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Cite as: [2008] UKVAT V20800

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Rainbow Pools London Ltd v Revenue & Customs [2008] UKVAT V20800 (11 September 2008)

20800

Value Added Tax – Supply of building materials under Item 4 of Group 5 of Schedule 8 to VATAct 1994, and the definition of "building materials" in paragraph 22 – Supply of retractable insulated covers for indoor swimming pools – Supply of moveable floors for indoor swimming pools – Appeal allowed as regards the covers and dismissed as regards the moveable floors

LONDON TRIBUNAL CENTRE

RAINBOW POOLS LONDON LIMITED Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: HOWARD M NOWLAN (Chairman)

TYM MARSH

Sitting in public in London on 18 August 2008

Stuart Dickson, Finance Director of Rainbow Pools London Limited, for the Appellant

Christian Zwart, counsel, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

This case was effectively two separate appeals, though each related to whether the supply of particular materials in the course of the Appellant's work in constructing indoor swimming pools in new dwelling houses was zero-rated under Item 4 of Group 5 of Schedule 8 to the VAT Act 1994.

The materials involved in the first part of the appeal were those required for the relatively common-place provision of electrically-powered, fully-retractable and insulated swimming pool covers, that retract into a concealed cavity below the pool floor, so leaving the cover hidden when retracted. This appeal raised some interesting legal questions on the proper interpretation of the definition of "building materials" in Note (22) of Group 5, and we allow this appeal.

The second part of the appeal related to something relatively novel and, in an engineering sense, very interesting. This was a moveable tiled floor to an indoor swimming pool that could be locked in its "high" position, so that the swimming pool completely disappeared and the floor became part of the tiled floor in the house in question (the hall, in the case of the particular moving floor in contention), and could also be set at various "low" positions, so that the floor became the floor of the pool, at varying depths to suit toddlers, children and adults. Whilst fascinated by the engineering expertise involved in the moving floor concept, we have, somewhat reluctantly, had to dismiss this part of the appeal.

The description of the retractable covers

These covers are quite common, and we were indeed told that they are installed today in 90 to 95 per cent of newly created indoor pools. They are fundamentally similar to the roller-drums often used to enable a plastic bubble-cover to be drawn over the surface of a pool to conserve heat, and then to be retracted by turning a wheel on the drum. The concealed covers all require the sprayed gunnite shell of the pool to be built so that, right across the shallow-end of the pool, there is a cavity of approximately 2 feet square to the outside of the pool, and beneath the paving around the pool, into which the plastic cover can retract onto the drum in the cavity, through a 2-inch gap below the water level of the pool. Modern covers are generally made of rigid plastic sections that almost span the width of the pool, each 4- or 6-inch section hinging to the adjacent section so that they can lie flat on the pool surface or be wound around the drum when retracted. Modern covers often slide in rails along each of the long sides of the pool, one advantage of this system being that the rails prevent the cover from being forced below water level should pets or children, and even in some cases adults, fall on the cover when drawn across the pool surface. Modern covers extend and retract electrically and in, sophisticated systems, air-conditioning in the poolroom will be adjusted according to whether the cover is extended or retracted.

The purpose of the covers is of course to conserve heat in the water and prevent evaporation. The dual benefit of this is not only that it greatly reduces the cost of gas, oil or electricity in heating the water, but also that it reduces humidity in the pool building, and thus reduces the damage that high humidity causes to many building materials. A further benefit is the safety feature just mentioned, in that modern covers can prevent accidental drowning. Whilst it was not mentioned in argument or evidence in our hearing, we note from the decision of Mr Colin Bishopp in the case of Leisure Contracts Limited v. Revenue and Customs Commissioners, (2005) VAT Decision No 19392, that local authorities often actually require retractable pool covers to be installed in new indoor swimming pools, as a requirement under the building regulations. We were told that the retractable covers added about 10 % to the cost of an indoor pool, so that a pool costing from say £120,000 to £150,000 would include about £12,000 to £15,000 on the extra works and materials for the retractable cover.

We accept all the evidence summarised above, and we entirely accept that retractable covers are now regarded as a virtual necessity in a newly-created indoor pool. We can imagine that an inferior alternative might be a hand-operated bubble cover wound on to a moveable roller that can be rolled to and back from the edge of the pool, but readily understand that the convenience of the electrically-operated, fully-retractable cover, and the avoidance of the cumbersome drum make the type of covers described above the near inevitable choice of anyone building a domestic indoor pool.

The description of the moveable swimming pool floors

The moveable swimming pool floors were an altogether different product, in that they are a relatively new innovation, they are rare and are certainly not specified in the vast majority of new indoor pools, and they are very much more expensive to install. As an engineering innovation, they are fascinating.

The installation of a moveable floor first requires the base of the pool to be strengthened, the base to have a constant depth, and the pool sides to be constructed to exacting standards so that the sides are perfectly vertical, and the distances from one side to the other, and end to end, do not vary by more than a couple of millimetres. The moveable floor then consists of a stainless steel ladder frame, about 9 inches deep that covers the entire pool surface except for a 4-millimetre gap at the edges. The ladder frame is then covered with a stainless steel top skin, which is tiled in a style of tiling that matches the tiling surrounding the pool, and the ladder frame is then filled with tough buoyancy boxes, so that in its natural state the frame, boxes and tiled surface float on the water, once the pool is filled. There are then four or more cables attached to the bottom of the frame, that pass round wheels on the base concrete floor of the pool, and then pass into a machinery room where electrically-operated rams can retract or play out the cables, either pulling the moveable floor down (against the force of its own buoyancy) or releasing it so that its buoyancy will raise it. The floor must move very slowly, so generally taking 15 minutes to be fully raised or lowered, in order that, as it moves, the water can flow through the 4-millimetre gaps at the edges. The gaps can be no greater in order to eliminate the risk of people's fingers being trapped, and in order to enable the floor, in its raised position, to form an integral part of the overall tiled area of the room in which the pool is located. There are sprung rollers around the edges of the frame which ensure that the steel does not touch, or scratch the tiling on the sides of the pool when the floor moves up and down, and there are bolts that lock the floor securely to the surrounding surface when the pool is in its up position.

Having described that rather extraordinary structure, we must now mention the different advantages that a floor of this type can have in both private and public pool installations.

Whilst we did not undertake a site visit, one had been planned to show us a moveable floor installed in a private house that had cost about £11 million. In that case the swimming pool was actually installed in the hall of the house. In this installation therefore, the owner could either use the large hall as an entertainment area, without people even being aware that they were standing on a pool; or a pool could be created at varying depths to be suitable for infants, children or adults; or the floor could be held about 6 inches below the surrounding surface so that people could walk around the hall and admire the very shallow shimmering pool. An incidental benefit of the floor naturally was that, in its fully-raised position, it greatly reduced heat loss and condensation, and it did virtually the same when only 6 inches of water were visible above the floor.

We were told that moveable floors were now often installed in new public swimming pools and we were even told that it was a condition for obtaining a Lottery grant for a public pool that such a floor be installed. The purpose of the moving floor in a public pool is to enable the pool to be used by different categories of users at different times, say by infants, children, the disabled, and adults in general, with the result that a local authority could meet all the various needs of its different customers with just one pool with a moving floor, whereas in the past the pool complex might have required three or four different pools. Contrary to initial expectations therefore, in the case of public pools, moveable floors can be regarded as an economy measure.

We were only concerned in this hearing of course with moveable floors being installed in newly-constructed dwelling houses. We were told that the Appellant's sub-contractor that supplied the steelwork and machinery in issue in the Appeal had so far provided the equipment for four new-build houses, but this particular supplier was not the only United Kingdom supplier. The particular supplier currently had enquiries for about 100 moveable floors in private pools worldwide, and it considered its systems to be superior to other American systems. It believed that the use of such floors would increase.

The relevant law

It was common ground that the Appellant was rendering zero-rated construction services under Item 2 of Group 5 of Schedule 8 to the VAT Act 1994 when building indoor swimming pools in new houses. The relevant wording of Item 2 is as follows:

"The supply in the course of the construction of-

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

(b) …

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."

Item 4 of Group 5 then deals with the provision of building material by a person who is already rendering construction services under Item 2, or the presently irrelevant Item 3. It thus identifies:

"The supply of building materials to a person to whom the supplier is supplying services within item 2 or 3 of this Group which include the incorporation of the materials into the building (or its site) in question."

The only other relevant provision is Note (22), which defines "building materials". It provides as follows:-

"(22) 'Building materials', in relation to any description of building, means goods of a description ordinarily incorporated by builders in a building of that description, (or its site) but does not include –

(a) finished or prefabricated furniture, other than furniture designed to be fitted in kitchens,

(b) materials for the construction of fitted furniture, other than kitchen furniture;

(c) electrical or gas appliances, unless the appliance is an appliance which is–

(i) designed to heat space or water (or both) or to provide ventilation, air cooling, air purification, or dust extraction; or

(ii) intended for use in a building designed as a number of dwellings and is a door-entry system, a waste disposal unit or a machine for compacting waste; or

(iii) a burglar alarm, a fire alarm, or fire safety equipment or designed solely for the purpose of enabling aid to be summoned in an emergency; or

(iv) a lift or hoist;

(d) carpets or carpeting material."

Although the HMRC Public Notices are not law, we should quote two extracts from Public Notice 708, section 13 which deals with the VAT meaning of "building materials".

Section 13.3 describes when materials are "incorporated" in a building and inter alia states that they are incorporated when fixed in such a way that the fixing or removal would require the use of tools. Section 13.4 describes what "ordinarily" means, in the phrase referring to "goods of a description ordinarily incorporated by builders in a building". It reads as follows:-

"An article is 'ordinarily' incorporated in a building (or its site) when, in the ordinary course of events, it would normally be incorporated in a building of that generic type, such as a dwelling, church, or school. Generic types of building are not split into sub-categories. So, no distinction is drawn between large detached houses and small terraced houses.

The same approach is taken when determining if the goods themselves are the norm for that type of building. For example, a tap would be regarded as being 'ordinarily' incorporated whether it is chromium or gold-plated.

Examples of articles 'ordinarily' incorporated in different types of building can be found at paragraph 13.8.

The range of items 'ordinarily' incorporated in a building is likely to change over time in line with trends and consumer expectations."

Section 13.8 of the same Public Notice then gives "examples" of "articles "ordinarily" incorporated in various buildings. It lists the articles under the headings of "Dwellings", "Relevant Residential Purposes", "Buildings used for charitable purposes", "Schools" and "Churches". The list of articles ordinarily incorporated in "Dwellings" contains 37 items. The only ones that we need to refer to are:-

"Air Conditioning"

"Saunas"

"Lifts and hoists"

"Swimming pools inside the house, including water heaters and filters but not diving boards and other specialist equipment."

The contentions on behalf of the Appellant

Following the provision of very clear information by the Appellant in relation to the retractable covers, and by the only witness, namely Keith Austin, of ADM Limited, the suppliers of the moving floor, in relation to the nature and function of the moveable floor, it was contended as regards the retractable covers that:-

• the covers were built into the pool structure; and

• were building materials ordinarily incorporated within new indoor swimming pools.

As regards the moveable floors it was contended that:-

• the moving floors were an integral part of the swimming pool structure controlled by a system of cables and pulleys permanently attached to the structural base;

• the installation was permanent and could not be removed to operate the pool without the moving floor;

• the pool was specifically designed to incorporate a moving floor; and

• the floor was finished in stone work and mosaic to form part of the central hallway of the new-build dwelling.

The contentions on behalf of the Respondents

It was contended on behalf of the Respondents that:-

• the test as to whether any particular building materials were "ordinarily incorporated" in a building had to be applied to the categories of building identified by the Items of Group 5, in other words dwelling houses, churches and schools and not to sub-categories such as luxury dwelling houses;

• whilst an indoor swimming pool might, as a luxury item, seem an unlikely inclusion under the term "ordinarily incorporated" into a dwelling house, it is not, per se, a single unit that can be distinguished as a building material but rather, it shares the materials (bricks, mortar, tiles etc) that would be used for constructing the dwelling. The swimming pool itself is contained within the fabric and structure of the building and these materials will broadly be required regardless of the existence or otherwise of the swimming pool:

• moving floors and swimming pool covers do not form part of the fabric of the building and are quite distinct items;

• the test of what is "ordinarily incorporated in buildings" must address, on the authority of Mr. Justice Glidewell's decision in Customs and Excise Commissioners v. Smitmit Design Centre Ltd and Customs and Excise Commissioners v. Sharp's Bedroom Design Ltd [1982] STC 52, whether the particular materials are ordinarily or usually incorporated into buildings, and not whether, albeit highly unusual, nevertheless something that if incorporated in a building, would ordinarily be incorporated by the builders rather than by any other trader;

• moving floors and swimming pool covers are not "ordinarily incorporated" into a dwelling house;

• moving floors, (and retractable covers as well on the authority of Mr Bishopp's decision in Leisure Contracts) are powered by electricity and may in the alternative be excluded from ranking as "building materials" by virtue of being "electrical appliances";

• following the ruling of the European Court of Justice in the case of Talacre Beach Caravan Sales Ltd v. Customs and Excise Commissioners, (Case C-251/05) [2006] STC 1671, where there is one overall supply of a swimming pool for instance, and that supply is zero rated, it is nevertheless permissible for the local law to dis-aggregate items within that one supply and provide for some items within the overall supply to be taxed at the standard rate.