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Simon Brown v Revenue & Customs [2006] UKVAT V19884 (13 November 2006)

19884

VALUE ADDED TAX — zero-rating — work "in the course of construction of a new dwelling" — VATA 1994 s 30, Sch 8 Group 5 Item 2 — demolition of house damaged in arson attack — later erection of replacement dwelling — whether demolition undertaken "in course of construction" of new dwelling — whether demolition zero-rated — no — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

SIMON BROWN

Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

Tribunal: Colin Bishopp (Chairman)

Sitting in Manchester on 18 October 2006

The Appellant in person

Stefan Brochwicz-Lewenski, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appellant, Simon Brown, was the owner of a house at 18 Greenhurst Lane, Ashton-under-Lyne. It was his home. On 20 September 2004 the house suffered an arson attack as a result of which it was extensively damaged. What remained of the house presented a danger to the public and on 28 September the local authority issued a demolition notice. The house was demolished soon afterwards, at a cost of £28,000 plus VAT of £4,900.

Mr Brown claimed an indemnity from his insurers, to cover the cost of demolition and of building a replacement dwelling. However, the insurers did not accept liability until February 2005, and it was only then that Mr Brown was able to embark on the process of identifying and instructing an architect, arranging for plans to be prepared, obtaining planning consent and appointing builders. The work of constructing the new house was begun quite recently and is not yet complete.

The question at issue in this appeal is whether, as Mr Brown contends, the demolition was carried out "in the course of construction of" the new dwelling and should properly be zero-rated; or, as the Respondents maintain, is standard-rated because the demolition was undertaken in order to comply with the demolition notice and not in the course of constructing a new dwelling. They accept that the new dwelling might have been in Mr Brown's contemplation when the remains of the old were demolished, but nothing had been done, at that time, to turn it into reality.

Section 30 of the Value Added Tax Act 1994 applies a zero rate of VAT to various supplies of goods and services, which are set out in Schedule 8 to the Act. Group 5 of that Schedule relates to the construction of buildings and includes, at Item 2:

"The supply in the course of construction of —

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

It is agreed that there is no other provision of the Act which might extend zero-rating to the work in question.

The Respondents, represented before me by Stefan Brochwicz-Lewenski of counsel, accept that the construction of the new dwelling falls within Item 2 and that, had the demolition been carried out as part of the overall project—that is, in order to prepare the site for the new construction—it, too, would have been taxable at the zero rate. They contend, however, that there is no temporal connection between the demolition and the construction of the new dwelling, and for that reason the demolition cannot be considered to form part of the work of construction. Mr Brochwicz-Lewenski relied on the decision of the High Court in Customs & Excise Commissioners v St Mary's R C High School [1996] STC 1091. The school itself was built between 1979 and 1983 but, because it was first necessary to divert a right of way, the school's playground could not then be constructed. It was only in 1994 that the difficulties were resolved and it was possible to construct the playground. Jowitt J concluded that two conditions must be satisfied if the requirements of item 2 were to be met. At p 1094 he said:

"Firstly, the services must be connected with the construction of the building in that they either facilitate its construction or produce in their finished result one whole with the building. Services which facilitate the construction of the building would include for example such matters as site clearance, ground works and the provision or improvement of an access where needed to enable the work of constructing the building to be carried out …

Secondly, there has to be a temporal connection between the construction of the building and the provision of the other services if those other services can be said to have been provided in the course of the construction of the building. Usually these services will be provided contemporaneously with the construction of the building or nearly so, but this may not always be the case. When it is not, it will be necessary to consider both the reasons for and the length of the delay before deciding whether or not the temporal connection is established. Questions of degree may be involved and the facts of a case may permit of two different views."

The first of those conditions would be satisfied, Mr Brochwicz-Lewenski argued, if the demolition had been undertaken in order to facilitate the erection of the new dwelling, but that was not the case: the remains of the old house had to be demolished whether or not a new dwelling was to be built. It could not be said that the demolition had been undertaken in the course of a single project, for the removal of the old house and its replacement. And it was necessary to consider the position, not long after the work was done and in the light of later developments, but as it was when the demolition was carried out. At that time, nothing had been done towards constructing a new house: there were no plans, planning consent had not been obtained, funds were not available and no builders had been identified. It was not possible to rely on hindsight in order to make two distinct projects appear to be one.

Mr Brown, who represented himself at the hearing, relied on the tribunal's decision in Dart Major Works Limited v Customs & Excise Commissioners (2004, Decision 18781). In that case a married couple bought a house in June 2002, and moved into it. Only a few days later it was very badly damaged by fire. The house was a listed building and the formalities which had to be completed before the remains of the house could be demolished were complicated but it is apparent from the decision that demolition was necessary since the damaged house presented a danger, and preservation of the remains was not practicable. The owners had wanted the house to be rebuilt, but that too was found to be impractical and a new house, in a different style, was planned and, in due course, built on the site. As in this appeal, the issue was whether the demolition works were zero-rated.

It is clear from the decision that the Commissioners advanced much the same arguments then as were advanced by Mr Brochwicz-Lewenski before me, and that they also relied on the decision in St Mary's High School. The tribunal pointed out that Jowitt J, in that case, had not been referred to the decision of the Inner House in Customs & Excise Commissioners v Rannoch School Limited [1993] STC 389 in which, at p 393, the Lord Justice Clerk, giving the judgment of the court, said (evidently with approval):

"Counsel were agreed that 'in the course of' refers to services done contemporaneously or consecutively in relation to a new building, and that in addition the services supplied must have a substantial connection with the new building. It is plainly a question of degree."

The tribunal also pointed out that both Rannoch School and St Mary's High School concerned work which had been carried out after the main construction had been completed whereas in Dart Major Works, as here, the work in question was carried out before the main construction could begin. The tribunal in Dart Major Works concluded that intention was of limited value as a guide, and that what mattered was what had happened. It concluded that there was an unbroken chain of events leading from the decision that the damaged house must be demolished to the construction of its replacement. It consequently found that the demolition work was zero-rated.

I confess I was at first troubled by the tribunal's decision in Dart Major Works. However, on closer analysis there is, I think, a significant difference between that case and this in that, there, the insurers appear to have agreed to indemnify immediately and they, or their appointed representatives, were involved in the decisions about the demolition and the rebuilding from the outset. The tribunal's reference to the irrelevance of intention was made in the course of its rejecting the Respondents' argument that the change from the owners' initial intention to rebuild the damaged house to what was in fact done, the erection of a new house in a different style, must lead to the conclusion that the demolition could not be regarded as part of the construction project which occurred. I respectfully agree that such a change is not a material factor; what matters, and what distinguishes that case from this is that there was, from the beginning, an intention to construct a replacement dwelling.

If one gives the words "in the course of construction" their ordinary meaning, it is in my view impossible to conclude that the demolition works with which I am concerned were carried out in the course of constructing a new house. It can be said, it is true, that, without the demolition of the remains of the original dwelling, a new house could not be built; but it cannot be said that the demolition was undertaken in order to facilitate the construction of the new. It was, as the Respondents maintain and I agree, undertaken in order to comply with the demolition order. Mr Brown might thereafter have built a new house, but he might instead have built an entirely different structure, left the land vacant or sold it. Indeed, had the insurers refused an indemnity, or he had no insurance at all, he might have been forced to sell without rebuilding. That was not the position in Dart Major Works where there was never any prospect that a course other than the erection of a replacement would be adopted. I am satisfied that "in the course of construction" cannot be interpreted in a way which brings into the scope of zero-rating demolition work which merely makes the work of construction possible. There must be more. In my view what is required is a construction project of which the demolition work is a necessary, or at least integral, part. Here, there was a demolition requirement which in fact preceded a construction project, but there is no more intimate connection between the two. In my judgment it is impossible to say, from the mere fact that the one preceded the other, that the demolition was undertaken "in the course of construction" of the replacement house.

I recognise the unfairness of taxing work into which Mr Brown has been forced through no fault of his own but in my view that is what the law requires and, with some regret, I have concluded that this appeal must be dismissed.

COLIN BISHOPP

CHAIRMAN
Release Date: 13 November 2006

MAN/06/0289