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Curry v Revenue & Customs [2007] UKVAT V20077 (23 March 2007)

20077

Value Added Tax re-claim under do-it-yourself builders' scheme - whether works carried out in the course of business - Appeal allowed

LONDON TRIBUNAL CENTRE

MICHAEL PATRICK CURRY Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: HOWARD M NOWLAN (Chairman)

RUTH A WATTS DAVIES, MHCIMA, FCIPD

Sitting in public in London on 5 and 6 March 2007

The Appellant in person

Caroline Neenan, counsel, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction

This was an appeal by Patrick Curry against the decision of Her Majesty's Commissioners for Revenue and Customs ("HMRC") to refuse to refund VAT under the "do it yourself" builders scheme, provided for by section 35 VAT Act 1994.

At the conclusion of the hearing, we were minded that the appeal would have to be dismissed. This was because the Appellant's intentions, whilst constructing the house into which the various building materials had been incorporated, appeared to support the decision made by HMRC to reject his claim on the law as the law was understood during the appeal. It was unfortunate that there was virtually no discussion of the legal issues during the hearing, largely because the Appellant appeared in person. It was thus only when we came to consider the legal position more carefully after the hearing that we reached the conclusion that the assumptions made in relation to the law during the hearing were not correct (or were at least materially incomplete), and that on a proper reading of the law, the appeal should be allowed.

The facts

The Appellant was the only witness and the facts, which were not particularly in dispute, were as follows.

In November 2002, the Appellant and his partner saw an advertisement for a house in New Malden, known as "No.12, The Close", which had the benefit of planning permission for the construction of another house on part of its land. The Appellant and his partner purchased the house with some enthusiasm. We were not told what experience of building the Appellant had, and there was no suggestion that he was then a builder who was registered for Value Added Tax purposes, though it was implicit that he knew what he was doing since he subsequently built a new house on the relevant land relatively quickly.

It was not in dispute that when the Appellant and his partner purchased No.12, his intention was to implement the planning permission to build a new house on part of the land of No.12, and it was their joint intention to live at No.12, and to sell the new house. When the house was purchased there were sitting tenants, who did not vacate until May 2003, but when the tenants left, the Appellant and his partner moved into No.12.

The facts have been somewhat complicated by various planning permissions and refusals. When No.12 was purchased, it was a condition of the planning permission for the construction of the adjacent house that two garages should be built in locations laid down on the relevant land. In June 2003, however, the Appellant obtained planning permission to demolish an existing "lean-to" attached to No.12, and to erect a single storey rear extension. Doubtless the Appellant appreciated this next point prior to building that extension, but he nevertheless concluded that once the extension had been built, the proposed garages would have to be re-sited because there would otherwise not be room to drive cars into the garages. He accordingly applied for a revised planning permission to re-site the garages.

In September 2003, the bricks for the construction of the new house were purchased, and in October 2003 the first major work on the new construction, the laying of the concrete foundations or raft, was completed.

On December 2003 the planning authority refused the Appellant's application for the proposed new location of the garages.

In April 2004, two events of note occurred. First the Appellant sought and obtained tax advice from an accountant in relation to the income tax and capital gains tax (rather than VAT) implications of selling one or other house, the adjacent property now being referred to as No.14, or of letting the new house. It was certainly stated as one of the background facts recited in the relevant tax advice that, tax apart, the Appellant and his partner would have expected to continue living at No.12. The advice was quite complex but it certainly suggested that there would be quite significant advantages to a change of plan, whereunder the Appellant and his partner would instead sell No.12 and move into the new house. No specific mention was made of a fact that was by then troubling the Appellant, but he was nevertheless then concerned that it would be difficult to sell either house when there was a planning requirement that the garages be built, but his application to re site them had been rejected. This would not only mean that neither property would have a garage, but it would also mean that it would not be possible to anticipate where the boundary line between the two properties would be drawn, and that would naturally make it virtually impossibly to sell either property. Whether the tax advice was sought in part because of concerns about this problem was not stated, but the periodic references in the tax advice to a possible letting might have been occasioned by the reality that neither house could be sold immediately, and that with borrowings and substantial interest costs, some plan had to be evolved to deal with the situation once the new house was finished.

The other fact to mention in relation to April 2004 is that it was reasonably clear from the details of materials being ordered in that month that the shell of the house would almost certainly have been completed, and it was materials such as tiles and kitchen and bathroom fittings that were then being bought.

The certificate of completion for the new house, No.14, was issued on 19 August 2004. On 1 October the house was let for a one year period to a Mr. and Mrs. Grant, South African "friends of friends" who wanted to try living in the UK for a period before deciding whether to settle in the UK or not.

On 4 October, the Appellant's appeal against the December 23 2003 rejection of his plan to re site the garages was turned down.

On 16 December 2004 planning permission was eventually granted for a new revised proposal for the siting of the garages. It appears that the garages were "ready-made" garages because on 18 February 2005 the garages were delivered and erected on a concrete base that had been prepared in advance.

On 1 February 2005 the Appellant asked HMRC for advice on when he should submit his claim to recover the VAT charged in respect of all of the building materials that he had bought and that had been incorporated into No.14.

The tenancy to Mr. and Mrs. Grant was extended (presumably on more than one occasion) because we were told that Mr. and Mrs. Grant were now about to terminate it because they were currently in Australia, considering moving to Australia rather than to the UK.

The correspondence and phone calls in relation to the Appellant's claim for a VAT refund under the "do it yourself" builders scheme

Shortly after the Appellant applied for the VAT refund, he wrote to the Claims Processing Centre on 28 February 2005, explaining why he had filled in certain boxes on the reclaim form in a particular way, and he said:

"I have filled in box 11 with the date of occupation by Mr. & Mrs. Grant who will reside here until we can sell the property".

Later in the same short letter he said:

"The work on the house was finished in August 2004 but there was a problem with building the garage because of planning refusal at first and subsequent planning approval, (see planning approval dated December 2004). We could not leave the property empty until it is offered for sale".

The claim was refused because of the Appellant's intention that the property be let and then sold. It was explained to him (by reference to certain paragraphs of VAT Notice 719) that both of his intentions for the use of the property were disqualifying business purposes.

The Appellant wrote a further letter on 26 May in which he explained how the planning difficulties had made it impossible to define boundaries between the two properties, and that as the Grants needed accommodation quickly, "we decided to let the property to them for a while".

This letter continued:

"We intend to keep the property and move into in when it is vacant, but should anything happen to our relationship in the mean time, we would then each have accommodation without causing each other any problems at the late stage of our lives.

In our letter dated 28 February we realise we misled you by stating that we were going to sell the house, we do not intend to sell No.14 but would sell No.12 to provide us with funds to enhance our pensions if necessary".

There was also a phone call (or possibly phone calls) during this period when the Appellant made statements as regards his intentions, broadly in line with those in the February letter.

Other relevant points to emerge from the evidence given by the Appellant

We now summarise various other points that emerged in evidence.

• It seemed that when the Appellant received the tax advice in April 2004, it put him into something of a quandary. He did not assert that he immediately decided that it would make far better sense to sell the house that had been bought as, and used as, his and his partner's principal private dwelling house, and move into No.14, albeit that this was a conclusion that might have seemed sensible in the light of the advice from the accountant. Perhaps because he was still busy building, and because the problem of the garages remained unsolved, he merely said that the advice posed him with some serious thinking that would need to be done at some stage.

• His relationship with his partner had now resolved itself and it was unquestionably now their joint intention to build a conservatory on to no 14, and move into it, and to sell No.12. In the meantime, the Grants had been excellent tenants and had looked after No.14 very well.

• Not that this was directly relevant (in that there is no "wait and see" test to be applied to claims under the "do it yourself" builders scheme), but he nevertheless offered to defer his claim until he could show that it was in fact No.12, not No.14, that was sold.

• He said that he thought when he made his VAT refund claim that no relevance attached to whether he intended to sell a house in respect of which he was making a claim.

• He naturally confirmed that he had said on two occasions that he intended to sell and to let No.14, and he also confirmed that he would doubtless have said this in the telephone conversations that he had had with the Claims officials.

• He did not confirm, however, as counsel for HMRC asserted, that it had at the time of these letters and conversations been his intention to let and sell No.14, as had been stated in conversations and in the earlier letter quoted above. He accepted that he must have said what HMRC officials had recorded, and had plainly written a letter confirming that those were his intentions, but his explanation of this was that he thought that nothing at all turned on which house might be sold for VAT purposes, and he assumed that the factor that was undermining his claim was the fact that the newly built property had been let. That had been why he was emphasising the planning difficulties, and the impossibility of selling either house when the boundaries could not be drawn.

Our interpretation of the evidence

It was undisputed that when the Appellant purchased the whole property back in 2002, he had intended to build on the adjacent plot, and it was almost certainly No.14 that would be sold, and No.12 that would be and remain his and his partner's principal private dwelling house.

We both accept that the Appellant's decision to let No.14 resulted from the difficulties of selling either house on account of the garage problem and the inability to draw the boundary between the two properties.

It was suggested by counsel for HMRC that the fact that it was No.14 that was let in October 2004, rather than No.12, illustrated that it was then still the intention to sell No.14. This may have been so, but this is not definitely established, and it is also perfectly possible that it was easier to remain living in the house that the Appellant and his partner were living in at the time, and let the brand new property, rather than the reverse.

In the light of the finding in paragraph 20 above, and the finding that the initial one year let was effectively forced on the Appellant by circumstances outside his control, we consider that it is immaterial whether the extensions of the lease subsequently demonstrated a longer term intention to derive income from No.14, since the validity of the VAT refund claim revolves around "business purposes" during the construction period, and not possible extensions of a lease more than a year after the completion of the property. In any event there was no evidence that those extensions were planned from the outset, and we think that the extensions of the lease may have been explained by the fact that the Grants were said to be ideal tenants, looking after the property immaculately, and since the rent doubtless covered the financing cost, the urgency to sell would have disappeared.

We were in mild disagreement about the proper interpretation of when the Appellant changed his intention and decided to sell No.12, and not to sell No.14. Ruth Watts Davies considered that it remained the Appellant's intention to sell No.14 until about May 2005 when he suddenly realised that this proposal was also fatal to his VAT claim, so that his letter of 26 May either resulted from a change of mind occasioned by the realisation of the VAT consequences of the earlier assertions, or at worst, was not genuine. I was inclined to be slightly more sympathetic to the Appellant's assertion in his letter of 26 May that he had unwittingly misled HMRC in the earlier letter. It seemed credible to me that the tax advice that the Appellant had received in the preceding April would have made him realise, if not that there were compelling reasons to sell No.12 rather than No.14, but that nevertheless serious thought would have to be given to the issue of which house should be sold. I therefore found it credible that when he said that No.14 was merely let until it could be sold that he was concentrating on why the property was let, and as to whether that was a permanent proposal, and not on the issue of which property would be sold, and which would remain or become his and his partner's private dwelling house.

In the event, if our conclusions on the law are correct, it seems that this mildly different interpretation of the facts is not relevant to the outcome of the appeal. It is worth observing that we were both convinced that it was now the Appellant's intention to move out of No.12 and to sell it and to move into No.14. This we support by his clear statement that this would be so, regardless of the outcome of the VAT appeal; also by the apparent proposal to construct a conservatory at no 14; and by his suggestion that he was perfectly prepared to allow the outcome of the VAT appeal to be left in abeyance until it emerged whether it was indeed No.12, and not No.14, that was sold.

The relevant statute law

The relevant law in this case is contained in section 35 VAT Act 1994 which provides that:

"(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.

(2) The works to which this section applies are-

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

……………….."

The contentions of the Respondents as to the proper application of section 35

It was contended on behalf of the Respondents that a "do it yourself" builder lost his entitlement to the VAT refund if he had the intention, during the construction period, either to sell or let the house. The first actual use of the house was also to be considered strongly indicative of whether the construction was carried out "in the course or furtherance of any business". The business issue was to be tested over the construction period as a whole, and in accordance with the decision of this Tribunal (John Clark and Michael Silbert, FRICS) in the case of Mr. and Mrs. Williams v. HMRC, heard on 23 April 2004, particularly at the end of the construction period.

It was accepted that there were certain lettings and apparent business uses that could be ignored. For instance if a person built a house for his own use when he ceased to be committed to live in tied premises, and he let the house in the meantime, that letting could be ignored. But as the Appellant always intended in this case (at least until the shell of the house was completed in April 2004, if not until final completion in August 2004) to sell or let the house, and to sell it at the end of the period of a short let, none of these "disregards" applied.

The legislative context of section 35, as a guide to its proper application

We have found the remarks made by the members of the Tribunal in the Williams case just referred to to be of considerable assistance in clarifying the purpose of section 35. We entirely follow the proposition that the purpose of the section is to put the person who builds his own house in the same position as the person who either buys a newly built house from builders, or who contracts with a builder that the builder will build a new house on land owned by the client. The builder's sale of the house (namely the first grant of a major interest in a newly built house) and the builder's services of building a new house on a client's land will both be zero rated transactions for VAT purposes so that the builder will recover, and not pass on, the VAT content of the price paid for all the building materials, and charge no VAT in relation to the balance of the price paid. To achieve symmetry with this position, the "self builder", who will initially have suffered the cost of VAT when purchasing the building materials, is afforded a VAT reclaim under section 35.

We do not however agree with the explanation put forward in the Williams case as to the coherent purpose underlying the provision in section 35 that denies the VAT refund if the self builder carried out the works "in the course or furtherance of a business". We will examine what we consider to be the proper purpose of this limitation to the relief in relation to both of the contended disqualifying purposes, namely the intention to let the property and the intention to sell it.

In the Williams case, it was held that Mr. and Mrs. Williams completed the conversion of their barn into living accommodation (another of the works to which section 35 plainly applied) with the intention of letting the barn for full rent. They alleged that they had the longer term intention that the barn might eventually be occupied by one or more of their children, but it was held that because this was merely a vague hope (the children being relatively young at the time), the immediate intended use (the commercial letting) was the decisive factor, and therefore Mr. and Mrs. Williams lost their entitlement to a VAT reclaim because the barn was converted "in the course or furtherance of a business".

The Tribunal in the Williams case explained that in their view the justification for the "business" limitation in the case where a property was built or converted with a view to its being let was that the limitation rightly precluded the landlord from recovering VAT, so that the "self builder" landlord would be in the same position as any other landlord. We of course accept that save where the landlord elects to waive the exemption and than pay VAT in respect of the rents charged, the landlord is precluded from recovering any VAT that it might have indirectly suffered in paying for goods or services used in its business of letting. The crucial factor in the situation of a new building or a new conversion is however that the VAT that the self builder is precluded from recovering if he builds or converts with a view to letting the new property in the course of a business is VAT that the landlord who engages a builder to build for him or buys a new house from a builder in the course of the same leasing business still avoids. For either of those supplies by the builder will remain zero rated, notwithstanding the landlord's intention to use the buildings in the business of property leasing. The VAT that the landlord will generally fail to recover, when incurred in relation to the exempt activity of letting a property, is VAT in respect of taxable services rather than zero rated "new building" services, but then the self builder will never be able to recover the VAT incurred in relation to these items in any reclaim made under section 35. For that section plainly only deals with the refund of VAT suffered in relation to building materials, and third party labour charges, where the materials are incorporated in the newly built house.

It may be worth just adding an example to illustrate the point made in the previous paragraph more graphically. Assume that the next door neighbours to Mr. and Mrs. Williams had a substantial amount of land and that they decided to set up in the business of property leasing in a big way, engaging a builder to build 20 houses with a view to letting them all, and also paying numerous other bills for estate agents' services and other services that are standard rated for VAT purposes. And then they let all the houses. Simultaneously Mr. and Mrs. Williams convert their own barn into living accommodation, paying VAT in respect of building materials, and in respect of agents' fees which they also incur.

On this example it would appear that if the purpose of section 35 as a whole is to put the self builder in the same position as the person who engages a builder, the result would be achieved if the business limitation was struck out of section 35 at least as regards "the business purpose of letting". For then Mr. and Mrs. Williams would have recovered the VAT in respect of the building materials, precisely matching the way in which the next door neighbours would not have suffered VAT indirectly in the bills paid to the builder because the "new build" services would have been zero rated. And both would continue to suffer the VAT in respect of the agents' fees and other services because such VAT could never be recovered under section 35 anyway. But if the limitation operates as presently drafted, Mr. and Mrs. Grant would appear inexplicably to be unable to recover the "new build" VAT that manifestly the neighbours would not suffer.

While we will revert later to the presumed purpose of the "business limitation" in section 35, particularly as regards the other alleged fatal intention of selling the "self built" house, we will now turn to the facts as regards the letting in the present case. We accept naturally that our function is to apply the law as it stands, even though we consider that there is a material drafting error in section 35.

Our decision as to whether the Appellant's intention to let no. 14, which intention existed before the completion of the construction meant that the construction was carried out "in the course or furtherance of any business"

We accept that the activity of deliberately letting a property for a significant period does rank as the "carrying on of a business" for VAT purposes. This conforms with Article 4, para 2 of the Sixth Directive which provides that "The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity". It is mildly unfortunate that this provision of the Sixth Directive is enshrined in UK domestic VAT law by the definition of "business" in section 94, particularly as the definition of business in that section is far from clear on the point by merely defining "business" to include "any trade, profession or vocation". Nevertheless we accept that the letting of property "on a continuing basis" is realistically a business. Indeed were that not so, there would be no need for the letting of real property generally to be an exempt transaction for VAT purposes, and no coherence in the universal belief that if a landlord waives "exemption", then the letting of real property becomes a taxable supply for VAT purposes.

We have no doubt that in this case the Appellant only decided to let the property for the reasons that he gave. In other words, the unexpected planning difficulties made him realise that he would not be able to sell either property at a time when the garages had not been built; a planning appeal to build them in a different position was about to be turned down; and he could not therefore even know where the boundary would have to be drawn. But he could let No.14, and felt forced to do so because of the interest cost being borne, and the other risks attendant on leaving a property empty.

We consider that it is inappropriate to suggest that a person is carrying on the business of letting property if he decides that he must let a property for a short period because his other plans have been undermined by factors outside his control. It seems self evident to us that if a person buys one or more houses with a view to letting them continually, that person has commenced a business of letting. It equally seems self evident (to adopt a slightly different example) that if a person hoping to sell one house when moving into a new house really wants to sell the first house but cannot do so because of a sudden down turn in the housing market, so that he reluctantly lets it for a short period, is not commencing a business. That person will equally receive rent, and pay income tax on the rents, but he has not realistically commenced a business. This decision conforms with the wording of the passage quoted about from the Sixth Directive which refers to property being let "on a continuing basis", and it conforms to the thinking in the Williams case where it was considered that significance attached to the fact that the converted property was going to be let for a considerable number of years, and indeed that it was only speculation that children would one day live in the converted barn.

The legislative context of section 35 as regards the limitation that VAT refunds are not available under the section where the "self builder" intends to sell the house being built

We first observe that the factor that is fatal to a VAT refund claim under section 35 is not the "self builder's" intention to sell the property, but the feature that his building work is "carried out in the course or furtherance of any business". The most obvious business that the self builder might be conducting is of course the business of being a house builder, which immediately means that although the self builder will not be able to reclaim VAT under section 35, nevertheless precisely the same amounts of VAT will still be recovered when the self builder grants the first major interest in the newly built house, since the sale of the house will be a zero rated supply. It accordingly appears that where self builders are denied refunds of VAT under section 35, on account of their intention to sell the property on completion, the authorities ought to be directing the claimants to ensure that they are registered for VAT purposes whereupon their sale of the house will be zero rated, and precisely the same VAT will be refunded, as was being claimed mistakenly under section 35.

We have considered whether there is any day-light between the cases where a person can properly recover VAT under section 35 as a "self builder" and where a builder in business zero rates his supply of a major interest in a new house and thus effectively recovers precisely the same VAT. There appears to us to be no such day-light. Once the conclusion is reached that a self builder has been building a house "in the course or furtherance of business", and once that person grants the first major interest in the house, it appears that all the ingredients are present for a VAT refund based on the notion that the relevant supply is zero rated. The relevant supply cannot be "outside the course of business" for zero rating purposes, once it is held to be "in the course of business" for a claim under section 35, and since the price receivable will manifestly exceed the VAT registration threshold, and the sale will be a grant of the first major interest, we are unable to see any "middle course" where the VAT refund is seriously intended to be denied.

There appear to be two situations where there might theoretically be a gap between the two bases on which VAT is properly to be refunded. First if a self builder does not realise that he will be regarded as "carrying on a business", so that he does not register for VAT purposes, he may be too late to register if registration is only applied for immediately before the sale, and the authorities refuse to back-date the registration. The other conceivable case is the one that is more relevant in the present context, and this is the rather novel situation that the house is initially constructed "in the course of a business", but the builder then changes his mind and retains the house, never thus making the sort of supply that will rank as zero rated.

We consider that it is inconceivably that the "business" limitation is inserted into section 35 in order to provide a trap for the "border-line builder" who fails to register in time in order to recover VAT when making a zero rated supply. We now turn to the facts of this case, and consider whether the Appellant was carrying out the building works "in the course of any business" whilst the works were being undertaken, but that because it will be No.12 and not No.14 that will be sold, no VAT will ever be recovered on a zero rated supply because the builder has decided not to sell No.14. Is there thus the most extraordinary element of day-light between the two different provisions, such that there is a situation where the VAT refund will properly be denied?

Our decision on the issue of whether the Appellant's initial intention to sell No.14 means that No.14 was built "in the course of business" notwithstanding our conclusion on the facts that it is now the Appellant's intention to live at No.14, and to sell No.12 instead

The most natural reading of the business limitation in section 35 is that a person will be conducting an existing business, and the house will then be constructed "in the course or furtherance" of that business. The business in other words comes first.

We do nevertheless accept that if a person builds just one house, always intending to sell it, and he sells it, that person is carrying on a business, and indeed a trade.

The critical question in this case is thus whether the Appellant was conducting a business during most of the construction period, albeit that house No.14 is not now to be sold in the course of that business, so that seemingly the business has ceased; or whether in the alternative the feature that we accept that No.14 is not now to be sold means that it is appropriate to say that the Appellant was not at any stage conducting a business.

Leaving aside at this stage the question of whether the letting of No.14, or the now proposed sale of No.12 affect this conclusion, and looking at the "business" question solely by reference to our acceptance that No.14 is not now to be sold, our decision is that there has in the event been no business. It is a strange business in which not a single supply is made. Also for income tax purposes it is well established that a trade only commences when a person sells or offers for sale the products that he has for sale (in the context of a selling trade), and that until that point there is no trade. Relief might now be given for pre-trading expenditure, but until goods are sold or offered for sale, there is no trade. It is our decision in this case that although at one point it looked as if the Appellant would sell No.14, and that that sale might well have been regarded as being in the course of business, he has in fact changed his intentions such that any once proposed business has in fact not commenced.

We understand that the Appellant still intends to sell No.12, and that he has let No.14 for a reasonable period, and we now address the issue of whether this should influence our conclusion that he has never in fact commenced a business. It is our decision that these facts do not change our conclusion. He has now decided to sell his dwelling house, and we do not consider that the sale of that house will be made in the course of any business. The letting of No.14 was for the reasons already given not a transaction in the course of the business of letting, but a short term expedient to deal with planning difficulties that undermined the Appellant's original plans. And the Appellant's decision to move into and live in No.14 seems to us to mean that any possible business as regards that property never commenced, rather than that a business asset has been appropriated to private use.

Our decision is accordingly that although at one point it looked as if the Appellant would be carrying on a business in which the sale of No.14 would have been a supply made in the course of that business, in the event he has not commenced any business either of selling or of letting No.14; and indeed he has not commenced any business for VAT purposes. Accordingly his appeal is allowed.

We have given thought to the point that since the claim for relief under section 35 has to be made within a period after the completion of the house, it may not always be clear at that point whether the house is to be sold, and whether it is thus appropriate to conclude that he building was undertaken "in the course or furtherance of any business". This point will not usually occasion any difficulty because the self builder, building in the course or furtherance of a business will generally be conducting an existing business, and presumably be registered for VAT purposes, and the business test will clearly be satisfied. And equally the sale of the house would appear to be a zero rated sale of a newly built house.

In the rare case such as this, where the self builder is not conducting any business in any other context, we still consider that if the house is never sold it is right to conclude that a business has never been commenced, and that it follows that the house cannot be said to have been built in the course of any business. The test is not what the builder actually intended during the building period, but whether the building was actually undertaken in the course or furtherance of any business, and if (as here) it is realistic to conclude that no business was ever in the event commenced, then this governs the availability of the relief under section 35, whatever the builder initially intended.

The proper meaning of the business limitation in section 35

In our view the business limitation in section 35 makes perfectly good sense in the context of demonstrating to the realistic business builder that his route for recovering VAT is by making zero rated supplies either of the grant of a major interest in a new build, or by rendering appropriate new build services. .

It follows that the business limitation is principally designed to direct claimants to recover VAT in respect of new builds in whichever of the two ways is appropriate, rather than to create some middle situation where the VAT borne in respect of building materials in a new house should not be recovered. It is also our view that the application of the "business limitation" in the context of an intention to let a newly built house creates an inexplicable asymmetry between the case of the self builder and the landlord who may commission the new building of countless houses in the course of a letting business, and we assume that there is thus an error in the legislation. Whether this results from the draftsman having contemplated only the type of business that results in the business builder recovering VAT in the way mentioned in the previous paragraph rather than under section 35, or whether the draftsman was influenced by the reasoning that the Tribunal later adopted in the Williams case, we do not know, but we hope that the relevant authorities will reconsider whether the drafting of the "business limitation" in section 35 does achieve its properly intended purpose.

HOWARD M NOWLAN

CHAIRMAN

RELEASED: 23 March 20077

LON/2006/134