ZERO-RATED SUPPLY – Construction of a day centre for a charitable purpose – whether alteration/extension to existing building – Yes – whether annexe – No – Appeal dismissed – VAT Act 1994 Schedule 8 Group 5 Notes (16) and (17)

LONDON TRIBUNAL CENTRE

	THE ALZEHEIMER’S SOCIETY	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Michael Tildesley  (Chairman)
						Michael Sharp FCA FHCIMA

Sitting in public in London on 6 August 2003

Mr Chapman for the Appellant

Dr Ian Hutton Counsel for the Respondents

© CROWN COPYRIGHT 2003

DECISION

The Appeal

1.	The Alzheimer’s Society, Harrow and Hillingdon Branch,(the Appellant) appeals against a refusal of the Respondents dated 13 November and 13 December 2002 to allow zero-rating of construction works in respect of the Templeton Day Centre, Northwood Hills.

2.	The Notice of Appeal was dated 23 January 2003. The ground for the Appeal was that the refusal to allow zero-rating of construction works was unreasonable in the light of the facts.

The Legislation

3.	Item 2(a), Group 5, Schedule 8 of the 1994 VAT Act (1994 Act) provides for zero-rating of the supply in the course of the construction of a building intended for use solely for a relevant charitable purpose.

4.	Note 6 to Group 5 states that use for a relevant charitable purpose means use by a charity otherwise than in the course or furtherance of a business.

5.	Note 16 to Group 5 states that 

	“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”.

6.	Note 17 to Group 5, however, allows the zero-rating of  the construction of an annexe which is intended for use 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.

The Issue

7.	This Appeal was about  the construction of  Templeton Day Centre which provides care for persons suffering from Alzheimers. The Appellant  contended that the day centre was an annexe which met the requirements of Note 17,  Group 5, Schedule 8 of the 1994 Act. Therefore, the construction of it was a zero-rated supply. The Respondents disagreed. They were of the view that the day centre was a conversion of and an extension to an existing building, in which case the construction was a standard rated supply. There was no dispute about the day centre being used solely for a relevant charitable purpose.  The burden of proof was upon the Appellant to satisfy the Tribunal on the balance of probabilities that Templeton Day Centre was an annexe within the meaning of Note 17, Group 5,Schedule  8 of the 1994 Act.

The Evidence

8.	The Tribunal heard from one witness, Mr Gordon Maclean B.Arch, F.R.I.B.A who was called by the Appellant. Mr Maclean has been in practice as an architect for 40 years. He was employed by the Appellant to deal with the project for Templeton Day Centre from initial design. A bundle of documents including drawings of the construction was presented to the Tribunal. The Appellant also produced two photographs of the Day Centre.

The Facts Found

9.	The Appellant was a registered charity which was supplying part of the funds for the construction of Templeton Day, Northwood Hills, Middlesex, to provide day care for persons suffering from Alzheimers.

10. 	In the 1990’s the Appellant was involved in a fund raising project (“Holding Hands Appeal”) with the local hospital, St Vincent, to raise £3m to convert one of the wards at the hospital into a day centre for persons suffering with Alzheimers. Unfortunately the “Appeal” raised only about £300,000 which meant that the original plan for converting a ward was no longer viable. Instead it was agreed with the hospital to refurbish an existing day centre within the hospital grounds. The refurbishment proved a success, increasing from two days to five days when the centre was open to people suffering from Alzheimers. The Appellant occupied the day centre on a licence from the hospital. The term of the licence was five years with a rent below market rates. This arrangement reflected the friendly working relationship between the Appellant and the hospital: “good friends working together”.

11.	The hospital, however, was in urgent need of re-development. In early 2002 it transpired that the only way in which this redevelopment could be funded was by selling off the hospital grounds for housing purposes. The Appellant was given six months notice to quit the day centre. This generated a storm of local protest, mainly directed at the hospital managers.  Some of the protestors, however, criticised the Appellant for the “friendly arrangements” with the hospital, in particular the lack of security of tenure with the day centre.

12	The Appellant’s management committee was determined not to repeat the same mistakes as it did with the hospital site with its “new home” for the day centre. The Appellant was offered a haven by the United Reform Church, which owned a Church on Joel Street, Northwood Hills. The congregation of this Church was small, about 50 persons with the result that the building’s future as a Church remained uncertain.  It was agreed with the United Reform Church that the Church would be separated into two parts. One part with additional space would function as the Appellant’s day centre. The second part would continue to function as the Church.

13	The Appellant having learnt from its experience with the local hospital agreed a 25 year lease with the United Reform Church. The Appellant also ensured that the design of the day centre would not expose it to the same risks as the hospital site. Thus, the day centre could remain physically intact in the event of a re-development of the Church site.

14.	Mr Maclean informed the Tribunal that the Church was built in the 1950’s. The building was a composite structure with a steel frame encased in brickwork which was both decorative and fireproof. The roof also consisted of a steel frame. The Church was designed on a modular basis in a series of bays, which has been the basic Church design since 1066. Each bay shared the same structural composition but the bays were structurally independent of each other. 

15.	The new day centre consisted of two day rooms. Day room one was created from within the existing Church building, taking up 110 square metres of the 250 square metres of the Church. Day room 2 was an additional building to the Church with a size of 90 square metres.

16.	Day room one was accessed through the original main entrance to the Church on its east elevation. The room was surrounded on the east and south elevations by the outer walls of the Church, which also housed the new worship area. The north wall of day room one, however, was no longer an outer wall instead it served as a partition between room one and room two with a large opening to allow access between the two rooms. On the west side of day room one was a one-hour fire resisting partition which separated the day centre from the worship area in the Church building. The partition contained a fire door for emergency exit. Day room one has a treatment area, kitchen, bathroom and toilets.    Day room two was a new construction on the north side of the Church with its own roof of same colour slates as the Church. Its height was about 3 metres compared with about 7 metres of the Church itself without including the roofs. Day room two was enclosed by three new walls but on its south side it shared the original wall (north) of the Church through which access was gained to day room one. Day room two had no separate access to the outside.

17.	The day centre had separate supplies of gas and water from the worship area of the Church. The electricity supply to the day centre was from a branch off the supply to the whole building. The day centre  had its own electricity meter. The day centre and the worship area have separate car parking areas which shared the same entrance but with different exits.

18.	Mr Maclean in his expert opinion was of the view that the day centre could be structurally separated from the worship area because of the modular design of the Church building. The roof could be safely cut off and the partition between day room one and the worship area was a substantive wall which would only need brickwork on the side of the worship area. In cross examination Mr Maclean accepted that day room one was effectively part of the Church building and if the whole Church was demolished day room 2 would be an incomplete building with three walls. Mr Maclean acknowledged that he described in his drawings the works to create day room one as “alterations work”; “existing church building with alterations” and day room two as “extension”.

19.	The Appellant went out to tender for construction of the day centre in August 2002. The building was completed in March 2003 and was now open five days a week catering for 12-15 persons suffering from Alzheimers.

20.	The cost of the construction works was stated to be £171,175.66, of which the United Reform Church provided £75,000. The works were carried out by Gullet and Sons Ltd.

21.	Gullet and Sons Ltd wrote to the Respondents on the 11 October 2002 requesting a ruling on the VAT liability of the construction works. The Respondents replied on the 24 October 2002 stating that the evidence supplied did not indicate the creation of an independent annexe for charitable purposes but rather an extension to the original church building. The Respondents, however, confirmed that the construction works in respect of the bathrooms, washrooms and lavatory facilities for people with disabilities would be zero-rated for VAT purposes. This relief would be extended to widening of doors and construction of ramps but not the provision of day or treatment rooms. There followed a series of correspondence between the Appellant and the Respondents. On 13 December 2002, the Respondents informed the Appellant that the Reconsiderations Officer for Reading VAT written enquiries had carried out a review.  The Officer upheld the original decision that the construction works except  facilities for people with disabilities did not meet the legal requirements for zero-rated supplies. 

The Authorities

22.	We were referred to the following decision of the VAT and Duties Tribunal:

Bryan Thomas Macnamara v The Commissioners of Customs and Excise  VAT Decision No. 16039  29 March 1999	

Colchester Sixth Form College v The Commissioners of Customs and Excise  VAT Decision No. 16252  4 August 1999	

Woodley Baptist Church v The Commissioners of Customs and Excise  VAT Decision No. 17833  26 September 2002

We were also referred to Customs and Excise Notice 708/02, Buildings and Construction.

The Submissions

23.	Mr Chapman contended on behalf of the Appellant that the purpose of the legislation was to exclude relevant building work for Charities from VAT. Note 16 to Group 5 of Schedule 8 of the 1994 Act, however, makes certain works connected with alterations to existing buildings standard rated supplies for VAT purposes. Note 17 provides an exception, namely the construction of an annexe intended for use solely for a relevant charitable purpose. 

24.	Mr Chapman referred to the VAT and Duties Tribunal Decision in Macnamara (16039) where the Tribunal defined the series of building works identified in Note 16 by their degree of integration with the existing building.  The term annexe connoted something that was adjoined but either not integrated with the existing building or of tenuous integration.  This definition was explained in paragraph 3.2.6 of the Customs and Excise Notice 708/02:

“An annexe is a structure which has only a minimal physical connection with the existing building. For example the structure could be linked to the existing building by means of an enclosed walkway, or abut the existing building along one wall with a connecting door. It would be easily recognisable as a structure that would be a separate building, were it not for the physical connection”. 

25.	Mr Chapman submitted that the Tribunal had to consider the legal definition of the term “annexe” and not its colloquial meaning. In his view the legal definition involved examination of the degree of integration of the construction with the existing building and its structural independence. 

26.	Mr Chapman stated that the evidence showed that the day centre was structurally independent from the new worship area of the Church. The design of the Church allowed the day centre to remain intact as a separate building in the event of the demolition of the new worship area. Mr Chapman added that the day centre abutted the worship area along one wall with a fire door. Thus its physical connection with the existing building was minimal: “anything else less integrated would be freestanding”.

27.	The day centre was constructed as a single project with its own separate access from the outside. Mr Chapman concluded that the day centre was an annexe which met the requirements of Note 17, Group 5, Schedule 8 of the 1994  Act  and therefore was a zero-rated supply for the purposes of VAT.

28.	Dr Hutton referred the Tribunal to passages in the Macnamara decision (16039)  which set out the legislative background to Group 5, Schedule 8 of the 1994 Act. Essentially  the scope of zero-rating was cut down across the board, leaving only construction works on the provision of new buildings for residential or charitable purposes. Thus construction work on annexes were outside the ambit of zero-rating except for a privileged class of annexe which was neither an alteration  nor an extension and which satisfied the test in Note 17, Group 5, Schedule 8 of the 1994  Act.

29.	In Dr Hutton’s view the relevant Tribunal Authorities made it clear that paragraphs (a), (b), and (c) of Note 16, Group 5, Schedule 8 of the 1994 Act were mutually exclusive. The Tribunal would, therefore, have to start with consideration of   whether the day centre was an alteration/conversion to the existing building. The Tribunal would only move on to consideration of paragraph b (extension/enlargement) if it had decided that the construction was not an alteration/conversion. Thus the issue about whether the day centre was a “privileged class of annexe” would only come into play once the Tribunal had discounted the construction as an alteration/conversion or enlargement/extension.

30.	Dr Hutton submitted on the evidence presented to the Tribunal that day room one was an alteration/conversion of the existing building. The room had been built within the structure of the existing building and there had been no significant alterations to the outer walls of the original Church. A person walking past the building complex would not be aware that there were two separate units. Day room two was an enlargement to the existing building. It has a high degree of integration with the existing building and no separate access to the outside. In short the construction of the day centre fell at the first two hurdles of Note 16. There was no need for the Tribunal to go onto consider whether the day centre met the strict requirements of Note 17.

Our Decision

31.	A supply made in connection with the construction of a building intended for use solely for a relevant charitable purpose is zero-rated for the purposes of VAT. It is agreed that Templeton Day Centre was intended for use solely for a relevant charitable purpose.  Note 16, Group 5, Schedule 8, however, excludes alterations, conversions, enlargements and extensions to existing buildings from the definition of construction of a building which ranks for zero-rating. Note 16 also excludes the construction of annexes unless it falls within the privileged class of annexes as defined by Note 17. The issue to be determined in this Appeal is whether the construction of Templeton Day Centre meets the legal requirements for the privileged class of annexes.

32.	This issue has been considered by the Tribunal in a number of decisions (Macnamara VAT Decision No.16039; Colchester Sixth Form College 16252; Yeshurun Hebrew Congregation 16487; and Woodley Baptist Church 17833) . We have followed the approach adopted in these decisions to address the disputed issue in this Appeal. 

33.	The approach consists of two stages:

1)	to consider the existing building as it was and then to consider the end result of the construction works, and then
2)	to ask whether viewed objectively and in the light of all the relevant information, the work done amounts to an  alteration/conversion of an existing building, if no whether it is an enlargement/extension to an existing building, if no is it an annexe and does it meet the requirements of Note 17. 

The second stage reflects the legislative construction of Note 16 which defines three separate categories of building works in descending degrees of integration with the existing building, which are mutually exclusive of each other. Thus the interpretation placed on Note 16 means that a specific building work cannot fall within more than one category, for example, it cannot be both a conversion and an annexe.

34.	We consider that Mr Chapman on behalf of the Appellant has overlooked the first stage of the approach. We are required to examine the relationship as it now exists between the end result of the construction works and the existing building, not whether at some future date the end result is capable of being structurally independent from the existing building.  Whilst we accept Mr Chapman’s assertion that the works involved in the construction of Templeton Day Centre was treated as a single project, it did consist of   two distinct elements: day room one and day room two, which was confirmed by  Mr Maclean’s drawings.

35.	Day room one is part of the original Church building, having the same roof as the Church and surrounded on all sides by the walls of the Church except the west side. Access to the day centre and day room one is via the main entrance of the original Church. Day room one was created by partitioning the original Church building into two sections. Mr Maclean, the architect commissioned by the Charity, named the construction of day room one in his plans “alteration works”. A bystander in possession of these facts would conclude that the construction of day room one is an alteration of the original Church building. 

36.	Day room two is a new  structure with its own roof and three additional walls which extends the space available to the day centre by 90 square metres. The eastern and western walls of day room two, however, are fixed onto the walls of the original Church building. The south wall through which access is gained from day room one is part of the north wall of the Church.  Access from the outside to day room two is via the main entrance of the original building. Mr Maclean named the construction of day room two in his plans as an “extension”. A bystander in possession of these facts would conclude that day room two is an extension to the original Church building.

37.	We were kindly shown two photographs of the Templeton Day Centre by Mr Chapman. The photographs confirmed our opinion that the informed bystander would view Templeton Day Centre as part of or closely integrated with the original Church building.

38.	We have, therefore, decided that Templeton Day Centre is not an annexe because it is an alteration of (day room one)  and an extension to (day room two)  the existing building. In view of our decision it is unnecessary to consider whether the construction of the day centre meets the requirements of the “privileged class of annexes” as defined by Note 17. We dismiss the Appeal. We make no order for costs.

MICHAEL TILDESLEY
CHAIRMAN

RELEASED:

LON/03/107