[2011] UKFTT 48 (TC)

TC00925

Appeal number: MAN2008/0654

VAT- construction of kitchen and laundry facilities at hospital – whether an additional unit and therefore standard rated or a continuation of development of the hospital and zero rated – building part of the original development and therefore zero rated – appeal allowed.

FIRST-TIER TRIBUNAL

TAX 

	HOYLAKE COTTAGE HOSPITAL CHARITABLE TRUST	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	DAVID S PORTER (TRIBUNAL JUDGE)						ANN CHRISTIAN (MEMBER)

Sitting in public at Alexandra House, Manchester on 20 December 2010

Nigel Gibbon, VAT consultant, for the Appellant

Vinesh Mandalia, of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	The Appellant, Hoylake Cottage Hospital Charitable Trust (the Hospital) appeals against the decision contained in a letter dated 6 February 2008 from the Respondents (HMRC) that the construction of a new kitchen and laundry block for the Hospital complex does not qualify for zero rating pursuant to group 5, Schedule 8, Value Added Tax Act 1994 (the Act). The Hospital contends that the construction of the kitchen and laundry block, albeit after the construction of the main body of the hospital, should be considered to be in the course of the construction of the hospital and therefore zero rated. HMRC contend that the construction of the new kitchen and laundry does not qualify for zero rating because it is an addition to a completed construction (that is the nursing home), and must therefore be standard rated.
2.	Nigel Gibbon, as an agent for VAT Advisors Limited, appeared for the hospital and called Stephen Heywood, the Hospital’s Finance Director, who gave evidence under oath. Vinesh Mandalia, of counsel, appeared for HMRC. The tribunal were provided with two agreed bundles.
3.	We were referred to the following cases:
•	Commissioners for Customs & Excise v Marchday Holdings Limited 1996 WL 1091023 (CA)
•	Trustees of Sir Robert Geffrey’s School Charity v Customs& Excise Commissioners [2002] S.T.I. 1672
•	Brahma Kumaris World Spiritual University London 12946
•	Cantrell (t/a Foxearth Lodge Nursing Home) v Customs & Excise Commissioners [2003] EWCH 404 (Ch)
•	Douglas Virtue & Sonia Virtue t/a Lammermuir Games Services v The Commissioners for Her Majesty’s Revenue & Customs 20259
•	Dart Major Works Limited v The Commissioners of Customs & Excise 18781
•	Customs & Excise Commissioners v St Mary’s RC High School [1996] STC 1091.
Preliminary issue
4.	Judge Porter advised the parties that he had, as a solicitor in private practice, instructed Mr Andrew Needham, Mr Steven Allen’s partner in VAT Solutions (UK) Limited on VAT matters. Mr Mandalia and Mr Allen both confirmed that they had no objection to Judge Porter presiding. 

The facts
5.  The facts in the case are not disputed and are set out in the statement of case. The Hospital operates as a nursing home from premises at Birkenhead Road, Hoylake, Merseyside.CH47 5AG and they are not registered for VAT. By a letter dated 3 August 2004 the Hospital sought confirmation that the construction of a new self contained 60 bed nursing home, that formed the first phase of the planned redevelopment of the hospital’s premises, would qualify for zero rating in accordance with Group 5 of Schedule 8 of the Act. In support of the request the Hospital submitted plans of the redevelopment and the Notice of Grant of Planning Permission issued by the Metropolitan Borough of Wirral dated 3 December 2003. Those plans did not make provision for a laundry and kitchen block. The Hospital explained that “..future plans will include the development of a new day unit…. together with a new laundry and kitchen block to serve the site..” Furthermore, the Hospital asserted that  “.. temporally, the new nursing home is to be served by the kitchen and laundry facilities  currently on site, which is all that is to remain in the existing buildings. This being said, should the use of these facilities prove impractical either immediately or during the demolition stage, it may be that external contractors may be used until such time as funding for a new kitchen/laundry block is available”. By a letter dated 7 October 2004, HMRC confirmed that zero rating would apply to the construction of a new self contained 60 bed nursing home. HMRC also accepted that until such time as additional funding was available to allow the demolition of the existing Kitchen and laundry the new nursing home could be served temporarily by the kitchen and Laundry facilities currently on site or by outside contractors.
5.	On 2 September 2005 the Hospital submitted a new application for planning consent under reference 10057072 to replace the pervious consent. This application included a new set of plans and included the construction of the kitchen and laundry block. The parties agreed that it was this planning consent that formed the basis for the development to take place. The consent required the work on the development to commence within 3 years of the date of the consent. The work commenced within that period. The planning consent includes the construction of the kitchen and laundry block. Once the development has started there is no time limit required by the planners for it to be completed. Mr Heywood confirmed, under oath, that the current arrangements for the kitchen were far from satisfactory. The original kitchen and laundry block are situated in the middle of the site of the old buildings. The food has either to be wheeled all the way round the existing units or pushed outside across the site, what ever the weather. He also confirmed that although it had been suggested that outside caterers might be used they never had been utilised. The reports they had received from other nursing homes, which had used outside caterers, had indicated that such caterers were not satisfactory. The Commission for Social Care Inspection also confirmed that the original plans met the requirements of the National Minimum Standard, but they required that the kitchen and laundry facilities be completed by July 2010. Mr Heywood also confirmed that the Hospital had retained 12 bedrooms in the original buildings, prior to the completion of phase one, because they had needed the revenue. 
6.	On 25 November 2007, VAT (Solutions) Limited, as the Hospital’s new representatives, wrote to HMRC requesting confirmation that the proposed construction of a kitchen and laundry block was also covered by the earlier ruling and would qualify for zero rating. The application was refused by the letter of 6 February 2008. The letter of 27 November 2007 also sought confirmation of zero rating for the proposed new day care unit not the subject of this appeal. Confirmation has, however, been given that the Day Centre would qualify for zero rating. The new 60 bed nursing home was handed over by the contractors on 27 May 2008 and occupation commenced on 7 July 2008 with 50 residents. Warburton Associates, the architects to the development, issued a statement of partial completion on 27 May 2008 when the first phase was taken over by the Hospital. That statement provided for the landscaping, fencing and outstanding snagging to be completed by 27 May 2009 when the developers’ liability would end. We were told that the landscaping was still outstanding at the time of the appeal. 
The Hospital has provided plans of the development and they show that the kitchen and laundry block is sandwiched between the bedrooms and the day centre all three units forming a partial horseshoe to the site. When completed the hospital will be a complete unit with facilities not dissimilar to those of the original building. At the time of the application to the Tribunal the Hospital had not raised sufficient funds to be able to start the development of the kitchen and laundry block. Mr Heywood told us that the Hospital has recently received a sufficiently large donation for the work to commence. He produced a letter and flow chart from Warburton Associates dated 18 October 2010 which reveals that the contract would start on 1 November 2010 and it was expected to be completed by 19 August 2011. Mr Heywood confirmed that Scottish Power (cable division) were on site installing the electrical supply. 

The Law.
7.	The legislation governing the imposition of input and output tax is governed by the Act. These provisions are in conformity with the applicable European legislation.
Section 30(1) of the Act provides that where a taxable person supplies goods or services and the supply is zero rated, then, whether or not VAT would be charged on the supply apart from the section:-
a.	No VAT shall be charged on the supply; but
b.	It shall in all other respects be treated as a taxable supply.
and accordingly the rate at which VAT is treated as charged on the supply shall be nil
Section 30 (2) provides that a supply of goods or services is zero rated by virtue of this subsection	 if the goods or services are of a description for the time being specified in Schedule 8 or the supply is of a description for the time being so specified.
In turn, Schedule 8 Group 5 item 2(a) refers to the supply in the course of the construction of 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, 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.
The Notes to Schedule 8 Group 5 provide as follows:-
 (12) Where all or part of a building is intended for use solely for a relevant residential purpose or a relevant charitable purpose-
(a) a supply relating to the building (or any part of it) shall not be taken for the purposes of items 2 and 4 as relating to a building intended for such use unless it is made to a person who intends to use the building (or part) for such purpose; and
(b) a grant or other supply relating to the building (or part of it) shall not be taken as relating to a building intended for such use unless before it is made the person to whom it is made has given to the person making it a certificate in such form as may be specified in a notice published by the Commission stating that the grant or other supply (or a specified part of it) so relates
 (16) 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.
      (17)  Note 16 (c) above shall not apply [where the whole or part of an annexe is intended solely for a relevant charitable purpose and]-
        	(a) [the annexe] is capable of functioning independently from the existing building, and
(b) the only access or 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.
Submissions
8.	Mr Mandalia submitted that the initial plans that set out the planned development of the site simply proposed the construction of a new self-contained 60 bed nursing home. Although the Hospital’s “future plans” were at the time no more than an aspiration to develop the site further in the event that the Hospital secured the necessary funding. The Hospital indicated that if the temporary use of the kitchen and laundry proved unsatisfactory it would use external contractors to carry out the work. As a result the kitchen and laundry block is not an essential or integral part of the redevelopment and the lack of such facilities would not render the new self-contained 60 bed nursing home inoperable. Phase 1 of the redevelopment was completed and handed over to the Hospital on 27 May 2008. by 7 July 2008 there were 50 residents in occupation and the premises must for all intents and purposes therefore have been  safe and habitable. The complete building is functioning as a nursing home without the kitchen and laundry block and the building of the kitchen and laundry block is not a pre-requisite or pre-condition to the operation of the nursing home. In Commissioners for Customs & Excise v Marchday Holdings Limited 1996 WL 1091023 (CA) Stuart-Smith LJ stated “the touchstone for the application of Note (1A) [now Note 16] is whether a reasonable person, appraised of all the facts, would conclude that the building which existed before the work started still retains its identity – in the sense, still exists – at their completion though it may have been transformed by conversion etc. Whether that is the correct conclusion in any particular case will be a matter of fact and degree. The key is the continuity or otherwise of the identity of the building, which was there before the work started”. In this case the building continues to be a 60 bed nursing home with or indeed without the kitchen and laundry block. In Trustees of Sir Robert Geffrey’s School Charity v Customs& Excise Commissioners [2002] S.T.I. 1672 the VAT and Duties Tribunal held that where part of the new school building was constructed with one storey due to a lack of funds, supplies relating to the building of the seconds storey approximately 8 years later did not have a sufficient temporal link to the original works to qualify as a supply in the course of the construction of the new school. At the time Mr Mandalia prepared his submission, in June 2009, work on the kitchen and laundry had not commenced. By the time of the hearing the Hospital had secured sufficient funds to commence the building works. Mr Mandalia submitted that there was no temporal link between the completion of the 60 bed nursing home and the proposed construction of the kitchen and laundry block. Having insufficient funds to undertake the construction was not a sufficient reason for the delay. The construction of the kitchen and laundry amounts to an enlargement of, or an extension to, the original building rather than the continuation of the construction of the building and the construction of the new kitchen and laundry does not therefore qualify for zero rating and the appeal should be dismissed.
9.	Mr Gibbon submitted that HMRC rely on the fact that the 60 bed nursing home, which was occupied in July 2008 was able to function by using temporary kitchen and laundry facilities as a reason for contending that the kitchen and laundry block cannot be considered as being constructed in the course of the construction of the main body of the hospital. Mr Gibbon contended that the fact that the hospital can function using temporary facilities is not the test. The test in Customs & Excise Commissioners v St Mary’s RC High School [1996] STC 1091 is, whether, for the purposes of the functional condition, the new block will help the main building to function in accordance with its purpose. This is clearly the case in this appeal. Both the Commission for Social Care Inspection and the Local Authority require the kitchen and laundry block to be constructed. The temporary facilities have always been intended to be purely temporary. In Douglas Virtue & Sonia Virtue t/a Lammermuir Games Services v The Commissioners for Her Majesty’s Revenue & Customs 20259 the Tribunal concluded civil engineering works carried out separately from the construction of the new dwelling houses were to be considered to be supplied in the course of construction of those houses because the works formed part of one overall planned project. Similarly, in this appeal, the kitchen and laundry block has, since 2005, been intended to be part of the hospital construction project and features as part of the project in the 2005 planning permission. With regard to the temporal connection, the Tribunal in Dart Major Works Limited v The Commissioners of Customs & Excise 18781 held that a gap of two years between the main body of construction and the ancillary works satisfied that connection. In this appeal the demolition works commenced in October 2010, construction commences in January 2011 and the works will be finished in August 2011, which is broadly consistent with the decisions in Dart Major Works Limited and Lammermuir. Accordingly the Hospital satisfies both the functional test and the temporal test and the proposed construction of the kitchen and the laundry block should be zero rated.
The Decision
10.	We have considered the facts and the law and have decided that the construction of the kitchen and laundry block are a continuation of the original development and should be zero rated. When the first phase was being constructed HMRC conceded that the Hospital could continue to use the kitchen and laundry facilities until such time as the new kitchen and laundry facilities were built. Whilst it is suggested that the 60 bed nursing home could operate without the kitchen and laundry in the old building, by importing caterers and outsourcing the laundry function, the fact of the matter is that they did not do so. The Hospital has chosen to continue to use the kitchen even though there was the inconvenience of transporting food in trolleys across the site.  We are satisfied that the kitchen and laundry are connected to the use of the building. When constructed they will form an integral part of the Hospital’s operation and will provide compliance for the requirements of the Commission for Social Care Inspection. Once the Day Centre is constructed the Hospital will represent a complete building to fulfil all the needs of a nursing home. 
11.	In Customs & Excise Commissioners v St Mary’s RC High School [1996] STC 1091 Jowitt J indicated that there has to be a temporal connection between the construction of the building and the provision of other services, if those services can be said to have been provided in the course of the construction of the building. Usually those services will be contemporaneous or nearly so, but this is not always the case.  When it is not the case it will be necessary to consider both the reasons and the length of the delay. It is accepted that the 60 bed nursing home was effectively completed on 7 July 2008. It is also accepted that the development has been constructed under the terms of the second planning permission, which permission allows the development of the kitchen and laundry block. The developers remained liable for phase 1 until May 2009. The Commission for Social Care Inspection considered that it was reasonable to allow the Hospital until July 2010 to provide an appropriate kitchen and laundry. In fact by the time of the appeal there has been some slippage in that time scale, but it would appear that the Commission for Social Care Inspection have not, as yet, raised any query because the time they insisted on has lapsed. As the development is now under way we imagine they will not challenge the time limit. The flow chart indicates that the activity with regard to the kitchen and laundry block commenced in October 2010 as fortunately the Hospital has obtained sufficient funds to commence the development. Note 12 of group 5 of Schedule 8 of the Act requires the Hospital to notify the developer before the work starts to identify that the development is for a relevant charitable purpose. In our view the temporal period runs from 27 May 2009, when the developer’s liability ceased for phase 1(even though the landscaping has still not been finished) until 18 October 2010 when the second phase started, a period of 18 months. All of the cases that we have been referred to indicate that the decisions depend on the facts of each case. The hospital could not function without the kitchen and laundry. That development was the second phase of the original construction work and is an integral part of the Hospital’s activities. It is accepted that the fund raising in itself would not be a grounds for allowing the time to run indefinitely.  The activity is contemporaneous because a period of 18 months between the developments, coupled with the fact that the Commission for Social Care Inspection thought it was reasonable to allow the hospital to operate on a temporary bases until July 2010 is not an unreasonable delay in all the circumstances. We therefore find that group 5 of Schedule 8 of the Act applies and the construction of the kitchen and laundry block is to be zero rated.
12.	We reserve our decision with regard to costs. We consider that costs must be decided under the earlier rules as the Appellant entered into this appeal on the basis of those rules and not the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. We direct that the Appellant submits its application for costs to the Tribunal and to the Respondents within 28 days from the release of the decision. The Respondent shall reply within 56 days with the Appellant’s right to reply within 70 days. The tribunal will decide the costs on the basis of written representations.
13.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

TRIBUNAL JUDGE
RELEASE DATE: 13 January 2011