ZERO-RATED SUPPLY – Conversion of a non-residential building into a building designed as a dwelling – Item 1 Group 5 Schedule 8 VATA 1994 – Not zero rated because non residential building had been used as a dwelling in the preceding 10 years – Note 7 of Group 5  Schedule 8 VATA 1994 – The conversion was exempt from VAT – Group 1 Schedule 9 VATA 1994

CANCELLATION OF REGISTRATION – Paragraph 13 Schedule 1 VATA 1994 – No intention to make taxable supplies - Yes

LONDON TRIBUNAL CENTRE

	BEVERLEY PROPERTIES LIMITED 	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal: Michael Tildesley	 (Chairman)
					     Lynneth Salisbury (Member)

Sitting in public in London on 4 June 2003

Kingston Smith, Chartered Accountants, for the Appellant	

Miss Shaw, Counsel, for the Respondents	

© CROWN COPYRIGHT 2003

DECISION

The Appeal

1.	The Appellant was appealing against a decision of the Respondents to delete its name from the register of taxable persons under Schedule 1, paragraph 13 of the Value Added Tax 1994  (hereinafter referred to as the 1994 Act) as communicated in a letter dated 19 July 2002 and an assessment to tax in the sum of £21,664 dated 26 July 2002 in respect of input tax claimed by the Appellant. The Respondents were taking the decision because the Appellant had produced no satisfactory evidence of an intention to make taxable supplies.

2.	The Appellant’s ground for appeal was that it was intending to make a zero rated supply of a converted non-residential building under Item 1(b) of Group 5 of Schedule 8 of the 1994 Act.  

The Legislation

3.	Item 1 of Group 5 of Schedule 8 to the 1994 Act provides for the zero rating of:

	“The first grant by a person –

		……
		(b) converting a non-residential building , or a non residential part of a building into a building designed as a dwelling or number of dwellings, or a building intended for use solely for a residential purpose.

	Of  a major interest in, or in any part, of the building, dwelling or its site”.

4.	Note 7 of Group 5 of Schedule 8 of the 1994 Act provides:

“For the purposes of Item 1(b), and for the purposes of these Notes so far as having effect for the purposes of item 1(b), a building or part of a building is “non-residential” if –

(a)	it is neither designed, nor adapted, for use –
(i) as a dwelling or number of dwellings, or
(ii) for a relevant residential purpose; or

(b)	it is designed, or adapted for such use but –
(i)	it was constructed more than 10 years before the grant of the major interest; and
(ii)   no part of it has , in the period of 10 years immediately preceding the grant been used as a dwelling or for a relevant residential purpose”.

5.	Note 9 of Group 5 of Schedule 8 of the 1994 Act  provides:

“The conversion other than to a building designed for a relevant residential purpose, of a non residential part of a building, which already contains a residential part is not included within items 1(b) or 3 unless the result of that conversion is to create an additional dwelling or dwelling.

6.	Item 1 of  Group 1  of Schedule 9 of the 1994 Act  provides that  “the grant of any interest in or right over land or of any licence to occupy land …..” shall be an exempt supply.

7.	Paragraph 13(2) of Schedule 1 provides that “where the  Commissioners are satisfied that the registered person has ceased to be registrable, they may cancel his registration with effect from the day which he so ceased or from such later date as may be agreed between them an him”.

8.	Paragraph 9 of Schedule 1 provides that :

“Where a person who is not liable to be registered under this Act and is not already so registered satisfied the Commissioners that he –

(a)	makes taxable supplies; or
(b)	is carrying on a business and intends to make such supplies in the course or furtherance of that business,
     
 they shall if he so requests, register him with effect from the day on which the request is made	 or from such earlier date as may be agreed between them and him”

The Issue

9.	The Appellant was a property development and investment company. It purchased the leasehold interest in a property situated at 130 Ebury Street, London. The Appellant applied to be registered for VAT with effect from 1 January 2001 on the basis that it intended to make a supply in the form of a grant of a major interest in property falling within Item 1(b) of Group 5 of Schedule 8 of the 1994 Act.

10.	The Appellant was converting 130 Ebury Street to a residential property. The Appellant maintained that it had been a non-residential property for at least ten years prior to the first grant of a major interest. If that was the case   supplies made by the Appellant in the furtherance of its business would be zero rated in accordance with Item 1(b) of Group 5 of Schedule 8 of the 1994 Act. The Respondents disagreed, in their view the evidence would show that 130 Ebury Street had enjoyed joint use for   residential and non residential purposes and the conversion involved no additional dwellings.  In these circumstances the supplies associated with the conversion would be exempt in accordance with Item 1 of Group 1 of Schedule 9. As the Appellant’s business involved exempt supplies it did not meet the eligibility requirements for registration under the 1994 Act. Therefore, the Respondents were entitled to remove the Appellant from the Register of Taxable Persons.

11.	The issue before the Tribunal was whether 130 Ebury Street had been used exclusively for non-residential purposes in the ten years prior to the first grant of a major interest in the property following the conversion. This was a question of fact with the burden of proof on the balance of probabilities resting on the Appellant.

Preliminary Issue

12.	At 9.16am on the 4 June 2003 the Tribunal received a fax from the Appellant’s representatives, Kingston Smith requesting an adjournment of the hearing. The fax read:

“The trader received paperwork from Customs on this case on Monday 2 June and Tuesday 3 June and it has not had time to deal with or produce documentation to stand against that produced by Customs. The trader will not be appearing at today’s hearing and requires further time to seek documentation to support its case and answer the material produced yesterday. Kingston Smith will not be attending the hearing on behalf of its client”.

13.	The Appellant’s application for adjournment was opposed by the Respondents on the following grounds:

•	The Appellant had been aware of the Respondents case since 14 March 2002.
•	The information contained in the Respondents’ bundle of documents had been readily available on request from 24 January 2003.
•	The information faxed to the Appellant on 3 June 2003 from the Respondent had contained no new information. It merely corroborated the information within the bundle of documents.
•	The Appellant’s representative had advised the Respondents on the 3 June 2003 that he was  not intending to appear at the tribunal hearing on the 4 June 2003. The Appellant was informed by the Respondents that they were going to oppose the application for adjournment and that he should appear at the hearing to make the application. 
•	In the Respondents’ view it was not good enough for the Appellant to decide not to appear. The  faxed request for the adjournment did not indicate the prejudice that the Appellant would suffer if the hearing went ahead. Also there was no detail provided of the further documentation that the Appellant intended to supply. 

14.	We established the following facts in relation to the application for adjournment:

I.	           The Appellant had been informed of the Respondents’ view that the conversion at 130 Ebury Street was an exempt supply in a letter dated 14 March 2002 from Miss L Howes, Customs and Excise Officer.
II.	           The Appellant had been requested by the Respondents to provide satisfactory supporting information to substantiate its contention that the conversion was a zero rated supply on 14 March 2002, 25 April 2002,  26 June 2002, 19 July 2002, 30 July 2002 and 11 September 2002. 
III.	           On 24 January 2003 the Appellant was served by the Tribunal with copies of the statement of case and the list of documents provided by the Respondents.
IV.	           The Respondents’ list of documents contained a statement inviting the Appellant to make a written request for copies of the documents included in the list. The Appellant had made no written request.
V.	            The Respondents posted  the bundle of documents to the Appellant on Monday 2 June 2003. However, we ascertained  that the Appellant had seen all of the documents in the bundle except  the VAT Audit Report regarding the visit to the Appellant by the Respondents on 7 March 2002, a copy of the Electoral Roll for 130 Ebury Street and copies of the Westminster City Council Database for the purposes of Council Tax. We noted that all these documents had been included in the list of documents served on the Appellant on the 24 January 2003. The contents of the  Electoral Roll and the Westminster City Council database were referred to in the Respondents’ statement of case. The Appellant representatives had been present at the visit on 7 March 2002.
VI.	           The documents faxed by the Respondents to the Appellant on 3 June 2003 at 4.15pm were supporting documentation in relation to the Westminster City Council database for Council Tax purposes.
VII.	           We were unable to ascertain which documents were received by the Appellant on the 2 June. It appeared to us that the bundle of documents and the faxed documents would have been received by the Appellant on the same day – 3 June 2003.

15.	We acknowledge our duty to ensure a fair hearing. We concluded that the Appellant had more than adequate time to prepare for the hearing. The Appellant had been fully aware of the Respondents’ case from service of the Statement of Case on 24 January 2003. The Appellant had suffered no prejudice from the delivery of documents on 3 June 2003. Further the Appellant had chosen not to attend the hearing on 4 June 2003 despite being informed by the Respondents to do so.  In all the circumstances we decided that there was no merit to the Appellant’s application and therefore refused the adjournment. We  proceeded to hear the evidence in accordance with regulation 26(2) of the Value Added Tax Tribunals Rules 1986. 

The Evidence

16.	We heard from one witness, Ms Lynne Howes, called by the Respondents. The bundle of documents was provided by the Respondents.

Facts Found

17.	The Appellant was a company registered in the Island of Nevis and its main business was property development and investment. In early 2001 the Appellant purchased a leasehold interest of 99 years with effect from 25 March 2001 in 130 Ebury Street, London (hereinafter referred to as “the Property”).  As a result of that purchase the Appellant applied for registration for VAT with effect from 1 January 2001. In the application for registration the Appellant declared that it intended to make taxable supplies to the value of £1m (zero rated). 

18.	 The lessor for the Property was the Grosvenor Estate. The Property comprised an area of 291 square metres consisting of six floors. Since 1964 the basement and the ground floor had been used by Heyman Barwell Jones as a store and showroom in connection with their business as wine merchants. The basement and ground floor comprised an area of 118 square metres and was registered for business rates.  The upper floors comprised an area of 173 square metres and had planning permission for use as a maisonette for residential purposes. The upper floors were registered for Council Tax.

19.	The Appellant had purchased the leasehold to convert the Property to a six bed roomed town house exclusively used for residential purposes. The planning application dated 1 June 2001 submitted by OMI Architects on behalf of the Appellant declared that the last known use of the Property was office/residential. The application also stated that the Property had two existing bedrooms.  The Respondents had inspected the schedule of works dated 1 April 2001 associated with the planning application. That schedule stated that the work required in the 4th bedroom included removing wardrobes and taking down existing structure dividing wall between bedroom and bathroom. 

20.	According to the Grosvenor Estate the lease prior to the Appellant’s commenced on 27 November 1964 granted to Heyman Barwell Jones. The user clause of the lease provided for the ground floor and basement to be used as a shop with the upper parts to be used as residential.

21.	The City of Westminster was the Council Tax Billing Authority for the Property. Their records for the upper floors revealed that  

•	From 1 April 1993 to 24 January 2000, Mr Percival Brown was  registered for paying Council Tax as a “Named Occupier” for the Property.
•	From 25 January 2000 to 29 March 2001, Hayman Barwell Jones Ltd was the registered “Responsible Party” for paying Council Tax. Hayman Barwell Jones claimed a 50% discount rate from 25 July 2000 to 29 March 2001.
•	From 30 March 2001 to 22 December 2002, Fundserve Development Ltd was the registered “Responsible Party” for paying Council Tax. Fundserve Development Ltd claimed 50% discount from 30 March 2002 to 22 December 2002.
•	From 23 December 2002 to present date, Mr Milkdah Alkadhai was the current named occupier registered for paying Council Tax. Mr Alkadhai was not claiming any discounts for Council Tax. 

22.	Inspection of the Electoral Role for 130 Ebury Street showed that Mr Percival Brown and Ms Joan Brown were registered at that address for the purposes of the Representation of the People Act 1983. Further that Inspection revealed that Mr Percival Brown’s length of residence was 18, which we have assumed means 18 years. The dates of these documents were recorded in the footer as  30 August 2002 and  6 September 2002.

23.	On the 7 March 2002 Ms Lynne Howes, Customs and Excise Officer, visited Mr Woolridge of Kingston Smith who represented the Appellant. At that visit Ms Howes expressed her reservations about whether the supplies connected with the conversion of the Property were zero-rated. In her view the documents indicated that the supplies were exempt in which case the claims made by the Appellant for input tax would be disallowed.  Ms Howes on behalf of the Respondents followed up her visit with a letter dated 14 March 2002 which stated that

“I would be obliged if you would arrange to send me supporting evidence within the next ten days to support zero rating failing which the intended supply will be treated as exempt and all input tax claimed will be repayable to HM Customs and Excise”.

24.	The Respondents issued further letters on 25 April 2002 and 26 June 2002 requesting the Appellant supply independent commercial documentation that there had been no residential use of the Property since 1973. The letter of 26 June 2002 was written by Mr David Butcher who had conducted a local reconsideration of the matter. The Appellant did provide some documentation but the Respondents considered that the documentation provided was insufficient to support former commercial use of the whole Property. On 19 July 2002 the Respondents issued another letter containing  the notice to delete the Appellant from the Register of Taxable Persons under paragraph 13 Schedule 1 of the 1994 Act on the ground that the Appellant had produced no satisfactory evidence of an intention to make taxable supplies. On 26 July 2002 the Respondents sent a Notice of Assessment in the sum of £21,664.00 plus interest of £774.42 to recover the input tax claimed by the Appellant.

25.	The Respondents sent two additional letters on 30 July 2002 and 11 September 2002 to the Appellant explaining why they considered that the documentation produced by the Appellant was insufficient in their view to show that the whole Property had been used for commercial purposes. 

26.	The Respondents in a letter of 20 August 2002 accepted that they had a mistake about the need for the Appellant to produce evidence about the use of the Property since 1973. The Respondents had failed to take account of the changes in the 2001 Budget which meant that from August 2001, the Property must not have been used for any residential purpose for at least ten years rather than from 1973. This mistake by the Respondents, however, did not alter their view that the Appellant had failed to produce satisfactory evidence that the Property had been exclusively used for commercial purposes in the ten years prior to the grant of a major interest in the Property.

27.	The Appellant has produced a series of documents in response to the Respondents’ requests for supporting information about the prior commercial use of the whole Property. The “Preliminary Enquiries before Contract” and the “Local Authority Search” in connection with the Appellant’s purchase of the leasehold interest in the Property did not give any significant information about the prior use other than the present planning use of the Property had been continuous since 1964. The Appellant provided correspondence from Realty Insurances which had insured the Property under the terms of the Grosvenor Commercial Block Policy. Their records revealed that that Property had been insured since 1964 on the basis that it was occupied for commercial purposes until it was converted to residential use this year (2002).    

28.	The Appellant also produced four letters from Cheyne Investments Limited who were property advisers specialising in the Belgravia Market. They had been asked to find a buyer for the Property and had issued a mail slot to which the Appellant had responded. 

Their first letter addressed to the Appellant on 15 January 2001 stated that “As you are aware from our inspection of the property it is currently occupied by Wine Shippers who we understand have been there since the early 1970’s. The upper floors comprise unused residential which have been used for office and storage space. As you saw the entire property is in a very poor state of repair”.

Their second  letter dated 24 May 2002 stated that “…… that the outgoing tenants confirmed to me that the entire property had been used for commercial purposes only since the early 1970’s. It was also evident that this was the case as they were definitely the sole occupants of the whole building and had been for a long time. There was no evidence of residential occupation….”

Their third letter dated 19 June 2002 and signed by J.C. Swift, Director stated that “I confirm that I have personally been aware of the type of usage to which this property has been put since 1 April 1973 and can confirm that it has been used for commercial purposes and not for residential purposes since that date”.

Their final letter dated 11 September 2002 contained a number of statements, namely: 

“You will recall that when I introduced this property to you I was not only involved in negotiations with the vendors but also with the outgoing tenants who were a wine company who had been in occupation for over 30 years. It was through the tenants that viewing arrangements were made because they were still in occupation”.   

“The upper floors which had been originally designed as a maisonette were in a very poor state and had been used by the wine company for at least 10 years for storage of files, records, etc and this was evidenced by old file racking in cupboards and wardrobes”.

“You will also recall that when I introduced the property to you I wrote to you on 15 January 2001 explaining the poor(my italics) condition of the building……. The initial purchase price of £400,000 and the asking price of the finished building of approximately £2.3m indicates clearly how much work had to be done”.

29.	The Appellant was unable to obtain a statement from Mr Percival Brown, the registered occupier for Council Tax, about the previous use of  the upper floors of the Property. The Appellant was in contact with Mr Brown who was not prepared to sign a letter to the effect that the upper floors had not been used for residential purposes since his involvement with the property. Also the Appellant had not obtained statements in support of the prior commercial use of the whole Property from the solicitors involved in the purchase and sale of the leasehold interest.

The Submissions

30.	Although the Appellant was not present at the hearing, its representatives made submissions to the Tribunal in the letter accompanying the Notice of Appeal dated 12 August 2002. Essentially the Appellant submitted that the supplies connected with the conversion of the Property  were zero-rated in accordance with Item1(b) Group 5 Schedule 8 of the 1994 Act. The Appellant submitted that the previous lessee of the Property was a very substantial business with an annual turnover of £10m. They required the whole of the Property to be used for commercial purposes. Also during the strip out of the Property there was no evidence of use as a dwelling, such as clothing, old toys and coat hangers. The Appellant considered that the Respondents had produced virtually no proof of their case and had tried to impose a condition that the commercial use had to date back to 1973 which was wrong in law.  

31.	Miss Shaw, Counsel for the Respondents  submitted that the Appellant had failed to discharge the burden of proof on the balance of probabilities. She said that the Appellant had not provided the best evidence, namely, a statement from the outgoing lessee that the Property had been used solely for commercial purposes during ten years prior to the grant of a major interest in the Property. The statements relied upon by the Appellants were contradictory, based upon hearsay and not material to the central issue of the case. The Respondents in contrast had produced evidence from reliable sources the Council Tax database and the Electoral Roll which showed that the upper floors of the Property had been reserved for residential use. This evidence was also supported by the Appellant’s own planning application and the statement from Grosvenor Estates, the lessor of the Property. The supplies in connection with the conversion of the Property were, therefore, exempt from VAT. In Counsel’s view the Respondents were entitled to cancel the registration of the Appellant in the Register of Taxable Persons under paragraph 13 Schedule 1 of the 1994 Act because the Appellant had produced no satisfactory evidence of an intention to make taxable supplies.  

The  Reasons for our  Decision

32.	The issue before the Tribunal was whether 130 Ebury Street had been used exclusively  for non-residential purposes in the ten years prior to the first grant of a major interest in the property. This was a question of fact with the burden of proof on the balance of probabilities resting on the Appellant.

33.	The Appellant produced two pieces of evidence to support its contention that the Property had been used exclusively for non-residential purposes. The letters from Cheyne investments were the most significant piece of evidence from the Appellant’s point of view . We have recited detailed extracts from those letters in the facts found. When the letters were  looked at  in sequence  we  concluded that the statements in them were not persuasive and carried little evidential weight because:

•	It was unclear whether Mr Swift had direct knowledge of the long term use of the upper floor. It would appear from the letter of  11 September 2002 that his direct knowledge stemmed from a visit to the premises in connection with the sale of the leasehold. There was no suggestion in the letters that Mr Swift or Cheyne Investments has had a long association with Property.
•	The “evidence” about the previous use of the Property was based on hearsay, namely conversations with  the outgoing tenants. There was no statement from the outgoing tenants to support  the truth of the facts in the  conversations.
•	The ability of Cheyne Investments to give an entirely independent view was questionable in view of their association with the Appellant with the purchase of the leasehold interest in the Property. We accept, however, there has been no evidence that Cheyne Investments  acted for the Appellants in the purchase.

34.	We found the statement from Realty Insurances inconclusive about the prior use of the Property. The fact that the Property was insured for commercial purposes did not exclude in our view residential use of the upper floors. There was no suggestion in the letter that Realty Insurances had inspected the Property before insuring it for commercial purposes. Finally the letter did not state that it was the only insurance policy in relation to the Property.

35.	The Appellant’s case was also weakened by the quality of the evidence produced by the Respondents. The City of Westminster’s  Council Tax database and the Electoral Roll were independent reliable sources of evidence. The database recorded  Mr Percival Brown as the “Named Occupier” from April 1993 to January 2000 for paying Council Tax  in respect of the upper floors of the Property. Mr Brown was liable for the full amount of Council Tax which indicated that he resided at the premises. Likewise the Electoral Roll named Mr Percival Brown and Ms Joan Brown as the registered persons at the Property. Section 49(1) of the Representation of the People Act 1983 states that

“ The register of parliamentary electors shall for the purposes of this Part of this Act be conclusive on the following questions –
(a) whether or not a person registered in it was on the qualifying date resident at the address shown”

Although section 49(1) does not apply to proceedings under the 1994 Act, the fact that named persons at the Property were registered for voting was persuasive evidence that they were residing there.  The Appellant was unable to provide a statement from Mr Percival Brown to contradict the evidence about his residency at the Property. The Appellant in his planning application admitted the joint commercial/residential use of the Property. Grosvenor Estates, the lessor for the Property, informed the Appellant that the previous lease had a commercial user clause for the basement and ground floor, and a residential use for the upper four floors.

36.	In our view the Appellant’s case has been swept away by the inherent flaws in its own evidence and by the Respondent’s compelling evidence about the joint commercial/residential use of the Property.  The Appellant has, therefore, failed to satisfy us on the balance of probabilities  that the supplies made in connection with the conversion of the Property  met the requirements of   Item 1 of Group 5 of Schedule 8 to the 1994 Act. Thus we have decided that the supplies made by the Appellant were exempt from VAT  and that it had no intention to make taxable supplies. 

37. 	We dismiss the Appeal for the reasons outlined above. We uphold the Respondent’s decision to delete the Appellant’s name from the Register of Taxable Persons. Further we uphold the assessment of £21,664 dated 26 July 2001. We make no order for costs.

MICHAEL TILDESLEY
CHAIRMAN

RELEASED:

LON/02/710