garage for which listed building consent was given on 22 December 2000. This third garage is a separate building which is not contiguous with the main development.
29. In coming to this conclusion we take into account that

(1) the architectural drawings, and in particular pages 174 and 175, show the development as one contiguous building covered by single drawings from different elevations;

(2) the development was carried out continuously as a whole by one builder;

(3) one completion certificate was given; and

(4) the ground floor division of the section between the two wings is covered by a single roof and roof space.

30. The building has not been constructed from scratch: it has in part been built as a conversion of a listed non residential barn into residential accommodation by approved alterations to the listed building and in part by conversion of unlisted non residential cow sheds to residential accommodation.

How can the conversion of the unlisted farm buildings qualify for DIY relief?

31. The DIY relief under section 35 of the VAT Act 1994 was, as foreseen by paragraph 2 of Information Sheet 10/95, extended by the Finance Act 1996 to cover appropriate residential conversions. By section 35(1A)(c) the "works" eligible for the DIY relief were extended to include "a residential conversion". Section (1D)(a) defines works to be "a residential conversion" to the extent that they consist in the conversion of a non residential building into "a building designed as a dwelling or a number of dwellings".
32. We accept that the south wing is, considered on its own, a dwelling. It has all the facilities for everyday living and must, therefore, be regarded as designed as a dwelling. The same conclusion applies to the north wing considered on its own. It follows that for the purposes of section 35(1D)(a) the single building is designed as a number of, specifically two, dwellings.
33. Section 35(4) provides that the notes to Group 5 of Schedule 8 apply to the meaning of section 35 as they do to Group 5. Group 5 is the Group that allows zero rating of certain supplies relating to or following from the construction of buildings. Note 2 of Group 5 is the relevant definition for the purposes of this appeal. This provides that in the case of a building designed as a dwelling or a number of dwellings each dwelling must meet certain conditions. We emphasise that each dwelling must meet the relevant conditions. Thus both the north wing and south wing must comply with these conditions. There are similar definitions and conditions in the provisions which apply to approved alterations to listed buildings.
34. Three of the four conditions are accepted by Customs as satisfied by the south wing. It is self contained living accommodation (Note 5(2)(a)); as a result of the changes that Dr Nicholson made to the planning permission that existed when he purchased the property, there is no direct internal access to any other dwelling (Note 5(2)(c)); and the works have been carried out in accordance with planning permission (Note 5(2)(d)). Presumably Customs also accept that these three conditions are each satisfied by the north wing, which is sometimes described as the main house. The condition that Mr Ward submits is not satisfied by the south wing is the condition in Note 2(c). This condition, in so far as relevant, states that a building is designed as … a number of dwellings if, in relation to each dwelling

(c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision;"

35. It doesn't surprise us that the meaning of this convoluted definition has been the subject of a number of appeals, including Whitely. In Whitely the facts related to works that consisted of the redevelopment of an existing residential property. The other cases that we are aware of that relate to the meaning of Note 5(2)(c) relate to extensions to an existing building. The works by Dr Nicholson were carried out to alter or convert buildings that were not existing residential buildings.
36. Is the separate disposal of the south wing prohibited? Although we have seen the restrictive covenants noted in the Land Registry binding the site, which include the covenant not to erect any building other that a private dwelling house "with separate granny annexe" and not to use the site "for any purpose other than private residential", Dr Nicholson pointed out that no reliance had been placed on them and Mr Ward did not dispute this. The first issue is, therefore, whether the fourth planning condition that "the annexe shall be used for purposes only incidental to the enjoyment of the dwellinghouse as such …" prohibits the separate disposal of the south wing. We accept Mr Ward's comment that in practice this condition must make a separate disposal unrealistic. It is likely to severely reduce the price that would be paid and the potential market. But that is not a prohibition. Separate disposal in the sense of a transfer of part, such as the South wing to a member of the family or friend would need careful delineation of rights of support and the like. But such a disposal would not be difficult to engineer.
37. Is the separate use of the annex prohibited? What must not be separate from what? This is far from clear to us in works such as these that are not an extension to an existing dwelling house, but which create one new family dwelling. The prohibition in the planning condition is simply that the use must be "incidental" to the enjoyment of the dwelling house. Can a use of residential accommodation be only incidental to the use of another dwelling, yet also be a separate use? We believe it can. Clearly any use of the annex is physically separate from the use of the north wing because of the way it is designed. Clearly the south wing was also used by Dr Nicholson "separately" when he lived in it before the north wing was completed. The planning permission, which relates to the specific design of two separate wings, has permitted one new family dwelling that allows separate use of the two wings by different members of the family. It would also permit separate use of the annex by, for example, employees of Dr Nicholson or other owner. Such separate uses of the annex could well be incidental to the enjoyment by Dr Nicholson of the north wing. We do not see how that can be regarded as a prohibition of "separate use" for the purposes of Note 5(2)(c).
38. We are reinforced in our conclusion because, if it is correct that the south wing cannot be used separately from the north wing, it must follow that the north wing cannot be used separately from the south wing. Each dwelling in the development must satisfy each of the four conditions in Group 5 Note (2). It would follow that no part of the works would be eligible for relief under the DIY scheme as a conversion nor, presumably, as an alteration to a listed building.
39. We are also reinforced in this conclusion because of the terms of Information 10/95. That was issued before the adoption of SI 1995/280 and its statutory extension of DIY relief to conversions. But it forecasts the extension of relief to conversions by the introduction of a new Extra Statutory Concession. It seems clear to us from our reading of Section A(2) together with Section B(9) that annexes and the like that would not be eligible for relief (whether under the new extra statutory concession or then existing statutory relief) were annexes that were built, altered or converted to be attached to another existing dwelling. This makes sense to us if these provisions for relief are regarded as encouraging new residential accommodation that will increase the number of available residences in the open market. The works by Dr Nicholson did consist of making available a new dwelling. We do not construe the conditions in Note 2 to Group 5 so that they can be stretched to prohibit relief for any of the works simply because the works are for a new building that is a substantial family dwelling that might be occupied in two parts.
40. For these reasons we allow the appeal by Dr Nicholson.
41. The above part of this decision was, in view of Mr Ward's request at the end of his submissions, put to both parties as a draft. By letter dated 18 November 2005 either party was given 28 days to submit further written submissions to the tribunal. If either party were to make any such further written submissions the other was entitled to submit a reply within a further 14 days. Either party was entitled to apply generally within those periods. No written submissions or application has been made by either party.

MALCOLM J F PALMER

CHAIRMAN

RELEASE DATE: 5 January 2006

LON/2004/1033