[2013] UKFTT 145 (TC)
TC02543
Appeal number:
TC/2012/05630
VAT – appeal against HMRC’s
decision that the appellant’s product Stormdry was not an energy saving
material for the purpose of Note 1, Group 2 Schedule 7A VAT Act 1994 – appeal
allowed- product found to be insulation for walls
FIRST-TIER TRIBUNAL
TAX CHAMBER
|
|
SAFEGUARD EUROPE
LIMITED
|
Appellant
|
|
|
|
|
|
|
- and -
|
|
|
|
|
|
|
|
THE
COMMISSIONERS FOR HER MAJESTY’S
|
Respondents
|
|
|
REVENUE &
CUSTOMS
|
|
|
TRIBUNAL:
|
JUDGE SANDY RADFORD
|
|
|
JO NEILL
|
Sitting in public at Bedford Square , London WC1 on 8 November 2012.
Mr C Ridgewell, finance
director of the Appellant
Mr P Rowe, officer of HMRC,
for the Respondents
© CROWN COPYRIGHT
2013
DECISION
1.
This is an appeal against HMRC’s decision that the appellant’s product
Stormdry is not an energy saving material for the purposes of Note 1, Group 2
Schedule 7A VAT Act 1994 and therefore that the installation or supply and
installation of Stormdry does not qualify for VAT to be charged at the reduced
rate.
2.
The legislation only deals with the installation or the supply and
installation by the same person of energy saving materials. As the manufacturer
and supplier of Stormdry rather than the installer the decision that is being
appealed does not alter the rate at which the appellant has to charge VAT which
is the standard rate.
Background and facts
3.
Mr Ridgwell explained that for the last six or seven years the appellant
had decided to manufacture and sell new products withdrawing from its
established market and customers in the damp proofing industry.
4.
The appellant decided to go down the green route and to push its
environmental credentials and make buildings drier as well as greener. At the
same time by this change of course the appellant hoped to tap into the
Government’s incentives.
5.
The appellant employed Dr Eric Hirsch to spearhead the development of
new products.
6.
Dr Hirsch explained to the Tribunal that the original concept of
Stormdry was to insulate buildings. He stated that the name Stormdry was a bit
of a misnomer but unfortunately the appellant was unable to find a name
incorporating “Insu” or “Therma” and names like “Insubrick” were already owned.
7.
Having spent over £80,000 developing the product the appellant made the
decision to launch it initially as water repellent as this data was easy to obtain.
8.
Once the heat saving/carbon reducing data was ready it followed the
launch of the product and established its insulation properties.
9.
Dr Hirsch stated that the appellant had always made and sold waterproofers
under the trade name Raincheck so waterproofing was not the objective of the
new product.
10.
The objective of the new product was to produce an insulating material
which was easy to apply and which did not alter the outside façade in any way.
11.
Mr Ridgwell stated that Stormdry is a gel which penetrates half an inch
into the brickwork creating a thick waterproof zone. It is breathable and so
not only can no dampness get in but also any dampness inside the house can get
out.
12.
Mr Ridgwell said that the energy saving is from making the bricks drier
and converting a half inch brick zone into an insulation barrier. By making the
bricks drier there is a reduction in the amount of heat lost. All their tests
had shown that there would be a significant energy saving.
13.
The appellant produced a number of laboratory reports and studies which
showed that an application of Stormdry improved thermal insulation and water
repellence.
14.
He stated that Stormdry differed from waterproof paints such as Weathershield
because it actually penetrated half an inch whereas Weathershield sat on the
surface. Weathershield was a paint which tended to develop micro cracks behind
which the water could penetrate. This did not happen with Stormdry. Whilst
moisture became trapped behind Weathershield, this did not happen with Stormdry
because of its breathability.
Legislation
15.
Section 29A of the VAT Act 1994 (“VATA”) states:
Reduced rate
(1) VAT
charged on—
(a) any supply that is of a description for the time being specified in
Schedule 7A, or
(b) any equivalent acquisition or importation,
shall be charged at the rate of 5 per cent.
(2) The reference in subsection (1) above to an equivalent acquisition
or importation, in relation to any supply that is of a description for the time
being specified in Schedule 7A, is a reference (as the case may be) to—
(a) any acquisition from another member State of goods the supply of which would be such a supply; or
(b) any importation from a place outside the member States of any such
goods.
(3) The Treasury may by order vary Schedule 7A by adding to or deleting
from it any description of supply or by varying any description of supply for
the time being specified in it.
(4) The power to vary Schedule 7A conferred by subsection (3) above may
be exercised so as to describe a supply of goods or services by reference to
matters unrelated to the characteristics of the goods or services themselves.
In the case of a supply of goods,
those matters include, in particular, the use that has been made of the goods.
16.
Schedule 7A of VATA Group 2 Installation of energy saving materials (“Group
2”) states:
Supplies of services of installing energy-saving
materials in—
(a) residential accommodation, or
(b) a building intended for use solely for a relevant
charitable purpose.
2 Supplies of energy-saving materials by a person who
installs those materials in—
(a) residential accommodation, or
(b) a building intended for use solely for a relevant
charitable purpose.
NOTES:
Meaning of
“energy-saving materials”
1 For the purposes of this Group “energy-saving
materials” means any of the following—
(a) insulation for walls, floors, ceilings, roofs or
lofts or for water tanks, pipes or other plumbing fittings;
(b) draught stripping for windows and doors;
(c) central heating system controls (including
thermostatic radiator valves);
(d) hot water system controls;
(e) solar panels;
(f) wind turbines;
(g) water turbines.
Meaning of
“residential accommodation”
2(1)
For the purposes of this Group “residential accomodation” means—
(a) a
building, or part of a building, that consists of a dwelling or a number of
dwellings;
(b) a
building, or part of a building, used for a relevant residential purpose;
(c) a
caravan used as a place of permanent habitation; or
(d) a
houseboat.
(2) For
the purposes of this Group “use for residential purpose” has the same meaning
as it has for the purposes of Group 1 (see paragraph 7(1) of the Notes to that
Group).
(3) In
sub-paragraph (1)(d) “houseboat” has the meaning given by paragraph 7(3) of the
Notes to Group 1.
17.
The legislation makes no further definition of what insulation for walls
is but the dictionary definition of insulation is “material used to insulate
something”. The word insulation derives from insulate which is defined as “to
prevent the transmission of electricity, heat or sound to or from (a body or
device) by surrounding with a nonconducting material.
HMRC’s submissions
18.
Mr Rowe submitted that Stormdry is a waterproofing product for use on
walls to prevent rain penetration. He submitted that any energy saving achieved
by the use of Stormdry was secondary and that improvement to the thermal
resistance of masonry by its use was similar to that which could be achieved by
the application of many other products such as the proprietary paint
Weathershield which would also reduce rain penetration and thereby improve
thermal resistance.
19.
He submitted that the primary or dominant purpose of a customer having
Stormdry applied to their property was to provide waterproofing. If a customer
wanted to insulate their walls then they would in all probability consider
cavity wall insulation or another alternative available for solid walls for
which grants were available rather than improving the thermal resistance of the
walls by waterproofing them.
20.
Mr Rowe submitted that in the case of Beco Products Limited, a
Tribunal case decided in 2004, the Tribunal had to consider what the dominant
purpose of the contract and in this matter Mr Rowe submitted that the dominant
purpose of using Stormdry was to achieve waterproofing.
21.
He submitted that any reduction in heat loss from the walls of a house
using Strormdry was mainly because it repelled water, not because of any
inherent insulation property. He submitted that energy saving from a house
which had been treated with Stormdry would be minimal if the house were dry. He
submitted that this was borne out by test results on the appellant’s website
which stated:
Further testing
carried out by the University of Portsmouth involved the comparative testing of
a treated and an untreated model house placed in an environmental chamber.
During the experiment the energy required to maintain a stable 20°C temperature
within the model test house was measured. Energy savings of between 5% and 9%
were demonstrated in a single brick width wall from the result of changing
outside temperature and humidity alone, indicating that energy savings are
possible even during periods of no rainfall. A 50% energy saving was
demonstrated during a single “wet” rain event.
Mr Rowe submitted that in view of the above test it was
most unlikely that a customer would choose Stormdry for its insulating
properties alone.
22.
Mr Rowe referred to the case of Pinevale v HMRC [2012] UKFTT 606 (TC) in which Sir Stephen Oliver QC concluded that in order to qualify for the
reduced rate of VAT, the potential insulating supplies had to satisfy a single
composite test that had two separate components. Sir Stephen Oliver QC decided
that the failure of either test would disqualify the supply from the reduced
rate.
23.
Mr Rowe stated that the first test was whether the product could be
classed as an energy saving material. He submitted that the appellant’s
evidence in the form of technical data suggested that the thermal conductivity
of a wall was affected by the moisture content of the wall; the higher the
moisture content the more conductive the wall and thereby the greater the heat
loss. Therefore by waterproofing the wall with Stormdry the wall became less
conductive and less heat would be lost hence energy would be saved.
24.
He submitted that HMRC drew an analogy to Sir Stephen’s words at
paragraph 25 of his decision in Pinevale where Sir Stephen accepted
“that a second layer of glass (when installed to create a double glazed roof)
may function as energy saving, but the glass itself is not energy saving
material”. He submitted that HMRC said that similarly Stormdry was not an
energy saving material.
25.
Mr Rowe explained that the second test related to the purpose or use for
which the material was supplied. In this case the test was whether Stormdry
was “insulation for walls”. He submitted that none of the appellant’s evidence
or its marketing referred to Stormdry as insulation.
26.
He submitted that in its application to the SBRI/Technology Strategy
Board it referred to “significantly improving the insulation properties (of the
brickwork)”. The appellant also referred to the cost of the cream Stormdry
costing much less than applying external insulation. In the conclusion of its
laboratory report as produced to the Tribunal the appellant stated that “the
system (application of Stormdry) had the advantage over internally or
externally applied insulation…” Earlier in the report Dr Rirsch stated that
“This will have the ability to keep the outer wall of a house dry and thereby
improve the insulation properties”.
27.
Mr Rowe submitted that the appellant had therefore made no claim that
Stormdry was insulation and thereby tacitly accepted that it was not. Mr Rowe
submitted that the appellant’s claims were that Stormdry improved the existing
insulation properties of the existing wall and therefore could not be said to
be insulation in its own right. Just because the product saved energy it did
not mean that it was an energy saving material.
28.
He submitted that therefore Stormdry failed both parts of the composite
test set out by the Judge in Pinevale Ltd.
29.
Mr Rowe stated that Schedule 7A was inserted in VAT Act 1994 by Finance
Act 2001 and was effective from 1 November 2001. It generally re-enacted
Schedule A1 VATA 1994 which was repealed in the same Finance Act. Reference was
made in the decision in the case of Beco Products Ltd to sub-paragraphs
1(1)(aa) and (ab), which have become Group2 Sch.7A. These sub-paragraphs were
themselves inserted in the repealed Sch.A1 by Finance Act 2000, effective from 1 April 200 0. Reference was made in the laboratory report to the work of Roedder and to
the reports of BRE and Kunzl. The references in the report showed that all
these reports that relate to the energy savings that could be made by the
waterproofing of bricks, pre-dated the legislation.
30.
Mr Rowe submitted that this evidence was available at the time
Parliament enacted this legislation. If Parliament had meant for waterproofing
materials such as Stormdry to be regarded as energy saving material it would
have included that definition in the Legal Notes. Mr Rowe submitted that what
Parliament took insulation for walls to mean was the usual understanding of the
word insulation, i.e. a nonconductive material, such as cavity wall insulation.
31.
Finally Mr Rowe submitted that HMRC did not dispute that Stormdry
resulted in energy saving. However Group 2 only permitted a reduced rate of VAT
for those products specifically listed under Note 1.
Appellant’s submissions
32.
Mr Ridgwell submitted that Stormdry fell within Note 1 as it was
insulation for walls. Once inserted half an inch into the bricks it created an
insulation barrier.
33.
Mr Ridgwell submitted that the appellant had made a decision in 2007 to
introduce products that would improve the energy efficiency of buildings and
reduce the amount of carbon dioxide in the atmosphere.
34.
He submitted that it would be unfair to turn down a product just because
it had been launched early, before the heat saving and carbon reducing data was
available, in order to recoup some of the initial costs.
35.
He submitted that HMRC had been overly influenced by this early data and
it was incorrect to compare Stormdry to Weathershield. As evidenced,
Weathershield is a waterproof paint which is applied to the surface and does
not penetrate as does Stormdry.
36.
Alluding to Sir Stephen Oliver’s first test Mr Ridgwell submitted that
HMRC had accepted in its skeleton argument that an application of Stormdry
resulted in energy saving.
37.
As to the second test he submitted that if all that was required was
waterproofing the appellant’s customers would choose one of the appellant’s
waterproofers such as Raincheck. Stormdry was specifically developed to provide
an insulation barrier and should therefore be regarded as insulation in its own
right.
38.
He submitted that contrary to Mr Rowe’s submission the dominant purpose
of applying Stormdry was to create an insulation barrier and it was most likely
that a customer would buy Stormdry for its insulating properties.
39.
One of the appellant’s contractor customer’s had decided to buy Stormdry
under a private label as “Thermotek” and intended to market the product to
homeowners as an insulating material.
Findings
40.
We found that Stormdry’s purpose was not decorative as would be a paint
but rather it converted an area half an inch into the bricks into an insulation
barrier.
41.
We found that Stormdry was a gel not a paint and unlike glass was an
insulation in itself.
42.
We found that it would only be used if an insulation barrier was
required. We found that if all that was required was waterproofing then there
were many waterproof paints available.
43.
We found therefore that Stormdry fell within Note 1 (a) being insulation
for walls.
Decision
44.
The appeal is allowed.
45.
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.
SANDY
RADFORD
TRIBUNAL JUDGE
RELEASE DATE: 13 February 2013
