United Kingdom VAT & Duties Tribunals Decisions

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URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20775.html
Cite as: [2008] V & DR 618, [2008] UKVAT V20775, [2008] STI 2392

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J F B & F R Sharples v Revenue & Customs [2008] UKVAT V20775 (15 August 2008)

20775

VAT – building works – cottages built as retirement homes in grounds of care home – zero rating – a building designed as a dwelling – Note (2) Group 5 Sch 8 VATA 1994 – condition (c) : "separate use, or disposal is not prohibited" – whether condition satisfied if separate use not prohibited but separate disposal prohibited – meaning of "disposal of the dwelling" – whether limitation on transfer of the freehold only was prohibition on disposal of the dwelling.

LONDON TRIBUNAL CENTRE

J F B & F R SHARPLES Appellants

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: CHARLES HELLIER (Chairman)

SHEILA WONG CHONG FRICS

Sitting in public in London on 24 June 2008

A. N. Ferringdon, Abbey Tax Protection Ltd for the Appellants

Richard Smith, Counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

DECISION

This appeal concerns the meaning and application of Note (2)(c) Group 5 Schedule 8 VATA 1994.

The Appellants, Mr and Mrs Sharples are a partnership. They arranged for the construction of seven sheltered housing units (the 'cottages') on land close to Bilney Hall in Norfolk. The Appellants contended that both the supply of the construction services to them and also the first grant of long leases, or freehold disposal, of the cottages would be zero rated by virtue of Group 5 Schedule 8. The Respondents decided that the cottages did not fall within Group 5. The Appellants appeal against that decision.

By virtue of section 30 VATA supplies described in Group 5 are zero rated. So far as relevant the Items described in Group 5 are:-

"1. The first grant by a person…constructing a building designed as a dwelling …of a major interest in, or in any part of, the …dwelling or its site.

The supply in the course of construction of …a building designed as a dwelling…of any services related to the construction.

The supply of building materials to a person to whom the supplier is supplying services within Item 2…which include the incorporation of the materials into the building (or its site) in question."

It will be seen that if the cottages are designed as dwellings the supply of their construction (and related materials), and the first grant of a "major interest" in the cottages will be zero rated. (A major interest is defined by section 96 (1) VATA to mean the fee simple or a tenancy for a term certain exceeding 21 years).

Note (2) to Group 5 provides that:-

"(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 its construction or conversion has been carried out in accordance with that consent."

The Respondents say that the condition in (c) has been failed and that, as a result, that the cottages are not designed as dwellings with the result that neither their construction nor their first long lease or disposal are zero rated. They say that this is because the planning authority obtained a covenant from the Appellants that the freehold interest in the cottages would not be disposed of separately from Bilney Hall. The Respondents did not submit that the other conditions of Note (2) were not satisfied.

The Appellants say that condition (c) is satisfied. They say:-

(a) that there was no prohibition on the separate use of the building: condition (c) is expressed in the alternative "separate use, or disposal", and since the separate use was not prohibited the condition is satisfied; and

(b) in any event the covenant not to dispose of the freehold separately was not a prohibition on the disposal of the cottages because (i) the separate disposal of long leases was not prohibited, and (ii) the covenant was subject to certain exceptions.

The issues for us are therefore:-

(i) whether the condition of (c) requires both separate use not to be prohibited and separate disposal not to be prohibited;

(ii) what the nature of the restriction on disposal is: and

(iii) whether that restriction is a prohibition of the disposal of the cottages.

The Evidence and Findings of Fact

We heard oral evidence from Mr Sharples who produced a written statement, and had before us a bundle of copy documents including plans, the planning permission for the cottages, and a copy of the "section 106 agreement" between the Appellants and the local planning authority. In addition to any facts described earlier, we find the following facts.

In 2003 Mr and Mrs Sharples made arrangements for the purchase of Bilney Hall and surrounding land. As a result of these arrangements the freehold interest in the land on which the cottages were built was vested in the Appellant partnership, and Bilney Hall and the reminder of the land vested in the trustees of a self invested personal pension plan (the SIPP) whose pensioners were Mr and Mrs Sharples. The trustees of the SIPP were Mr and Mrs Sharples and Personal Pension Trustees Limited.

In December 2005 Breckland Council gave planning permission for the construction of the cottages. The permission was subject to 11 conditions of which only number 11 is relevant to this appeal. It provided:

"This permission is subject to a Section 106 Agreement [an agreement much pursuant to section 106 of the Town and Country Planning Act 1990] which ensures that:-

(i) [related to other building work]

(ii) the sheltered housing units [the cottages] to be constructed pursuant to this permission shall only be occupied by person(s) aged 55 years or over;

(iii) [related to other holdings];

(iv) the freehold interest in the (cottages) shall not be sold assigned or disposed away from that in the main [care] home."

The "main care home" was Bilney Hall

On 13 December 2005 a section 106 agreement was made between Breckland District Council, the Appellants, "Personal Pension Trustees Ltd … (hereinafter called "the Fund")", and the mortgagees of the land on which the cottages stood. There was no indication of the capacity in which Personal Pension Trustees Ltd was a party. Under clause 5.1 the Appellants covenanted to comply with obligations set out in the agreement. We set out the relevant obligations later in this decision.

Bilney Hall is used as a care home for the elderly. The cottages were built in its grounds and were separated from the Hall by about 30 yards. Each cottage has its own bedrooms, living room, kitchen and bathroom. Each has a car port. Each is a self contained unit without internal access to any other building. The cottages share a communal garden. Each cottage is independently rated and has separately charged utilities.

The Appellants intended the cottages to provide independent living for retired and elderly people with the availability for the occupants, should they wish, of the support facilities at the Hall; and perhaps at a later stage in their lives, should they become incapacitated, the possibility of a transfer to Bilney Hall. The Appellants' intention was to grant 999 year leases of the cottages to the residents for a premium.

Breckland Council supported the concept advanced by the Appellants. The Appellants were told however that because the site was not in a development zone restrictions would need to be imposed on disposal separately from the Bilney Hall estate and in relation to the occupants' ages.

We had no documents before us in relation to the SIPP. Mr Sharples told us, and we accept that he and his wife were the beneficiaries of the SIPP. He also indicated that the trustees of the SIPP had borrowed. We assumed that the SIPP was an approved self invested personal plan constituted as a trust and within regulation 3 of the Personal Pension Scheme (Restriction on Discretion to Approve) (Permitted Investments Regulations 2001 SI 2001/117 (repealed with effect from 6th April 2006 but relevant at the time of planning consent), and that such borrowing fell within regulation 6 of those regulations. We conclude that Mr and Mrs Sharples had a beneficial interest in the property owned by the SIPP but that it was not the interest of a beneficiary under a bare trust – i.e. one absolutely entitled as agent the trustee to direct how the trust property should be dealt with, - and was, in particular, an interest which was subject to the rights of any lender to the trustees.

From these facts we conclude that the conditions in paragraph (a) and (b) of Note (2) are satisfied. There was no suggestion made that condition (d) was not satisfied and we conclude that the construction was in accordance with the planning permission and that that condition was satisfied. That leaves condition (c).

The Appellants' argument

Mr Ferringdon says that the section 106 agreement restricted rather than prohibited the sale of the freehold interest in the cottages. He points to an exception in the covenant (see para. 47 below : 6.2 of the agreement) which permits transfer between the Appellants and the trustee of the SIPP. He says "prohibition" means forbidding or banning absolutely, not simply restricting. Thus disposal of the freehold was not "prohibited".

Even if it could be said that the transfer of the freehold interest in the cottages was prohibited, Mr Ferringdon says that there was no restriction on the grant of any leasehold interest. The grant of a 999 year leasehold interest is (depending on the terms of the lease) in practice and substance the disposal of the complete interest in the property. 1000 years is a long time. Such a grant he says may be a 'disposal', and therefore disposal of the cottages was not prohibited.

Mr Ferringdon says the cottages are separate independent dwellings which would be the possessions, and permanent dwellings, of the eventual tenants. These, he says, are the type of dwellings the legislation intended to zero rate. The purpose of the condition in Note (2)(c) was to exclude from zero rating buildings such as granny annexes which could not be disposed of separately from the house to which they were annexed. These cottages, by contrast, could clearly be disposed of separately in substance and reality.

Mr Ferringdon notes that there is no prohibition on the separate use of the cottages. Clause 6.4 of the section 106 agreement (see para 47 below) prevents their use by persons under 55, but that is not a prohibition on separate use.

Lastly Mr Ferringdon notes that different tribunals have approached the condition in Note (2)(c) differently: some construing it as satisfied if either separate disposal or separate use is permitted, others as requiring that both are not prohibited. He accepts fairly the difficulty in the words but urges us to find that, because separate use was not prohibited, the condition is satisfied.

The Respondents' argument

Mr Smith says that the separate disposal of the freehold interest is prohibited by the section 106 agreement covenant. He says that the exception in clause 6.2 for a transfer between the Appellants and the trustees (see para 47 below) is made because, since the trustees owned Bilney Hall, such a transfer would not split the ownership of the cottages and the Hall. In substance, therefore, this covenant was a prohibition on the separate disposal of the cottages.

Further he says that since Mr and Mrs Sharples were beneficiaries of the SIPP any transfer of the freehold estate between the Appellants and the trustees would not be an absolute disposal since at least part of the beneficial interest would start and remain with Mr and Mrs Sharples.

Mr Smith says that the grant of a leasehold interest, however long, is not a disposal of the property. Thus any ability of the Appellants to grant long leases either generally or to residents over 55 years is irrelevant in considering whether or not there is a prohibition on disposal. He submits that 'disposal' is intended to mean the action by which the owner divests himself of all interest in the property. When a lease is granted, however long, the owner retains rights – not least to the reversion. The granting of such a lease is not equivalent to the grant of the fee simple.

Mr Smith said that the Commissioners' position was that "disposal of the dwelling" in Note (2) (c) referred only to the disposal of the freehold interest in the dwelling because only in that way was all the interest 'disposed' of. Note (2)(c) was properly to be interpreted as requiring both that the separate use by the person in possession was not prohibited and that the separate disposal by the freeholder was not prohibited.

Mr Smith found support for his propositions in the legislative history. He told us that the predecessor of Note 2 was Note 1A to Group of Schedule 5 VATA 1983. This provided that reference to "the construction of any building… does not include a reference to:

...(h) any extension or annexation to an existing building which provides for internal access to the existing building or of which the separate use, letting or disposal is prevented by the terms of any covenant, statutory planning consent or similar permission…."

(with emphasis added). He notes that the reference to "letting" was there as an alternative to disposal, and says that the omission of "letting" indicated that Parliament's intention was to omit the requirement that separate leases could be granted from the conditions which had to be satisfied. In other words prevention of or permission for leasing was now irrelevant. That meant that Parliament's intention in Note (2)(c) cannot have been as described by the Appellants.

Finally Mr Smith says that, properly construed, Note (2) requires both the use and the disposal condition to be satisfied. Since the disposal condition was not satisfied, the condition in Note (2)(c) was not satisfied, and the cottages were not "designed as dwellings". Thus they were not eligible for zero rating under Group 5.

Discussion

"disposal"

We start by looking at the language of Group 5. "Dwelling" is used to connote the bricks and mortar constituting the dwelling rather than the legal estate relevant to the dwelling. Thus

(i) "building designed as a dwelling" in Item 1

(ii) "the dwelling consists of self contained living accommodation" in Note (2)(c)

(iii) "…adapted for use…as a dwelling" in Note (7)(a); and

(iv) "no part has….been used as a dwelling" in Note (7)(h)(ii)

By contrast where a legal construct is intended different words are used: "The…grant… of a major interest in … the … building dwelling or its site": in Item I.

Note (2)(c) speaks of the "use, or disposal of the dwelling". It seems clear that the concept to which 'use' relates is the same as the concept to which 'disposal' relates. It seems plain that "use" is related to bricks and mortar and not to a legal estate, and that 'disposal' must in some way relate to the same thing. A dwelling is a place in which one dwells: if you dispose of the dwelling you can no longer dwell there. It seems to us that the kind of "disposal of the dwelling" contemplated is a disposal of occupancy or the right to occupy rather than the disposal of any particular legal interest in the dwelling.

In circumstances where the draftsman is alive to the difference between a legal estate in a dwelling and a dwelling it seems wrong to read "disposal of a dwelling" to mean "disposal of a legal interest relating to a dwelling". Instead the draftsman uses "use" alongside "disposal" and it seems to us that "use" colours "disposal" and suggests disposal of occupancy or the right to use.

We discussed with Mr Smith the example of a dwelling built on a site, the freehold of which was owned by A who held it subject to a 999 year lease owned by B, who in turn held subject to a 100 year lease to C. We asked: with whose potential disposal is Note (2)(c) concerned – is it concerned with prohibitions on the disposal by A of the freehold, by B of his intermediate leasehold, or by C of his 100 year leasehold? Mr Smith said that the Respondents' view was that Note (2)(c) was concerned only with prohibition on A's disposal of his freehold, and consequently prohibitions on disposal by B or C of their interests were irrelevant. He said this was the case even if A's only interest was the reversion arising from the 999 year lease granted for a premium without any other covenant by the lessor.

We do not agree. First, we can see no reason why a prohibition on the disposal of a freehold 999 years remote from any physical interest in the dwelling should concern the legislature. Second, the approach treats 'disposal' as meaning "disposal of the freehold interest relating to", and we can see no warrant for such additional words. And third, for the reasons set out above, in our view the meaning of "disposal of a dwelling" in this context means the disposal of occupant or a right of occupancy of the dwelling (or the disposal of the dwelling as a dwelling).

We are not dissuaded from the conclusion by Mr Smith's reference to the history of the legislation (see para 27 above). That is for the following reasons. First we note that the former legislation was not specifically concerned with a dwelling but with an extension or annexation to an existing building. The concept of bricks and mortar was present but not the concept of dwelling.

Second we note that if "disposal" in the old legislation means and is limited to disposal of a freehold estate, then the trio of "use, letting or disposal" includes the grant of a lease but excludes the assignment of a leasehold interest. It seems to us illogical for the legislation to be concerned with the granting of a fresh lease (a letting) and with the transfer of a freehold, but not with the transfer of a leasehold. That leads us to the conclusion that the previous legislation did not intend "disposal" to mean solely "disposal of the freehold interest in" but had a wider meaning associated with the preceding words.

Lastly, as Mr Smith himself argued in relation to the Appellants' argument that effectively "disposal" meant "disposal of an interest in", if the legislation had intended disposal in the 1983 legislation to mean "disposal of the freehold interest only" it could and would have used those words.

"or"

The second question of construction was as to the effect of the word "or" in the phrase:

"the separate use, or disposal of the dwelling is not prohibited".

The question is whether this condition is failed only if both separate use and separate disposal are prohibited, or if either one is prohibited. This is a question on which different tribunals have come to differing conclusions.

In Nick Hopewell-Smith VATO 16725 the tribunal comprised the President, Stephen Oliver QC and Sheila Wong Chong, who was also a member of this tribunal. At paragraph 7 of the decision the tribunal said:

"7. There is no dispute here that:

……..Conditions (b) and (c) of Note (2) are satisfied here (Although, in the present case, the grant of planning permission confines the use of the barn to "a manner ancillary to or incidental to the "residential use of the house, it does not prohibit the separate disposal of the barn. As the two limbs of condition (c) are in the alternative, and the latter is satisfied here, condition (c) is satisfied)."

Mr Smith points out that there was no dispute before that tribunal over this issue. He says that Customs and Excise in that case made a wrong concession and that the point was clearly not argued. The parenthetical sentence, however, indicates clearly to us that the tribunal gave some consideration to the issue.

In Paul Henry Wiseman VATD 17374 the tribunal considered the legislative history of Note (2)(c). An earlier draft of the legislation had an additional word in Note (2)(c) (as had the precursor legislation):

"the separate use, letting or disposal of the dwelling is not prohibited…"

The chairman said that these words clearly meant that if any one of "use", "letting" and "disposal" were prevented the building failed the condition. He agreed that the omission of "letting" in the final legislation cannot have changed the fundamental meaning and held that both conditions (no prohibition on separate use, and no prohibition on separate disposal) had to be satisfied.

The chairman in Wiseman had Hopewell-Smith cited to him, but noted that there had been no argument before the tribunal in that case on the legislative history. He declined to follow Hopewell-Smith.

In Martin James Giblin VATO 20352 the tribunal was Charles Hellier and Ruth Watts Davies. Neither Hopewell-Smith nor Paul Henry Wiseman were drawn to the tribunal's attention, although the decision in Gill Cartegena which was to a similar effect as that in Wiseman was cited. The tribunal said

"17. It seems to us that condition (c) is satisfied only if there is both no prohibition or separate disposal and no prohibition or separate use. Effectively it encompasses two conditions. If it had read "the separate use and disposal…..is not prohibited" then if one activity but not the other were not prohibited the condition would be satisfied, but the use of 'or' to our mind makes plain that neither separate use nor separate disposal may be prohibited. To that extent we agree with the tribunal in Cartegena."

It seems to us that the difficulties in the construction of this phrase arise firstly from the words "not prohibited" and one's natural inclination to paraphrase them as "permitted", and secondly from the way "separate" applies to "use" and "disposal", which one tends mentally to rewrite as "separate use or separate disposal". Having done that, one writes the condition

"A or B is permitted"

and concludes that it means the same as

"A is permitted or B is permitted"

And thus one concludes that so long as either separate use or separate disposal are permitted the condition is satisfied.

It seems to us however that the comma after "use" indicates that "separate" groups together "use or disposal" as if in a bracket, and that requires one to consider whether one bracketed concept "is" not prohibited (the word "is" rather than "are" also leads to this approach). And if separate use only is prohibited then separate-use-or-disposal is prohibited so that the condition is failed.

Suppose the condition had been: "the separate use, and disposal are not prohibited". Then we think it would be clear that if one of then was permitted the condition would be satisfied. This contrast also suggests strongly that both separate use and separate disposal must be permitted for the condition in Note (2) as enacted to be fulfilled.

Thus, despite an initial impression that if either are permitted the condition is satisfied, a second look at the words indicates to us that both must be permitted for the condition to be satisfied.

We are reinforced in this conclusion by the reasoning of the tribunal in Wiseman, and a leaning towards the view that the purpose of Note (2)(c) is to allow a dwelling whose use and occupancy can pass into free circulation to benefit from zero rating (so long of course as the other conditions are satisfied).

The prohibition in the planning permission

Clause 6 of the section 106 agreement provided:-

"6.2 The freehold interest in the part of the land upon which the Sheltered Accommodation is situated or any part or parts thereof shall not at any time in the future be sold, assigned or otherwise disposed of separately from the freehold interest upon which the Principal Unit [Bilney Hall] is situated PROVIDED THAT transfers disposals or assignments between [Mr and Mrs Sharples] and [the SIPP Trustees] shall not constitute a breach of this clause."

"6.4 No part of the Sheltered accommodation or any unit continues therein shall be occupied by any person other than [a person over 55 and such person's spouse, cohabitant or dependants in] a single household

"6.5 The Sheltered Accommodation shall only be advertised for letting or leasehold sale as being dwellings for the elderly or for pensioners of age 55 or older…and shall not at any time be advertised or let out…as being available or suitable [for younger persons]."

It seemed to us that it was arguable that clause 6.2 prescribed any form of disposal of a legal interest in a cottage other than a disposal of the sort expressly contemplated by clause 6.5. That was because (a) the words "otherwise disposed of" might be intended to encompass the disposal of a lease our of the freehold; (b) the words "freehold interest" might be intended to mean all the fee simple interest but "any part thereof" might suggest a lesser interest, and (c) the possibility that the covenant could be sidestepped by granting a 999 year lease out of the freehold was so obvious a way round the restriction that a strict construction made the covenant virtually illusory, and as Lord Diplock said in Antaius Compania Naviera SA v Salen Rederierna AC [1985] A.C. 191.201:

"if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."