Lincoln Oak Company Ltd v Customs and Excise [2004] UKVAT V18503 (19 February 2004)

Claim for reduced rate of VAT to be applied – Conversion of nursing home to flats — Group 6 of Schedule 7A of the Value Added Tax Act 1994 considered — Supply of materials and services must be supplied together by a VAT registered person — Appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	 LINCOLN OAK COMPANY LIMITED 	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Mrs E. Gilliland (Chairman)
Sitting in Public at York on 20 November 2003
Mr J.M. Darbyshire, a director of the Appellant for the Appellant
Mr Richard Shaw of the Solicitors Office of HM Customs and Excise for the Commissioners				

	© CROWN COPYRIGHT 2004

DECISION

1.	This is an appeal by Lincoln Oak Company Limited (Lincoln) (the Appellant) against a ruling of the Commissioners contained in a letter from them dated 30 December 2002 subsequent to correspondence on behalf of the Appellant by Mr John Michael Darbyshire (Mr Darbyshire) for the application of reduced VAT costs.  

2.	Mr Darbyshire has presented the Appellant’s case.  Mrs Darbyshire has also been in attendance but neither Mr nor Mrs Darbyshire has given evidence as there is no dispute on the facts.  The Appellant is disputing the Commissioners’ interpretation of the law.

3.	Mr Darbyshire has referred me to the Notice of Appeal to the tribunal which he had submitted on 3 February 2003 and which set out the background of the matter.  What he had been seeking in his correspondence with the Commissioners was for the reduced rate of VAT of 5% to be applied in respect of the conversion of a former nursing home into a number of single household dwellings.  It was Mrs S. Bennewith of the National Advice Centre of H.M. Customs and Excise Business Services and Taxes who had made the ruling against and who had considered the new urban re-generation measures introduced by the Government in the 2001 Budget.  It seems likely that the reason for this policy was to encourage development of “brownfield” sites.

4.	Mr Darbyshire explained that there was a family partnership referred to in the appeal documentation, Bailgate Trust Company (Bailgate).  Bailgate manages and maintains flats.  Lincoln is a limited company of which Mr & Mrs Darbyshire are both Directors and that Company was set up on the advice of their Accountant for tax purposes in connection with a particular project namely the conversion of the nursing home into flats.  Mr Darbyshire has told me that he had originally intended the building to be used for student accommodation but had responded to local pressure to create flats instead of accommodation for students.  When he had applied for the reduced rate for VAT he was told that the reason for the decision against him was that the materials used had to be supplied by a person who was registered for VAT.  Most of the labour they used was unregistered self-employed tradesmen (although some were registered).  He himself had been a long-term self-employed contractor and a DIY contractor.  His materials were purchased from local suppliers but were not installed by a registered supplier.

5.	Mr Darbyshire also raised the issue of VAT refunds in respect of a Do-It-Yourself builder and envisaged a scenario where friends and employees were used.  He felt there were considerable anomalies and that there was a distinct conflict between the two leaflets of the Commissioners namely the Do-It-Yourself leaflet number 719 and the leaflet number 708 on which the decision in his own case was based.  

6.	The first piece of legislation to consider is Section 35 of the Value Added Tax Act 1994 (the Act).  The work in the current case cannot qualify as a DIY scheme as the section relates to the carrying out of work otherwise than as a business.  There is no dispute that this was a business venture and whilst Mr Darbyshire contended that there was a contradiction between the treatment of the project for Inland Revenue purposes and for VAT purposes that is not a relevant consideration as the Tribunal must look at the terms of the legislation in place.  

7.	I next turn to group 6 of schedule 7A of the Act to consider whether the nature of the works fell within the definition of “qualifying conversion” for the purposes of this provision.   Item 2 (1a) of group 6 schedule 7A of the Act states ;

“	     Meaning of  ‘Qualifying Conversion’
Item 2(1) A qualifying conversion means – 
(a)	a changed number of dwellings conversion ;
(b)	a house in multiple occupation conversion ; or
(c)	a special residential conversion

Item 1 of Group 6 schedule 7A of the Act provides ; 
The supply, in the course of a qualifying conversion, of qualifying services related to the conversion.  
1.	The supply of building materials if –
(a)	The materials are supplied by a person who, in the course of qualifying conversion, is supplying qualifying services related to the conversion, and 
(b)	Those services include the incorporation of  the materials in the building concerned or its immediate site.  “

	The meaning of  ‘person’ is set out in Section 3 of the Act as follows:-
	Section 3(1) A person is a taxable person for the purposes of this Act while he is, or is required to be registered under this Act.”

8.	In the presentation of their case Mr Richard Shaw has confirmed that the Commissioners have always accepted that the building works could qualify for the reduced rate (under the changed number of dwellings conversion i.e. to eight flats under Item 2 (1)(a)).  The significant point however has been that whilst the Appellant provided the materials the construction services were supplied by non-VAT registered contractors. 

9.	The Commissioners have submitted and I accept their submission that even if the building works can be accepted as constituting a qualifying conversion nevertheless there is an additional factor and that is that the supplies of materials and the services must go together.  In the instant case the suppliers of materials and the services were separate.  The Commissioners pointed out that in any event the supply of services from non-registered contractors meant that they were received equivalent to zero-rated. 

10.	The legislation arises from the European Union Sixth Directive on VAT article 12 3(a) Category 9 Annex H which permits member states to apply reduced VAT rates in certain circumstances as a matter of social policy.  The representative for the Commissioners has pointed out that it could have been possible for the United Kingdom Government to have gone further in separating out the supply of building materials but that it did not do so.  

11.	I am satisfied and find that a building which had been a nursing home was converted into eight flats and that in operating the business venture the Appellant provided the materials and used non-registered labour to do the construction work.  The persons doing the work did not provide the supplies.  Equally this was not a Do-It-Yourself scheme operation.  In the circumstances it appears to me that the legal position is clear : so far as the project is concerned to have the benefit of the reduced rate it must not only be a qualifying conversion but one where the supplies come with the services.  The VAT legislation stands on its own in this connection and the operation of the building project does not fall within the reduced rate provisions.  Accordingly I dismiss the appeal.

12.	The Commissioners have not made any application for costs and therefore I make no direction as to costs.

Mrs E Gilliland
Chairman
Release Date:

MAN/03/0176