Charlton v Customs & Excise [2003] UKVAT V01826(2) (08 August 2003)

	VALUE ADDED TAX — do-it-yourself builder — VATA 1994 s 35, Sch 8 Gp 5 — planning consent authorising conversion of commercial premises to student accommodation — appellant constructing accommodation first occupied by his own family but later let to students — failure to comply either with planning consent or with VATA s 35(1)(b) by reason of commercial letting of accommodation — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

NICHOLAS PETER CHARLTON	
Appellant
	
- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE
Respondents

				Tribunal:	Colin Bishopp (Chairman)

Sitting in public in Manchester on 23 June 2003 
The Appellant appeared in person
Alison Graham-Wells of the Solicitor’s office of HM Customs and Excise for the Respondents

© CROWN COPYRIGHT 2003

DECISION
1	This is an appeal by Nicholas Charlton against the rejection by the respondents of his claim for a refund of value added tax. Mr Charlton contends that he was a person carrying out construction work falling within section 35 of the Value Added Tax Act 1994, which applies to what are commonly known as do-it-yourself builders. The purpose of the section is to ensure that do-it-yourself builders are not at a tax disadvantage by comparison with professional builders. 
2	Mr Charlton represented himself at the hearing and gave evidence. The Commissioners were represented by Alison Graham-Wells of their solicitor’s office; she called as a witness the officer who, on review, had confirmed the refusal of Mr Charlton’s claim, Donna Ormsby. I also had a small bundle of documents, including a plan of the work carried out by Mr Charlton.
3	Mr Charlton and his wife have a music school at Rook Street, Huddersfield. The school is run mainly by Mrs Charlton, while Mr Charlton works on his own account in the construction industry. In neither capacity is he registered for VAT.
4	The music school building consists of two storeys, in an approximate reverse L-shape. About ten years ago, the ground floor of one arm of the L was converted into residential accommodation, consisting of four bedrooms, a bathroom, a lounge and a kitchen, and that part of the building has since been let to students at Huddersfield University; it is, Mr Charlton explained, registered with the University for that purpose. The students have their own bedrooms, but the other facilities are shared. The accommodation, taken as a whole, is self-contained, in the sense that it has within it all the facilities necessary for residential use. Access to it can be obtained without the need to pass through any other part of the building.
5	In 1999 Mr Charlton applied for and obtained planning permission authorising him to convert the upper floor of the building, immediately above the existing residential accommodation. That part of the building had, previously, been used as teaching rooms for the music school. The work permitted by the planning consent is described in it as “erection of first floor extension to music school and conversion of first floor to form additional student accommodation (within a conservation area).” The extension (which contains music school accommodation) and the conversion were discrete projects and the extension work is immaterial to this decision. The authorised conversion (which Mr Charlton assured me had been carried out in accordance with the approved plan) resulted in rather more accommodation than that on the ground floor. It has five bedrooms with communal bathroom, lounge and kitchen. It too therefore contains all the facilities needed for residential use. However, in order to gain access from the street to the converted upper floor, it is necessary to use a passageway which is also used by pupils of the music school and then a staircase leading from the remaining school accommodation on the ground floor to the upper storey. There is another exit, but it is designed for use only as a fire escape and it also acts as a fire escape for the school.
6	Although the planning consent was obtained in 1999, Mr Charlton explained that at that time he did not have the necessary funds to finance the development, and it was put on hold. However, in the summer of 2000 Mr and Mrs Charlton sold their family home, which was to be replaced by another home which they were building, or having built, on a plot of land. It became apparent that they would be required to vacate their old home before the new home was ready and they decided to begin the conversion of the upper floor of the music school premises; on completion of the sale of their family home, Mr and Mrs Charlton and their children moved into the upper floor, even though the conversion was by then not complete. They intended to remain there, using the accommodation as their only home (Mr Charlton described it as their “permanent” home), until their new property was ready for occupation. However, their new home too was not ready as soon as they had hoped and, in order that they could let the newly converted accommodation at the beginning of the academic year (its conversion had by then been completed), they moved out of it in about September 2001 and took rented accommodation for a short period. The newly converted upper floor had been their home for a period of about 9 to 12 months. Since the beginning of the 2001-2002 academic year, they have been letting the accommodation to Huddersfield University students, in the same way as they have let the ground floor. Mr Charlton told me the rent which he received was sufficient to defray the rates and mortgage payments and there was little or no surplus.
7	Mr Charlton complained that he had taken the precaution of consulting his local VAT office before embarking on the conversion work, had explained exactly what it was he intended to do, and had been assured that he qualified for a refund under the do-it-yourself scheme. He was therefore rather taken aback when his claim was rejected, the more so when the grounds for rejection changed in the course of the correspondence he had exchanged with David Robinson, the officer who initially rejected his claim, and with Mrs Ormsby, who upheld the rejection on review. Mrs Ormsby was unable to give any evidence about Mr Charlton’s enquiries since such enquiries were dealt with by a different section from that in which she worked and she had no knowledge of what had been said on either side. She did accept, however, that there had been a change in the Commissioners’ position during the course of the correspondence. That, she said, was due to their having been given certain information by the local authority, about the planning consent, which information the local authority had subsequently changed. Although that change correspondingly altered the Commissioners’ approach, the outcome was the same, namely that Mr Charlton did not qualify under the do-it-yourself scheme. 
8	 The essential requirements of the do-it-yourself scheme are set out at sub-section 35(1) of the 1994 Act which reads as follows:

“(1) Where – 
	(a)	a person carries out works to which this section applies,
	(b)	his carrying out of the works is lawful and otherwise than in the course or furtherance of any business,
	(c)	VAT is chargeable on the supply, acquisition or importation of any goods used by him for the purposes of the works,
the Commissioners shall, on a claim made in that behalf, refund to that person the amount of VAT so chargeable.”
9	The works to which section 35 applies are defined by sub-section (1A) as:
 “(a)	the construction of a building designed as a dwelling or number of dwellings;
 (b) 	the construction of a building used solely for a relevant residential purpose or relevant charitable purpose; and
 (c)	a residential conversion.”
10	By subsection (1D): 
“For the purposes of this section works constitute a residential conversion to the extent that they consist in the conversion of a non-residential building, or a non-residential part of a building, into—
	(a)	a building designed as a dwelling or a number of dwellings;
	(b)	a building intended for use solely for a relevant residential purpose; or
	(c)	anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings”.
11	Sub-section (4) as it read at the material time (that is in the summer of 2000) provided that “The notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group.” Only notes (2) and (4) are relevant in this case. They read as follows:
“(2)	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 any other 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 of 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.”
“(4)	Use for a relevant residential purpose means use as —…
		(d) 	residential accommodation for students or school pupils …”.
12	Mr Charlton’s argument was that he had undertaken a “residential conversion” within section 35(1A)(c), and the works therefore fell within section 35(1)(a); that section 35(1)(b) was satisfied because the conversion had not been carried out in the course of business but in order to house himself and his family (the subsequent letting of the accommodation being immaterial); that section 35(1)(c) was satisfied; and that he had made a claim as the subsection requires. Thus he had met all the necessary conditions for the obtaining of a refund.
13	Miss Graham-Wells accepted that “residential conversion” was the appropriate description of the works, that paragraph (c) of section 35(1) was satisfied, and that a claim had been made as the subsection requires, but she maintained that Mr Charlton failed the remaining tests. If, as she argued, the work consisted of the creation of student accommodation as the planning consent required (Mr Charlton’s occupation of it being no more than a temporary expedient to resolve his housing problems), it satisfied note (4) but failed the test imposed by section 35(1)(b) in that it had been undertaken in the course of business. On the other hand if, as Mr Charlton maintained, he had created a dwelling for his family, he had failed to comply with note (2), and also with the first requirement of section 35(1)(a) in that the work had not been carried out lawfully.
14	I turn first to the factual dispute, that is whether Mr Charlton set out to provide a home for his family, or to create student accommodation. I have no doubt that it was the latter. The plans he produced, and the planning consent he sought and obtained, both made it clear that student accommodation was in contemplation. There was no variation from the plans as the work proceeded in order to make the accommodation more suitable for occupation by a single family, though it is fair to say that any such variation would be a matter of choice rather than necessity. It is true that Mr Charlton was prompted to begin work which he had previously deferred when he and his family needed somewhere to live but, despite his insistence to the contrary, it seems to me that Miss Graham-Wells is right in her argument that this was no more than a temporary expedient. That the true intention was to create and let student accommodation seems to me to be amply borne out by Mr Charlton’s having moved out into other temporary accommodation at the beginning of the academic year; his doing so is not consistent with a dominant intention of providing a home for his family. I bear in mind also that the planning consent – which he did not seek to amend – limited him to the provision of student accommodation.
15	If that conclusion is correct it seems to me inevitable that I must also conclude that section 35(1)(b) is offended, in that the work was carried out “in the course or furtherance” of a business. This was not work carried out for purely altruistic or charitable motives; the intention was to earn an income from the rent paid by the occupying students. It may well be that the rent earned was sufficient only to cover the rates and mortgage payments but in due course the mortgage would have been paid off and Mr Charlton would be left with an asset of some value paid for out of the profit earned from letting the property. Even if, contrary to that conclusion, it could be argued that Mr Charlton was not motivated by the opportunity of making a profit, he was, nevertheless, pursuing a business activity as it is understood in the context of VAT: see Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1, in which it was determined that business activities were not restricted to those undertaken for motives of profit, to be contrasted with Customs and Excise Commissioners v Lord Fisher [1981] STC 238 in which the contributions by participants to the expenses of a jointly pursued pleasurable activity were found not to be the consideration for supplies made in the course of a business. That the letting of property amounts in principle to a business activity seems to me to be indisputable: see D A Walker v Customs and Excise Commissioners [1976] VATTR 10 and G W and J A Green v Customs and Excise Commissioners (1992, Decision 9016).
16	Even if I am wrong in my view that Mr Charlton set out to, and did, create student accommodation, I am satisfied that he does not qualify for a refund, though not altogether for the reasons advanced by Miss Graham-Wells. 
17	Her argument was that the finished accommodation was not “designed as a dwelling” within the meaning of note (2), first because it was not self-contained, as paragraph (a) of the note requires, in that access and egress were obtained over other property and, while each tenant had his or her own bedroom, the remaining accommodation was shared; and secondly because note 2(d) (and incidentally section 35(1)(a) which, in the context of this case, is no more than a repetition of note (2)(d)) were offended because the planning consent permitted student accommodation but not a single family dwelling. The latter point seems to me to be unanswerable, and conclusive by itself, but I am by no means convinced that the former is correct.
18	I think Miss Graham-Wells’ argument relating to access misconstrues the legislation. It seems to me that note (2) contains two, discrete conditions: by paragraph (a) that the accommodation is self-contained, and by paragraph (b) that there is no internal means of access to or from another dwelling. It was not suggested that the latter was offended. I do not think it legitimate to treat a non-exclusive means of access as a factor leading to the conclusion that the accommodation is not self-contained. Had Parliament intended that construction, it could easily have said so by wording paragraph (b) differently; instead it has provided that a particular type of access is a disqualifying factor, but has gone no further. It is commonplace for residential premises not to have their own, unshared, access to the public highway. Most flats, for example, have means of access shared with other flats within the same block; but that does not lead to the conclusion that they are not self-contained. In my view, once it is accepted or established that accommodation claimed to come within note (2) does not offend the limited terms of paragraph (b), the means of access ceases to be a relevant factor.
19	The argument that the accommodation was not self-contained because the students would share the communal facilities seems to me to be misconceived since the point arises for consideration only on the hypothesis that Mr Charlton created not student accommodation, but a home for occupation by his family. Questions of access and self-containment do not arise in the case of developments falling within note (4). On the hypothesis that this was a conversion into accommodation for Mr Charlton’s own occupation, the fact that the students who later rented it would share facilities is immaterial.
20	In summary, I am satisfied that Mr Charlton complied with the planning consent he had obtained by converting the premises into student accommodation, and that his own temporary occupation is to be left out of account. He carried out the conversion in the course of business, and is accordingly not entitled to a refund. If, contrary to my own view, he has, instead, created accommodation for his family, he is disqualified by the fact that he has failed to comply with the planning consent. His appeal must be dismissed.
21	I am unable to pass any comment on Mr Charlton’s complaint that he was misinformed by his local VAT office before starting the work. Matters of that kind are not within this tribunal’s jurisdiction, but are for the Adjudicator. I can understand Mr Charlton’s frustration that the grounds on which his claim was rejected changed during the course of the correspondence but that too does not amount to a ground on which his appeal might be allowed. I am quite sure that his claim was always bound to fail, for the reasons I have given.
22	I make no direction in respect of costs.

COLIN BISHOPP
CHAIRMAN
Release Date: 7 August 2003

MAN/01/553