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England and Wales High Court (Administrative Court) Decisions
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Cite as: [2000] EWHC Admin 283

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
CROWN OFFICE LIST


CO/1597/1999
CO/1598/1999


Royal Courts of Justice
Strand
London WC2A 2LL
Friday, 28th January 2000

B e f o r e
MR JUSTICE LIGHTMAN
BETWEEN:
BRIAN CANTRELL AND EILEEN CANTRELL
trading as FOXEARTH LODGE NURSING HOME
Appellants
and
THE COMMISSIONERS OF CUSTOMS AND EXCISE
Respondents
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
_________

Mr Jonathan Peacock (Instructed by Messrs Mills & Reeve Francis House, 112 Hills Road, Cambridge CB2 1PH) appeared on behalf of the Appellant.
Mr Rupert Baldry (Instructed by the Solicitor of Customs and Excise, New King's Beam House, 22 Upper Ground, London SE1 9PJ) appeared on behalf of the Respondents.
_______
Judgment
As Approved by the Court
Crown Copyright ©

Friday, 28 January 2000
JUDGMENT

MR JUSTICE LIGHTMAN:
INTRODUCTION
1. This is an appeal under Section 11 of the Tribunal and Inquiries Act 1992 against a decision released on the 26th February 1999 ("the Decision") of the VAT and Duties Tribunal ("the Tribunal"). The Tribunal determined, upholding the decision of the respondents, the Commissioners of Customs and Excise ("the CCE"), that the building construction works ("the Works") carried out by contractors, Wright & Fuller Limited, on behalf of the appellants, Mr and Mrs Cantrell at the Foxearth Lodge Nursing Home in Suffolk ("the Home") in 1997 and 1998 were standard (and not zero) rated for the purposes of VAT.
2. Section 4 of the Value Added Tax Act 1994 ("VATA") provides that VAT is to be charged on taxable supplies of goods or services made by taxable persons in the course of their business. By Section 30(1) VATA, no VAT is to be charged on supplies which are zero-rated. A supply of goods or services is zero-rated if the goods or services are of a description specified in VATA Schedule 8 (Section 30(2)). The relevant zero-rated supply is item 2 of Group 5 of Schedule 8 which so far as material reads as follows
:
"2. The supply in the course of the construction of-
(a) a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose; or
(b) any civil engineering work necessary for the development of a permanent park for residential caravans,
of any services related to the construction other than the services of an architect, surveyor or person acting as a consultant or in a supervisory capacity."
But Note 16 of Group 5 excludes from the benefit of zero-rating certain specified works:
"(16) For the purpose of this Group, the construction of a building does not include-
(a) a 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) ...the construction of an annexe to an existing building."
Accordingly the supply of goods and services in the course of the construction of an enlargement of, an extension to or an annexe to an existing building is standard rated.
3. The issue before the Tribunal was whether the Works were properly zero-rated within item 2 of Group 5. It was common ground that the Works were on a building intended for use solely for a residential purpose within the meaning of item 2(a) and accordingly qualified for zero-rating unless excluded by Note 16. The question for the Tribunal was whether the Works were in the course of an "enlargement" of or "extension" within the meaning of Note 16 or an "annexe" to an existing building, so as to be excluded from zero-rating. The question whether the works carried out constituted an enlargement, extension or annexe is a question of fact, not law (see CCE v. London Diocesan Fund [1993] STC 369 at 383 per McCullough J.). Therefore the Tribunal's decision cannot be disturbed unless it misdirected itself in law or the true and only reasonable conclusion on the facts found is inconsistent with the decision (Edwards v. Bairstow [1956] AC 14).
THE LAW
4. The two stage test for determining whether the works carried out constituted an enlargement, extension or annexe to an existing building is well established. It requires an examination and comparison of the building as it was or (if more than one) the buildings as they were before the Works were carried out and the building or buildings as they will be after the Works are completed; and the question then to be asked is whether the completed Works amount to the enlargement of or the construction of an extension or annexe to the original building: see Marchday [1997] STC 272 at 279. I must however add a few words regarding how the question is to be approached and answered. First the question is to be asked as at the date of the supply. What was in the course of construction at the date of supply is in any ordinary case (save for example in case of a dramatic change in the plans) the building subsequently constructed. Secondly the answer must be given after an objective examination of the physical characters of the building or buildings at the two points in time, having regard (inter alia) to similarities and differences in appearance, the layout and how the building or buildings are equipped to function. The terms of planning permissions, the motives behind undertaking the Works and the intended or subsequent actual use are irrelevant, save possibly to illuminate the potentials for use inherent in the building or buildings.
FACTS
5. The key facts in this case may be stated as follows:
(1) The appellants run two separate units at Foxearth Lodge, an "Elderly Medical" (or "EM") unit and an "Elderly Severely Mentally Infirm" (or "ESMI") unit. The units care for quite different types of patient;
(2) the nursing home business has grown over the years as the appellants have been able to purchase more land on and around the site. In 1992, prior to the Works, there were five buildings on the site, namely the original Foxearth Lodge, the EM unit, which by then incorporated an extension ("New Barn"), Mobbs Cottage (the matron's residence, which could only be used as a dwelling), Woodlands (a separate house containing the ESMI unit), a freestanding garage and a freestanding barn;
(3) the appellants planned to carry out building work divided into two phases. Financial constraints have however limited the appellants to carrying out the first phase consisting of the Works, and these were carried out in 1997 and 1998;
(4) in 1998, after the completion of the Works, the original Foxearth Lodge (the EM unit) as extended remains as before; Mobbs Cottage and Woodlands are connected and form part of a much larger building which houses the ESMI unit, and this unit joins onto the extended Foxearth Lodge building;
(5) the new ESMI unit is designed to operate entirely independently from the rest of the home. Its facilities are entirely separate from those of the EM unit and it is a requirement of the local licensing authority that the patients in one unit must be separate from the patients in the other;
(6) there is internal access from the EM unit to the ESMI unit which had to be retained for fire safety reasons and the internal fire exit corridors are not needed for "ordinary operational purposes";
(7) The planning application for the Works sought approval for the second phase, namely the demolition and rebuilding of Woodlands and the construction of three adjoining wings, i.e. adjoining or as an extension to Woodlands, for the ESMI unit.
THE DECISION
6. The Tribunal in the Decision first set out the two stage test for determining whether the works were an enlargement.
7. The Tribunal then proceeded to determine the issue before it:
"21. Applying that test, therefore, we start by considering the building as it was. In order to do this we begin by looking at the ground plan of Foxearth in 1992. There are five buildings. One is the original Foxearth Lodge which by 1992 had been attached, by means of new building, to the "New Barn", which itself was the old barn rebuilt (for ease of reference I will call this building Foxearth); then there was the rebuilt Mobbs Cottage, Woodlands, a garage, and another small barn. Both Mobbs Cottage and Woodlands were in use for the purposes of the nursing home; what the small barn was used for was never made known. Presumably the garage was in use as such. The end result is to be found in the ground plan as in 1998, with phase 1 of the building work complete but not phase 2. It is very different. Foxearth is still there, largely unaltered; it has the new lift and its foyer and the new motor and plant rooms for the lift tacked on to the eastern end, and some modification was necessary to attach the new structure to the eastern end of Foxearth. Mobbs Cottage and Woodlands still exist, but the garage and the small barn have gone. There is now a much larger building, roughly F shaped, which incorporates Mobbs Cottage and Woodlands. The end of the vertical stroke of the F is joined to Foxearth. There were five existing buildings, of which two have been demolished and three have been incorporated in the whole of what is now Foxearth Lodge Nursing Home. It is contended by the Appellants that the CCE must point to one existing building, and establish that the new structure is an extension, enlargement or annexe of that building. The CCE maintain that the existing building is the nursing home as a whole, as it was before the new building. In our view, restricting the expression "existing building" to a single edifice, when there are more than one in the complex viewed, as it must be, as a whole, seems to us to be artificial and unrealistic. Clearly the nursing home is a single organisation, which used to consist of five buildings. It now consists of one or conceivable of two which on any view are joined together ... a number of buildings did exist before the work began, and we have to consider whether the work amounted, under the present legislation, to an extension to, an enlargement of, or an annexe to one or more of them.
22. It is clear to us that there has been some addition to the buildings which formed Foxearth before the new building was begun. That new building cannot, in our view, be described as being independent in every way from the existing buildings. We accept that the internal access is essentially a fire escape, though the evidence does suggest that it is sometimes used for ordinary ingress and egress, and we do not consider this point to be paramount. The function of the new structure is, in one way, different from that of the existing buildings, in that it houses a separate category of patient who are intentionally prevented from mixing with the others. It is, however, entirely clear that those patients are patients of the nursing home, of which the new ESMI unit is undoubtedly part. Looking at the 1998 ground plan, it is clear that the nursing home is now a single building complex, of which, again, the new ESMI unit is clearly a part. The fact that one part of this building is single storey and another two storey, and that there are differences in style and architecture, does not seem to us to be conclusive, though they are points to be taken into consideration. It also appears to us that the condition to the planning permission makes it plain that the new structure is to be used only as part of the nursing home. From the above points, it is clear to us that the new structure is an enlargement of the nursing home, and thus falls within Note 16 to Group 5.
23. It may be that the expression "extension" is also apt to describe the new structure. It is certainly added to an existing building, indeed, to more than one, and is to be used in conjunction with them, as an integral part of the nursing home. There is internal access, not only through the fire escape, but via Mobbs Cottage and Woodlands also. In our view, the attributes given to the word "annexe" in the context of Note (16), may also be appropriate. But looking at the plan once more, and considering the normal usage of the word "annexe", in our view this is the least appropriate term, since the new ESMI unit is clearly an integral part of the nursing home."
THE CHALLENGE
8. The decision of the Tribunal is challenged on two grounds and I shall deal with each of them in turn.
9. The first ground of challenge is that the Tribunal proceeded on the error of fact stated in paragraph 23 of the Decision that there was an internal access to the new structure from Mobbs Cottage. The CCE concede that this error was made, but challenge that it has any significance, and say that this is confirmed by the fact that it only finds expression in paragraph 23 of the Decision. I do not think that the significance of the error can be discounted in this way. Express reference to the internal access is only made in paragraph 23, but that does not mean that it was not a relevant fact in the reasoning in paragraphs 21 and 22. The existence of the internal access is of sufficient importance to merit the reference to and reliance on it when considering the issue whether the new structure was an extension: I think that this affords grounds for concern that it was a factor in the reasoning that the new structure was an enlargement. I have in mind in particular the reference in paragraph 21 to the larger building "incorporating Mobbs Cottage" and the reference in paragraph 22 to the existence of a single building complex. In short I am satisfied that the existence or non-existence of the internal access was a relevant fact on the issue whether there was an enlargement and that the decision since it was reached on the basis of this error is unsafe and flawed and ought to be set aside.
10. The second ground of challenge relates to the question whether the Tribunal though having correctly posed for itself the two stage test, did not confine itself to considering the objective physical character of the buildings before and after the works were carried out, but took into account extraneous and irrelevant considerations. It is I think clear that it did so. In particular it took into account the effect of the Works on the appellants' nursing home enterprise as a whole. This is apparent from the reference in paragraph 21 to the nursing home as a single organisation and the references to the nursing home in paragraph 22. It lent weight to the "function" of the new structure in the sense of how the appellants use parts of the nursing home for accommodating different patients. It lent weight in paragraph 22 to the condition in the planning permission. In my view, in reasoning in this way the tribunal has misdirected itself and the misdirection may have affected its ultimate decision. The decision must accordingly be set aside for this reason.
RELIEF
11. The CCE has submitted that, if I find that the Tribunal has erred as I have held it erred, I should myself decide the question of fact whether there was an enlargement, an extension or an annexe on the basis that the answer is obviously in the affirmative. I decline to do so. The CCE may well be right, but I do not think that the answer is obvious.
12. In my view the Decision must be quashed and I should remit to the Tribunal the issue whether the Works constituted an enlargement, extension or annexe within Note 16 of Group 5 of Schedule 8 of the Act in the light of the guidance provided in this judgment, namely (1) that there is no internal access to Mobbs Cottage; and (2) that regard must be only to the physical character of the buildings in course of construction at the date of the relevant supply and that the subjective intentions on the part of the appellants as to their future use, their subsequent use and the terms of the planning permission regulating their future use are irrelevant, save only in so far as they throw light upon the potential use and functioning of the buildings.
13. An issue has however arisen whether I should remit the Decision to the same or a differently constituted Tribunal. No suggestion is or sensibly could be made that the same constituted Tribunal will be prejudiced or unfair, but concern is expressed that, having decided the case once, it may start with a preconception adverse to the appellants. In exercising my discretion whether to remit to the same constituted Tribunal I must balance the likely saving of time and costs against any possible perception of injustice on the part of the appellants. I have reached the firm conclusion that the balance favours remission to the same constituted Tribunal. I am confident that the Tribunal will look again with an open mind at the issues raised with the benefit of the guidance provided in this judgment.
*****

Friday, 28th January 2000

MR JUSTICE LIGHTMAN: For the reasons set out in the judgment which I have handed down, I direct that the decision of the Tribunal be quashed and the matter be remitted for a direction to reconsider the matter in the light of the guidance provided in my judgment.

MR PEACOCK: My Lord, my learned friend has very kindly drawn up two very short----

MR JUSTICE LIGHTMAN: The first one is the substitution of Mr and Mrs Cantrell for the traders, I made that order yesterday.

MR PEACOCK: The second one in accordance with your Lordship's judgment. That only leaves the question of costs. I ask for my costs of this appeal.

MR BALDRY: My Lord, I do not object, in principle, to the award of costs. As to the amount of the costs, I have just been served a notice of the Appellant's costs for this hearing. There had been a previous notice in relation to the whole matter, the tribunal----

MR JUSTICE LIGHTMAN: Just in relation to this hearing?

MR BALDRY: If your Lordship was minded to make a summary order.

MR JUSTICE LIGHTMAN: I do not think I have a copy of that, I do not think I have received it.

MR BALDRY: If your Lordship is simply going to make an order for costs for this hearing, then that is an order I cannot resist.

MR JUSTICE LIGHTMAN: Are you content for an order in this sum?

MR BALDRY: Not the figure, no, my Lord.

MR JUSTICE LIGHTMAN: Shall I make a summary assessment to save costs going off to taxation, I would have thought that was sensible. Do you want a chance to look at this and then come back later and tell me what your comments are on it?

MR BALDRY: As I have only received this schedule and those instructing me have not, I am certainly not asking you to make a summary order for costs today.

MR JUSTICE LIGHTMAN: Are you both content I make an order for taxation?

MR PEACOCK: My Lord, that would be the sensible course.

MR JUSTICE LIGHTMAN: I will direct the Respondents to pay the Appellants' costs of the appeal, such costs to be assessed by the costs judge. Thank you both for your help, in particular, in finalising the judgment this morning.

MR BALDRY: My Lord, may I make one final application for permission to appeal your decision? I would ask to do so and make the appeal on the basis of the original case put to your Lordship, namely that the decision of the Tribunal was clearly right. On a broader matter----

MR JUSTICE LIGHTMAN: You say upon the facts, it ought to go on, because there ought to be a decision on the facts. You are not disputing my decision on the law, you are disputing whether, as a matter of fact, there was an enlargement.

MR BALDRY: Yes, my Lord.

MR JUSTICE LIGHTMAN: That is why you are asking for leave.

MR BALDRY: Indeed.

MR JUSTICE LIGHTMAN: I am afraid I refuse permission. I do not think it is fit and appropriate for appeal, but thank you.

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