[2009] UKFTT 296 (TC)

TC00240

Appeal Number: MAN/2008/0969 

FIRST TIER TRIBUNAL TAX

 VALUE ADDED TAX – ZERO RATING – Construction of buildings for a relevant residential purpose – whether an extension to an existing building – yes – whether additional dwellings created –  no – Appeal dismissed – note 16(b) item 2 group 5 schedule 8 VATA 1994 

DECISION NOTICE 
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

	REBBA CONSTRUCTION LIMITED	Appellant

	- and -

         THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)

Sitting in public at Manchester on 12 October 2009

Tony Briscoe, Tax Advisor of DHC Accounting for the Appellant 

Nigel Bird counsel instructed by the Solicitor’s office of HM Revenue & Customs, for HMRC

© CROWN COPYRIGHT 2009

DECISION
The Appeal
1.	The Appellant was appealing against part of an assessment in the sum of £42,276 dated 18 June 2007. The disputed sum was £35,781 and related to construction works carried out by the Appellant for Mr and Mrs Reeve in connection with their business, Sandford Residential Home (known as Sandford). The works involved the construction of  a new building, known as the Tudor Wing, adjacent to the existing residential home
2.	The dispute was whether the supplies in connection with the construction of Tudor Wing were zero-rated. Tudor Wing was designed as a building intended for use solely for a residential purpose. The principal issue was whether Tudor Wing was a new build or an extension. If it was an extension, the construction supplies were standard rated for VAT purposes. The alternative argument put forward by the Appellant was that Tudor Wing was an extension creating additional dwellings, which if correct, the construction works would be a zero-rated supply.
3.	The Tribunal heard evidence from Mr Briscoe and Mr Reeve for the Appellant. Mr Briscoe acted as the Appellant’s accountant. Mr Reeve was the managing director for the Appellant and a partner with his wife in the residential home business run from Sandford. Mr Conyngham, the assessing officer, gave evidence for HMRC. A bundle of documents was presented in evidence. The Appellant supplied scale drawings for the construction works. No photographs of the buildings were provided.
The Legislation
4.	The  legislation is found in item 2 group 5 of schedule 8 of the VAT Act 1994, which so far as relevant to this Appeal  provides  for the zero rating of
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 residential purpose or a relevant charitable purpose; or …. 
of any services other than the services of an architect, surveyor or any person acting as consultant or in a supervisory capacity.
5.	Note 2 to group 5 provides:
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 another 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. 
6.	Note 16 to group 5 provides 
For the purpose of this Group, the construction of a building does not include –
b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling.
Facts Found
7.	In 1995 Mr and Mrs Reeve purchased Sandford as a residential home for elderly persons. At that time Sandford comprised a substantial two storey detached house with an attached garage located in its own grounds. The house accommodated 15 elderly residents. The house was constructed of brick with clay tiles and built in the 1950’s. The exterior had a rendered finish.
8.	In 1997 Mr and Mrs Reeve converted and extended the garage to form a substantial single storey L shaped addition to the detached house, which increased the number of residential units by seven. The single storey extension was of brick construction with a pebble dash finish and Marley roof tiles.
9.	In 2001 Mr and Mrs Reeve purchased a three bedroom bungalow with a loft conversion at 2 Tudor Close which occupied the adjoining plot of land to Sandford.
10.	In 2005 Mr and Mrs Reeve submitted an application for planning consent to demolish the bungalow and erect a two storey building made of brick with a roof of clay tiles on the cleared site. The construction was completed in summer 2006. The building was known as the Tudor Wing and described in the plans as an extension to Sandford. Planning consent was granted subject to 12 conditions which were described by Mr Reeve as standard.  The Appellant did not provide a copy of the planning consent. Mr Reeve assured the Tribunal that the planning consent did not include a condition preventing the separate disposal of Tudor Wing from Sandford.
11.	When completed, Tudor Wing was attached at ground floor level to the single storey addition of Sandford.  Tudor Wing occupied a footprint of 290 square metres. The footprints of the single storey addition and the original house were 290 and 320 square metres respectively, making a total footprint of 510 square metres for the home that existed immediately prior to the construction of the Tudor Wing. 
12.	The heights as measured from eaves to ground level for Tudor Wing, single storey addition and the original house were 5.5, 2.5, and 6 metres respectively. Tudor House supported its own roof structure.
13.	The scale drawings indicated that Tudor Wing had at the front the same building line as the single storey addition and the original Sandford house. 
14.	Tudor Wing provided 17 ensuite rooms for occupation by elderly residents. The rooms were arranged over two floors with seven units on the ground floor and ten units on the first floor. The rooms were accessed within Tudor Wing from a central corridor on each floor.  A lift within Tudor Wing enabled easy access to the first floor. There were no interconnecting doors between the rooms. The rooms did not provide cooking facilities and in that respect were not self contained. 
15.	The living accommodation in Tudor Wing was of a more superior quality than that on offer in Sandford. Mr and Mrs Reeve charged residents £495 per week for accommodation in Tudor Wing as compared to £395 per week for a room in Sandford. After opening, the rooms in Tudor Wing  were quickly taken up by new residents 
16.	A conservatory/living room and a separate dining room were located on the ground floor of Tudor Wing for use of the residents living there. Tudor Wing had its own gas and water supply. The electricity for Sandford and Tudor Wing was sourced from the same supply.
17.	The meals for Tudor Wing and Sandford residents were provided from a kitchen located in the L shaped addition to Sandford, which also contained the laundry for the entire complex. The medical supplies for the residents were kept in a room located in the Tudor Wing. Mr Reeve stated that a separate kitchen could be easily installed in Tudor Wing. Mr Reeve, however, added that it did not make good business sense to have two kitchens for the residential home.
18.	 The official access to Sandford and Tudor Wing was via the main door at the front of the original house. The reception for the residential home was situated close to the main door.  The visitors’ car park was stretched out at the front of the Sandford and Tudor Wing building complex. There was a parking area at the rear of Tudor Wing which was described on the scale drawings as parking for staff and delivery vehicles. Visitors to Tudor Wing were expected to sign in at the reception. The formal entrance to Tudor Wing was through a connecting door with the single storey addition, which was linked by a corridor to the main door. . 
19.	Mr Reeve stated that persons entered Tudor Wing through an external door in the dining room which opened out at the back of the property and led to the rear car park. He also said that visitors to Tudor Wing were not physically required to sign in at the reception desk in Sandford. They instead had to inform members of staff of their presence. The access arrangements described by Mr Reeve, however, were not practical for the operations conducted in Tudor Wing which were reliant on the facilities in Sandford. Further when Mr Conyngham visited the premises he observed a free flow of persons between Sandford and Tudor Wing via the connecting door. The Tribunal was satisfied that the arrangements described by Mr Reeve were infrequent and informal, which had developed over time since the opening of Tudor Wing. They were not the access arrangements envisaged at the time of the construction of Tudor Wing. 
20.	The construction works for Tudor Wing included painting the exterior and  windows for the whole building complex in the same colour. Mr Reeve stated that the purpose of the painting was to integrate Tudor Wing with Sandford.
21.	One postal delivery address served both Sandford and Tudor Wing, notwithstanding that the plots on which they were built stood on different streets with separate postcodes.
22.	On his visit to the premises, Mr Conyngham found no distinguishing feature marking out Tudor Wing from Sandford. He took the view that a lay person would see the new construction as a continuation of the existing building.
23.	The registration for Sandford as a residential home included the accommodation provided in Tudor Wing. Sandford and Tudor Wing catered for the same category of residents (Older Adults). Mr Reeve indicated that Tudor Wing was eminently suitable for housing a different category of resident, the elderly infirm. This change would require minimum alterations to Tudor Wing, namely the installation of a push button lock on the connecting door with Sandford.  The same managers and the same members of  staff serviced Tudor Wing and Sandford, which according to Mr Reeve was a sensible business arrangements.
24.	In December 2007 Mr and Mrs Reeve sold Sandford and Tudor Wing as a single business of a residential home.  
Dispute One: Was Tudor Wing an Extension?
25.	The Appellant contended that the substance and character of Tudor Wing were not that of an extension which by definition merely provided additional space and living areas for current residents. In the Appellant’s view Tudor Wing and Sandford should be perceived as two semi-detached properties. They were distinctive properties in terms of size and quality. Incoming residents had the choice of moving into either Tudor Wing or Sandford. The existence of a solitary doorway between Tudor Wing and Sandford was not sufficient to deny zero rating of the construction supplies. The Appellant considered the facts of this case were virtually the same as the facts in Allan Water Developments Ltd (VAT Decision Number 19131) in which the Tribunal decided that  a new construction to a residential home was zero rated as it was a separate building. In short the Appellant contended that it had constructed brand new homes for elderly people, which was a zero-rated supply. 
26.	The provisions of note 16(b) to group 5 dealing with the exceptions to zero-rating of dwellings were considered by the High Court on two separate occasions in the case of Cantrell and another (trading as Foxearth Lodge Nursing Home) v Customs and Excise Commissioners (1)& (2)  [2000] STC 100 and [2003] STC 486
27.	In the first High Court hearing Lightman J decided at [2000] STC 102 that the terms of note (16)(b) involved a two stage test:
“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 Customs and Excise Comrs v Marchday Holdings Ltd [1997] STC 272 at 279). I must however add a few words regarding how the question is to be approached and answered, for this has been the subject of some lack of clarity (if not confusion) in a number of the authorities cited to me and it is the failure to approach and answer the question in this case in the correct way which flaws the decision. First the question is to be asked as at the date of the supply. It is necessary to examine the pre-existing building or buildings and the building or buildings in course of construction when the supply is made. What is 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”.
28.	Sir Andrew Morritt V – C  in the second hearing at [2003] STC 491  adopted the Tribunal’s summary of the law as articulated by Lightman J: 
“Those matters may be summarised as follows: (a) the words used in Note (16) are not terms of art; (b) in applying them it is necessary to adopt a two-stage approach, first identify the existing buildings as they were before the construction work began and, second, determine whether the new construction satisfies all or any of the terms in Note (16); (c) cases decided on the provisions in force before 1 March 1995 are of doubtful help; (d) whether or not the construction works fall within Note (16) is a question of fact and degree as held in Customs and Excise Comrs v London Diocesan Fund [1993] STC 369 at 380 and Customs and Excise Comrs v Marchday Holdings Ltd [1997] STC 272; and (e) terms used in the grant of planning permission are not determinative of the nature of the works permitted by the VAT legislation”.
29.	The facts of this Appeal showed that the existing building at the time before the construction work began was a substantial  property of  brick and tile construction which consisted of a two storey building enlarged significantly by an L shaped single storey addition. The property was known as Sandford Residential Home and laid out as a home for elderly residents with individual rooms and shared facilities for eating and socialising.  The property incorporated a central kitchen and laundry to enable it to operate as a residential home. The bungalow which occupied the site for Tudor Wing had been used as a domestic dwelling and remained empty following its purchase by Mr and Mrs Reece. The bungalow was demolished to make way for Tudor Wing.
30.	 The Tribunal was satisfied that there was no substantial change in the finished building known as Tudor Wing as from the plans submitted for planning consent. The Tribunal holds from the facts found that as at the date of supply of its construction, Tudor Wing was an integral part of Sandford in both appearance and layout. 
31.	Tudor Wing was affixed to the L shaped addition of Sandford, and accessed via a connecting door between the existing and new constructions. The principal entrance to Tudor Wing was through the front door of Sandford which had a single reception for visitors to the home. The connecting door to Tudor Wing was linked to the main door by a corridor.
32.	Tudor Wing was essentially constructed of the same building materials as Sandford and of equivalent height to the original building. The footprint for Tudor Wing was approximately half the footprint for Sandford. The similarity of the two constructions was enhanced by the painting of their exteriors and windows in the same colour. 
33.	Although Tudor Wing provided better quality living accommodation, the lay out for Tudor Wing shared the same function and design as that in Sandford which was to provide individual rooms and communal areas for elderly residents. The layout for Tudor Wing, however, was incapable on its own of supplying the necessary services to support elderly residents. Tudor Wing had no kitchen and no laundry facilities, and relied on the facilities in Sandford to provide essential services to its residents.
34.	 The facts found undermined the Appellant’s assertion that the Tudor Wing was a building which was separate and distinct from Sandford. The Appellant’s comparison of Tudor Wing with the single storey L shaped extension was misplaced. The building existing at the time immediately before the construction of Tudor Wing was Sandford which comprised the original house and the L shaped addition. The comparison required under the two stage test was with Sandford as a whole not with just part of it. The Tribunal considered the Appellant’s evidence regarding the potential alteration of Tudor Wing fell foul of the rule that the Tribunal had to examine the property as it existed at the date of supply of the construction services. The Tribunal placed no weight on description of Tudor Wing as an extension in the planning application.  
35.	The Tribunal decision in Allan Water Developments Ltd was decided on its own facts, and established no legal principle which this Tribunal was bound to follow. The Tribunal was mindful of the guidance of Lord Wolfe MR in the Court of Appeal decision in C & E Commissioners v Ferrero UK Limited [1997] STC 881 which cautioned Tribunals against drawing principles of general application from other Tribunal cases which were not binding precedents. The role of the Tribunal was to apply the law to the facts of the particular case. 
36.	The first issue in this Appeal was whether Tudor Wing was an extension to Sandford. The Tribunal applied the two stage test to the facts found. The Tribunal found that Tudor Wing and Sandford were similar in appearance and shared a layout designed to function as a residential home for the elderly. Tudor Wing was constructed in such a manner that it was dependent upon the facilities in Sandford and inextricably linked with it for access. Tudor Wing enabled Sandford to increase its residential capacity. Tudor Wing was, as Mr Conyngham described, a continuation of Sandford with no distinguishing features. The Tribunal is, therefore, satisfied that Tudor Wing was an extension to Sandford within the meaning of note (16)(b), group 5, schedule 8 of the VAT Act 1994. 
Dispute Two: Did Tudor Wing create additional dwellings?
37.	The Appellant contended that even if Tudor Wing was an extension, 17 new dwellings for elderly people were established. Thus it was an extension which was zero rated and not caught by the restriction of note 16(b) because it created additional dwellings.
38.	The Appellant’s contention was flawed in two respects. First, the zero-rating provisions applied to the construction of buildings as dwellings or intended for use solely for a residential purpose. Tudor Wing was either a residential home or a dwelling. It could not be both. The Appellant’s contention flew in the face of its evidence that Tudor Wing was a residential home and contradicted its principal assertion. Second, the individual rooms did not meet the definition of a dwelling in note 2 group 5 schedule 8 of the VAT Act 1994.  The rooms were not self-contained living accommodation because they had no cooking facilities. The accommodation in Tudor Wing was dependent upon the kitchen facilities located in Sandford. Thus Tudor Wing was not an extension which created additional dwellings.
Other Arguments advanced by the Appellant
39.	 The Appellant submitted that whatever the technical arguments Tudor Wing was home for 17 elderly people and within the spirit of the legislation which advocated the zero-rating  of new homes. His representative relied on the wording of paragraph 9 of Revenue & Customs Brief 54/08 which identified the policy objective that new dwellings should be zero rated. The Appellant’s submission displayed a misunderstanding of the zero-rating provisions.  They constitute an exemption from the general principle that VAT is levied on supplies, in which case the zero rating provisions should be construed strictly but not restrictively. In short it was not open to the Tribunal to ignore the wording of the statutory provisions in favour of a broad principle.
40.	Finally the Appellant suggested in correspondence that if HMRC would not accept zero rating, the construction supplies might qualify for the reduced VAT rate of 5 per cent. Mr Conyngham rejected the Appellant’s claim for a reduced rate in his letter dated 23 May 2008 because Tudor Wing was a residential home not a dwelling. The Appellant did not advance this argument before the Tribunal. In those circumstances the Tribunal did not consider whether the construction of Tudor Wing qualified for the 5 per cent rate.  
Decision
41.	The Tribunal holds that Tudor Wing was constructed as an extension to Sandford Residential Home, and did not create additional dwellings. In those circumstances the Tribunal dismisses the Appeal and upholds the disputed assessment issued on 18 April 2007.    

                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE:4 November 2009

MAN/

Notes

1. A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.