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East Norfolk Sixth Form College v Revenue & Customs [2008] UKVAT V20816 (03 October 2008)

20816

VAT – Zero-rating – Building work – Annexe used for a charitable purpose – School teaching block – Whether capable of functioning independently – Note (17) Group 5 Schedule 8 VATA 1994 – Held: no

LONDON TRIBUNAL CENTRE

EAST NORFOLK SIXTH FORM COLLEGE Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: CHARLES HELLIER (Chairman)

SHEILA WONG CHONG FRICS

Sitting in public in Norwich on 24 June 2008

Michael Collins, counsel, instructed by HKB Wiltshire, for the Appellant

Robert Robinson, instructed by the solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

East Norfolk Sixth Form College is a thriving and expanding institution. In order to accommodate its increasing numbers of pupils it has been expanding its buildings. In Phase 1 of the programme of expansion it added a new library building to its site, in Phase II a sports hall and a teaching block (where classrooms were mostly equipped for the teaching of sciences), and in Phase III a two storey teaching block of 11 classrooms and an IT room. This appeal concerns the VAT treatment of the supply of the Phase III teaching block.

Section 30 (2) VAT Act 1994 provides for the zero rating of supplies described in Schedule 8 VATA. Group 5 of Schedule 8 describes certain supplies relating to the construction of buildings. Item 2 of Group 5 describes:-

"The supply in the course of construction of (a) a building … intended for a use solely for a relevant charitable 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."

and Item 4 the associated supply of building materials.

Note (6) provides, so far as relevant, that::-

"Use for a relevant charitable purpose means use by a charity in…the following [way] namely:
(a) otherwise in the course or furtherance of a business."

Note (16) provides:-

"For the purposes of this Group, the construction of a building does not include:-

(a) the conversion, reconstruction or alteration of an existing building; or

(b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or

(c) subject to Note (17) below, the construction of an annexe to an existing building."

Note (17) provides:-

"Note 16(c) above shall not apply when the whole or part of an annexe is intended for use solely for a relevant charitable purpose and –

(a) the annexe is capable of functioning independently from the existing building; and

(b) the only access, for where there is more than one means of access, the main access to:

(i) the annexe is not via the existing building; and

(ii) the existing building is not via the annexe."

In October 2007 the Respondents wrote to the Appellant indicating that they had decided that the new Phase III teaching block did not qualify for zero rating. The Appellants appeal against that decision.

The Respondents accept that the new teaching block is a building and that it is intended for use solely for a relevant charitable purpose within the meaning of Note (6). They also accept that the construction of the building does not fall within Note 16 (a) or (b). However they say that the teaching block is an annexe to an existing building within Item 16 (c) and does not fall within the saving provision of Note 17. While they accept that the conditions of Note 17(b) as regards access are satisfied, they say that paragraph (a) is not satisfied because the teaching block is not "capable of functioning independently from the existing building."

The Appellants accept that the teaching block is an annexe but say that it is capable of functioning independently from the existing building.

The sole issue for us was therefore whether the new teaching block was so capable.

The Evidence and Findings of Fact

We heard oral evidence from Joseph Santori who is the College Administrator. He provided a witness statement. We also had before us a bundle of correspondence, copies of plans of the college and the new teaching block, and a number of photographs. We find the following facts in addition to those set out above.

The ground floor of the new teaching block comprises a corridor on either side of which are three classrooms. The corridor runs approximately West to East and has a door to the outside at either end. The classrooms contain no particular fixtures or fittings which would fit them for teaching subjects such as chemistry, physics or home economics. There is no staircase within the building's walls. There are no other rooms on the ground floor.

On the first floor, the new teaching block comprises a corridor which lies above that on the ground floor. On each side of the corridor are three classrooms – each lying above the classroom below. Five of the classrooms are similar to those on the ground floor. The sixth room is an IT room equipped with wiring and benches for computer stations. One corner of this room is divided off and has a separate entrance into the corridor. This is the server room in which the computer server is located. The block contains no WCs, preparation or common rooms.

The block is situated between the Phase II science teaching block and the sports hall. It is constructed of brick of a type which matches that of the Phase I Library, the Phase II sports hall and the Phase II science block. The style of the roofs, gutters, windows and external cladding of the new block match that of the science block.

At the western end of the new block at first floor levels there is a bridge connecting the western end of the first floor corridor to the phase II science block corridor. The bridge is enclosed and has a roof which is in the same style as, and links continuously into, the roofs of the new block and the science block. The sides of the bridge are glazed in a style which matches the windows of the new block and the science block. There are no doors separating the bridge from the science block or the new block.

Underneath the bridge, a door at the western end of the ground floor corridor opens to the outside (but under the cover of the bridge), and opposite it a door opens from the science block giving access to the lower science block corridor.

The doors at the eastern end of the block are lockable as is the door on the ground floor at the west end. There is no door at first floor level at the western end.

Before the new block was built there was a staircase which led down from the end of the science block corridor in the space now, broadly, occupied by the bridge and the area beneath it. That had been a fire escape. One of the reasons that there are no doors leading on to the bridge from the first floor of the science block and from the new building, was related to maintaining ease of fire exit from the fist floor of the science block through the new building.

At the eastern end of the new block there is a metal staircase leading down from the eastern end of the first floor new block corridor. This is covered above by an extension of the roof of the new block which reaches all but a few feet up to the adjacent Sports Hall. The staircase leads down to a paved area into which the ground floor eastern door of the new block opens. This paved area is covered by a separate lower level roof lying mainly under the extended roof of the new block. From the paved area one may walk south to the outside or north through a glazed covered corridor to other parts of the college.

The interior decoration and architectural style of the new block matches that of the adjacent science block.

The first floor rooms of the science block comprise rooms equipped to function as physics, chemistry and geography laboratories, preparation rooms, store rooms, offices and two undifferentiated teaching classrooms. The lower floor rooms comprise similar offices and ordinary classrooms but the equivalent of the physics and chemistry rooms are biology rooms.

The science block has WCs on the ground and first floor adjacent to the link (by bridge or under the bridge) to the new block.

The college has common rooms and administrative offices in other parts its buildings. There is a cafeteria.

The construction of the new block began in March 2007 and was completed by 7 September 2007. Before the new block was built the college used a number of 'mobile' or temporary classrooms which were placed on the adjacent games field. These were removed after the new block was completed.

With the exemption of the supply of heat and electricity the new block does not require any support from any other part of the college.

The Appellant's argument

Mr Collins says that there is no definition of "capable of functioning independently" in the legislation. He says that the correct meaning of those words was that set out in the Respondents' own guidance on the legislation shortly after it was enacted. In Notice 708 of August 1997 they said:

"The intention of this relief is to treat a charity annexe connected by a door or corridor to another building in the same way as we treat a fully independent structure separate from the existing building. As a guide, the new annexe must be capable of fulfilling the function for which it was designed if the connection or corridor were closed."

Mr Collins says that the new block was designed to function as classrooms. The question is therefore whether it would be capable of functioning as classrooms if the bridge link to the existing building was closed. Clearly, he says, it would be.

Mr Collins says that the test relates to the capability of the building for independent function, not different function. An annexe is something which is supplementary to something else (see Cantrell v Commissioners of Customs & Excise [2003] STC 486 ("Cantrell No. 2"), it cannot therefore be required that its functions are different. The issue is instead whether it can carry on its function on its own.

He says that Note 17 (a) requires one to identify what function the building is capable of fulfilling and then ask whether it is capable of fulfilling that function independently from the existing building. This building was equipped to function as classrooms and could so function independently.

We asked Mr Collins whether he saw any difference between a requirement that the building could function independently "of" the existing building and independent "from" it. He said he did not.

Mr Collins drew our attention to the precursor legislation. This was Group 5 prior to its amendment by SI 1995/280. Item 2 was in the same terms as it is in the current legislation, but instead of Notes 16 and 17, Note (9) provided:-

"The reference in Item 2 to the construction of a building does not include a reference to:-

(a) the conversion, reconstruction, alteration or enlargement of an existing building or work; or

(b) any extension or annexation to an existing building which provides for internal access to the existing building or…"

He says that "extension or annexation to an existing building" indicates that it was only if a new building was attached to the existing building that the note had effect. If an "annexe" was not attached then it was zero rated; if it was attached then the provision of internal access would mean it was standard rated.

He says that the purpose of the 1995 change was

(i) to make all extensions standard rated whether or not they provided for internal access; and

(ii) to enable attached annexes to benefit from zero rating even if they had an internal link so long as they could function independently

The purpose he said was not to bring unattached annexes into standard ratings but to extend zero rating to attached annexes. The purpose of the "capable of functioning independently" requirement was to exclude those attached annexes which could not have been separate structures because they could not function without the link to the existing building.

This intention he says is made clear in the August 1997 Notice 708 which explains that the purpose of the change is to treat an attached annexe in the same way as a separate independent annexe.

Mr Collins put forward an argument based on Hansard which we deal with later.

Finally Mr Collins says that the fact that students who use the annexe also use the existing buildings is irrelevant. The test is of capability to function rather than of actual function.

The Respondents' argument

Mr Robinson says that the Commissioners' case is that the independent functionality requirement is not met because the annexe is merely part of a school and that the pupils and staff who use the annexe must, of necessity, require the facilities provided by the rest of the school to which the annexe is attached. The annexe provides only classrooms and an IT and server room.

Mr Robinson says that the purpose of the legislation is clear on its face: to apply zero rating to buildings which meet certain criteria of use and purpose but to deny that relief to building work which merely expands the capacity on an existing building. Annexes are excluded unless they meet the requirements of Note (12): the general principal is that they are excluded unless they meet the requirements rather than that they are in principal included in zero rating subject to exceptions.

Mr Robinson says that the terms of the Commissioners' publications merely represent the Commissioners' understanding of the law at a particular time. They do not in this case have legal effect.

Mr Robinson says that the test articulated by the Appellant, namely whether the new block is capable of functioning as a classroom if the bridge link were closed, would render the statutory provision virtually otiose. But it is wrong he says because it ignores the statutory words "from the existing building". Of course the annexe can function as something on its own but the question is whether it can function independently from the existing building". The words "from the existing building" affect the test to be applied.

A building, Mr Robinson says, is a static and inanimate object. It cannot function other than by means of those who use it – i.e. by means of the use to which it is put by those who enter and occupy it. Those users have to use the facilities contained in the rest of the school in order to function as staff and pupils. The annexe cannot therefore be said to be capable of function independently from the school.

We were referred to the decision of other tribunals:-

(i) Grace Baptist Church v CCE VATD 16093: where the tribunal had sufficiently adequate evidence that the annexe actually functioned independently from the existing building to enable it to conclude that it could so function;

(ii) William Brian Evans v CCE VATD 18432 where the tribunal commented that the test was not whether the annexe will in fact function separately but whether it could;

(iii) Torfean Voluntary Alliance v CCE VATD 18797 when in the context of Note 17 (a) the tribunal found it was satisfied saying: "The new building while integrated structurally can lead an independent life."

(iv) Longparish Church of England Primary School v HMRC VATD 20464: where the tribunal found that new classrooms were not capable of functioning separately because "anybody seeking to use them would have to use the toilets in the main building."

(v) The Archdiocese of Southwark of CCE VATD 18883. Here the tribunal found a new building was an extension and that it was not an annexe but went on to consider whether, if they were wrong, the test in Note 17 (a) was satisfied in relation to a new building comprising two classrooms, some lavatories and a kitchen room. As is the case in this appeal the accommodation provided by the new building had originally been housed in a temporary structure separate from the existing building. The tribunal found however that Note 17 (a) was not satisfied because "the pupils who occupy and use the rear building have to use the original building for assembly, eating, access to staff rooms, the library and the IT room." Mr Collins urged us not to follow this case blindly as, since the tribunal decided that the building was an extension it was hardly surprisingly that they decided it had no separate function.

Discussion

In Bryan Thomas McNamara v CCE VATD 16039 the tribunal provided a helpful insight into the scheme of Notes (16) and (17). It showed how the statutory words were designed to remove from zero rating buildings which were more integrated with existing building:-

The "independent function" criterion in Note 17 (a) is the classification or encapsulation of the final boundary of structural rating for charitable buildings.

In Cantrell No 2 Morritt V-C said that an annexe was a supplementary structure, 'annexe' meaning something which is an adjacent or accessory to something else.

We accept that the new block is an annexe. It is to some extent integrated – in layout, appearance and the activities for which it is equipped to function – with the existing buildings but the integration is not full: it is separated in space and is equipped to perform functions in addition to those of the existing buildings but yet supplementary to them (because it enables persons using the existing buildings to use the new block for additional lessons or teaching or IT work).

It seems to use that we must approach Note (17) (a) in the context of a building which is an annexe: we must ask in the context of a building which supplements and is tenuously integrated with an existing building: is it capable of functioning independently from it?

Further we believe that question should be asked having regard to the physical situation of the building. We are not required to consider whether, if the building were transported to a desert island, whether it would be capable of functioning as a place of shelter or a place to play eight gramophone records. This building is situated in the middle of a school site between other school buildings. The functions for which it is capable must be determined in the light of that situation

In Cantrell No 1 (Cantrell v CCE [2000] STC 100) Lightman J provided guidance on the approach to Note (16). He said that the question of whether a building was an extension, enlargement or annexe should be determined in the light of objective factors having regard to appearance, layout and what functions the building was equipped to perform; and not by reference to intention, actual use or the term of any planning permission. It seems to us that the same objective approach is called for in the application of Note (17). One is not required to ask about the building's intended functions, but to ask objectively what it is capable of. We agreed with Mr Collins: actual use is not relevant (save as to illuminate possible use).

When we look at this building we see 11 fairly plain rooms and an IT room situated in the middle of a school site. We ask what functions is that building capable of performing? As Mr Robinson points out, a building cannot function other than by means of the use to which it is put – or we add may be put.

What are those uses? In our view the rooms could be used as classrooms, store rooms or perhaps study or common rooms. But not all 11 rooms could be used as store rooms, and it seems to us that any use which the building as a whole is equipped to perform must include the use of some of the rooms as classrooms.

Then we ask whether the building can function as a provider of classrooms independently from the existing building. We agreed with Mr Robinson that the words "from the existing building" are important. The question to be asked is whether if the rooms are used as classrooms that use can be independent from the existing building.

In our view it cannot. Those being taught in classrooms need lavatories. It would be wholly impracticable to deny those attending classes the ability to use a lavatory during the class. The use as a classroom requires the facility to enable pupils to go to the lavatory. That facility is not present in the new block and pupils need to travel to the science block to use the lavatories there. Thus the use of the rooms as classrooms cannot be carried on without reliance on the existing building. In other words it cannot be carried on independently from the existing building.

It would be different if the block comprised one or two rooms only. They would be capable of being used for storage: a function which would not be dependent on the existing building although supplemented to it. It must also be different if the block comprised only lavatories or washrooms. But in this case the only functions for which this block as a whole is capable include functions which require the use of facilities in the existing building.

Mr Collins' discussion of the precursor legislation does not affect our conclusion. In the 1995 legislation there was no special role for charitable use: the old Note (9) applied (as does the current Note (16)) to any building work. The change from old Note (9) to new Note (16) does not illuminate the approach to Note (17). It seems to us that in making the changes to Note (16) it was intended that detached annexes could newly fall outside zero rating. That change from "annexation" to "annexe" seems to be part of the policy of the change. The exception for charitable annexes which have independent function does not seem to us so intimately linked with that general change as to affect the interpretation of Note (17).

We do not find the views of the Commissioners in the old Notice 708 persuasive. In particular we do not believe that the question of the "purpose for which the annexe was designed" is relevant.

The Hansard extracts

Mr Collins says that if there is any doubt about the proper construction of Note 16 and 17 we should have recourse to any relevant statement made in parliament in connection with the change in 1995. He says that this is no authority on their meaning and they are unclear. He says that there is a difference in the approach different tribunals have taken: thus in Longparish and Evans the tribunal considered actual use whereas in Archdiocese of Southwark the tribunal considered possible rather than actual use relevant. He says that the words are potentially ambiguous: do they require you to consider what would happen without the link or attachment, or do they require you to consider possible function if the existing buildings did not exist?

Mr Robinson says that we are not permitted to look at Hansard. We are permitted so to do only when "the legislation is ambiguous or obscure, or leads to an absurdity" (see Lord Brown-Wilkinson @ p. 923 Pepper v Hart [1992] STC 898). This legislation he says is not fairly open to more than one meaning and is not obscure: annexes are generally excluded from zero rating but some charitable annexes were excepted. The independent function condition was not obscure and there was no patent absurdity.

We tend to agree with Mr Robinson. Whilst there may be absurdities in the general operation of Note 16 (for example if an annexe is built in two stages, the first may qualify and the second may not even though, had they been built together, the combined annexe may have qualified) such absurdities are so plainly intended by the legislation that they cannot be called absurdities for this purpose. Nor do we see any real ambiguity in the provision.

Closer examination of the apparently divergent tribunal approaches to actual or potential use also shows, in our view, approaches which are consistent (or not inconsistent) with that we have taken.

The Hansard extract Mr Collins refers us to is from the Paymaster General's introduction of the changes. The second of Lord Browne-Wilkinson's conditions is Pepper v Hart is therefore satisfied.

But the third of the Pepper v Hart conditions is that the statements relied on are clear – or clear in relation to the point at issue. The paymaster general said:

"The order changes the tax treatment of new charity annexes to an existing building. Currently when a new annexe is built for non – business charity purposes which is detached from any other building and can function independently of that building, the construction is zero rated for VAT purposes. Alternatively if the annexe is built adjacent to the original building and connected by door or corridors, the construction is deemed to be work to an existing building and is taxed. Effectively, the change of law will ignore the connecting doors and apply the same tax treatment to both types of annexes. It is not, however, intended to give tax-free treatment to enlargements or extensions to charity buildings"

Reading this it is clear that the Paymaster General has in mind the existing treatment of attached and detached annexes, and that new legislation is intended to treat them in the same way. But that is also clear from the legislation. What is less clear is the source of the minister's comment that a detached annexe which "can function independently of that building" was zero rated under the existing law. However that independent function requirement is built into the new law so as to apply to both detached and attached annexes. There seems to us to be nothing which the paymaster general says which either sheds further light on the meaning of the independent function test or suggests that the test should be construed simply as asking whether, without the link, the building can fulfil the function for which it is designed.

Thus we find no help in the Hansard passage even if it were otherwise available to us.

Conclusion

In our opinion the new block was not capable of functioning independently from the existing buildings. Note 17 therefore does not save the block from Note 16 and the construction does not fall within Group 5.

We therefore dismiss the appeal. Our decision was unanimous.

We made no order as to costs.

CHARLES HELLIER

CHAIRMAN

RELEASED: 3 October 2008

LON 2007/1929