18903
Value added tax – Item 2, Group 6 Sch 8 VATA 1994 – protected buildings –whether separate building used as part of house which is a listed building is the same building – no – C & E Comrs v Zielinski Baker& Partners Ltd applied – whether building designed to become a dwelling consisting of self-contained living accommodation after the alteration – no – appeal dismissed

LONDON TRIBUNAL CENTRE

	LORD AND LADY WATSON OF RICHMOND	Appellants

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	EDWARD SADLER (Chairman)
					RACHEL ADAMS FCA ATII

Sitting in public in London on 6 December 2004

David Moll of Messrs Eacotts, Chartered Accountants, for the Appellants

Nicola Shaw, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The appeal and the decision

1.	Lord and Lady Watson of Richmond (“the Appellants”) claim that certain alteration works carried out to property which they own are approved alterations to a protected building for VAT purposes and that accordingly the supplies made to them in the course of carrying out those works comprise zero-rated, and not standard-rated, supplies for VAT purposes.  The Commissioners of Customs and Excise (“the Commissioners”) in their letter of 5 November 2001 deny that this is the case and require that the supplies in question are standard-rated.  The Appellants appeal against this decision by the Commissioners, and we are required to give a decision in principle.  We were told that the amount of VAT in dispute is approximately £9,000.  The appeal has only now come before the tribunal as the parties agreed to hold over the hearing until the decision of the House of Lords in the case of Customs and Excise Commissioners v Zielinski Baker & Partners Ltd, which is now reported at [2004] STC 456.  That decision is indeed relevant to this appeal, and in our view is determinative of the principal issue between the parties, requiring us to dismiss the appeal.
2.	We dismiss the appeal on the grounds that the approved alterations were made to a building (a utility room converted into a guest bedroom) which was separate from the principal house and that the building in question was not designed to remain as or to become a dwelling which consisted of self-contained living accommodation.  The building was not therefore a protected building within the terms of the zero-rating provisions.
The facts
3.	The primary facts are not in dispute.  We had before us in evidence plans and a photograph of the relevant buildings, architects’ drawings showing the works carried out and the related builders’ specification and estimate, the listed building consent granted by Mendip District Council in relation to the works, and the correspondence between the Appellants’ architects and accountants and the Commissioners.  Mr. David Horsfall, RIBA, of the firm of chartered architects of Horsfall and Norris, who had been instructed by the Appellants in relation to the design and execution of the alteration works, gave evidence.  We find the facts as follows:- 
(1)	The Appellants purchased the property known as Somerset Lodge in 1988.  The property then comprised a dwelling (formerly a gate house) with an adjoining conservatory, garage and stables, and an outbuilding across a courtyard used as a utility room and an outside wc.
(2)	The utility room/outside wc outbuilding (which for convenience we will refer to simply as the utility room) is connected from one of its corners to the corner of one of the stables by a stone wall of approximately 3m in length, and at the height of the roof eaves of the stable.  The arrangement of the buildings is such that there is a courtyard bounded on one side by the house itself, on a second side by the conservatory/garage/stables, on a third side by the wall connecting the stable to the utility room, and on the fourth side (as to about half the length of the courtyard) by the utility room, which leaves about half of the fourth side open providing access to the gardens.  There is a gate or doorway from the courtyard in the wall between the stable and the utility room, and the wall is sufficiently high that it continues above the gate or doorway.
(3)	All the buildings comprised in the property, including the wall between the stable and the utility room, were built at about the same time and of similar stone material.
(4)	The wall between the stable and the utility room serves no structural purpose in the sense that the utility room is not structurally dependent upon it.  It follows that the utility room is not structurally linked with or dependent on the stable or any other part of the property.
(5)	The utility room was used as a general utility workroom for the main house.  It shared mains drainage, electricity and cold water supplies with the main house.
(6)	The entirety of the property is a listed building within the meaning of the Planning (Listed Buildings and Conservation Areas) Act 1990.
(7)	On 20 July 1992 the relevant authority, Mendip District Council, granted listed building consent for certain alteration works to the property, namely the conversion of the conservatory, garage and stables into a sitting room and also the conversion of the utility room into a guest bedroom with en suite shower room and wc.  The alteration works comprising the conversion of the conservatory, garage and stables were carried out first, and they were zero-rated for VAT purposes.
(8)	The alteration works carried out to the utility room were extensive, and included the demolition of an internal wall, changes in the fenestration of the building, the removal of the “outdoor” wc and the installation of a shower room and wc, the installation of a hot water supply and under-floor (hot water pipes) heating system, and insulation of the roof and lining of the walls.  All services (including the hot water and heating supply) are supplied from the main house.
(9)	Although listing building consent was required (and obtained), none of the works carried out to the utility room required planning permission, nor was there any intended change of use such as to require planning permission:  had it been the intention to render the utility room a separate dwelling capable of being sold off separately from the main house, planning permission would have been required for that purpose.
(10)	Following completion of the works the utility room comprised a bedroom with approximate dimensions of 4m by 3.5m and an en suite shower room and wc with approximate dimensions of 1m by 3.6m.  A washbasin was installed in the shower room, but no sink, cooking facility or work surface was installed.  There is sufficient room in the bedroom to install some kind of work surface and a microwave oven so as to turn the bedroom into a bed-sitting room, for example as staff accommodation.
(11)	The intention of the Appellants in carrying out the work to the utility room was to create a guest bedroom to be used as part of and as a facility of the main house.
The legislation
4.	In order for the Appellants to succeed in their claim that the services and goods supplied to them in carrying out the alteration works to the utility room should be zero-rated for VAT purposes, they must show that they are of a description specified in Group 6 of Schedule 8 to the Value Added Tax Act 1994 (“VATA”).  Group 6 is headed “Protected Buildings”, and the relevant Items are as follows:-
2	The supply, in the course of an approved alteration of a protected building, of any services other than the services of an architect, surveyor or any person acting as consultant or in a supervisory capacity.
3	The supply of building materials to a person to whom the supplier is supplying services within item 2 of this Group which include the incorporation of the materials into the building (or its site) in question.
5.	The Notes to Group 6 set out key definitions for the application of Items 2 and 3, and for the purposes of this appeal the following are the applicable parts of the relevant Notes:
(1)	“Protected building” means a building which is designed to remain as or become a dwelling or number of dwellings (as defined in Note (2) below) or is intended for use solely for a relevant residential purpose or a relevant charitable purpose after the reconstruction or alteration and which, in either case, is –
(a)	a listed building, within the meaning of –
(i)	the Planning (Listed Buildings and Conservation Areas) Act 1990…
(2)	A building is designed to remain as or become a dwelling or 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 the disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision,
and includes a garage (occupied together with a dwelling) either constructed at the same time as the building or where the building has been substantially reconstructed at the same time as that reconstruction. 
6.	For the sake of completeness we should mention that Note 6 sets out the meaning of the term “approved alteration” which appears in Item 2 – in this appeal there is no dispute between the parties on this point, so that the works carried out to the utility room, as described above, are to be taken as comprising an “approved alteration” for these purposes.
The Appellants’ submissions
7.	For the Appellants Mr Moll made two alternative submissions:  first, that the utility room was, and was used as, part of the single building comprising the dwelling composed of the structures forming the courtyard, and continues to be, and to be used as, part of that single dwelling building following completion of the alteration works;  secondly, that if the utility room is not part of that single dwelling building, then it is a separate building designed to become a dwelling after the alteration which consists of self-contained living accommodation.  On either basis the supplies in question are made in the course of an approved alteration of a protected building, as defined in the relevant Notes, and should therefore be zero-rated.
8.	The first submission was made on two grounds.  Mr Moll argued first that, in relation to the physical structure, the utility room could fairly be said to be part of the same building as the “main house” and other structures which together enclosed and thereby formed the courtyard:  the utility room is physically linked to them by a substantial wall;  all the parts of the building were constructed at the same time and as some kind of unit; and they all share common utility services.  He argued secondly that the utility room, even if physically a separate building, nevertheless functioned as part of a single dwelling and that this continued to be the case after it was converted into a guest bedroom, so that, by reference to function, the alteration works could be said to be made to the building being the whole of the dwelling.  In this respect, he submitted, the Appellants’ case could be distinguished from that in Customs and Excise Commissioners v Zielinski Baker & Partners Ltd, where the structure where the works were carried out was a barn converted into an indoor swimming pool and games room, and therefore not, functionally, an integral part of the dwelling.  Mr Moll referred to the VAT tribunal decision in the case of Nicholas Forman Hardy v Customs and Excise Commissioners [1994] VATTR 302, where alterations to a building physically separate from the main house, but used as an integral part of the house (the entirety of the property being a listed building), were held to qualify for zero-rating on the grounds that together the buildings formed one dwelling which was a “protected building” for VAT purposes.  The decision in the Forman Hardy case had not been appealed by the Commissioners, and Mr Moll submitted that it had not been expressly over-turned by the Zielinski Baker decision.  Both of these approaches, Mr Moll argued, are consistent, in the present appeal, with all of the property (“main house”, garage, stables and utility room) being a listed building.
9.	As to his alternative submission, Mr Moll argued that, with minimal internal modifications the guest bedroom created out of the utility room could be equipped with basic kitchen facilities so as to become a bed-sitting room to provide accommodation for staff or a dependant relative.  It was therefore the case that the alteration works had been carried out to a building designed to become a dwelling consisting of self-contained living accommodation, so that on those grounds the works were the alteration of a “protected building”, as defined.  This again distinguished the Appellants’ case from that of the taxpayer in the Zielinski Baker case, where the swimming pool and games room could not function as self-contained living accommodation.
The Commissioners’ submissions
10.	For the Commissioners Miss Shaw relied on Customs and Excise Commissioners v Zielinski Baker & Partners Ltd, referring us to the judgment of Etherton J in favour of the Commissioners in the Chancery Division of the High Court (reported at [2001] STC 585), and also to the decision of the House of Lords (reported at [2004] STC 456).  She argued that the utility room is a physically separate building from the “main house”, and that neither the sharing of facilities or services, nor the fact that it functioned as part of the single dwelling entitled the Appellants to treat it as part of the building which comprised the “main house”.  It is now clear from the decision of the House of Lords in the Zielinski Baker case that in applying the requirements for zero-rating supplies in the case of alteration works to a “protected building”, it is necessary to look at the actual building to which the alterations are made by the works in question, and then see whether that building is a “protected building”, that is, satisfies the cumulative requirements of being both (a) a listed building and (b) a building which is designed to remain as or become a dwelling house (see Lord Hoffmann at [9] and [11]; Lord Hope of Craighead at [18]).
11.	In the present case, the listed building designation of Somerset Lodge extends to the utility room (so that it satisfies the requirement that it is a listed building), but the utility room cannot be said to be “a building which is designed to remain as or become a dwelling”, that is, self-contained living accommodation.  At the relevant time, when the alteration works supplies were made, the utility room was not designed to become self-contained living accommodation, but instead was designed to become a guest bedroom to be enjoyed and used in conjunction with and as an adjunct to the living facilities of the “main house”.  The utility room as converted offers no facilities for cooking or eating and no living space beyond the confines of a bedroom.  It is heavily dependent upon the “main house” for all services and utilities.  Miss Shaw referred us to the Court of Appeal decision in the case of Curl v Angelo and Another [1948] 2 All ER 189, which is concerned with rent restriction legislation, and where a bedroom annexed to hotel accommodation was held not to be let as “a separate dwelling”, on the grounds that the bedroom was not the “home” of anyone since the main activities of living – apart from sleeping – were carried on in the main part of the hotel.  In the present case, she argued, the converted utility room was, likewise, not designed to be the “home” of anyone:  it was designed to be the guest bedroom of the home of the Appellants, as the evidence of Mr Horsfall made clear.
12.	Miss Shaw submitted that the Appellants cannot rely on the Forman Hardy case, which can no longer stand as good law in the light of the House of Lords decision in the Zielinski Baker case:  the tribunal can now be seen to have asked the wrong question, since the issue is not whether the (separate) building which is subject to the alteration works is used as an integral part of the main building, but whether that building (assuming it is a listed building) is, in itself, designed to remain or become self-contained living accommodation.
13.	Miss Shaw told us that, taking a broader view, it should not surprise us that this is not a case where the taxpayer is entitled to the tax relief of zero-rating.  Referring to the analysis of the European context of the present “protected buildings” relief set out in the judgment of Etherton J in the Zielinski Baker case [2001] STC 585 at [12] to [21] she explained that there must be a social policy justification for extending the relief of zero-rating to a taxpayer or group of taxpayers, and that policy is the increase in the country’s housing stock by the provision of additional self-contained living accommodation – if that is the outcome of the alteration works to a listed building, then zero-rating is available; but if it is not, then the taxpayer should not be benefited at the cost of the general body of taxpayers.  In the present case no additional self-contained living accommodation resulted from the alteration works, and so zero-rating was not available: that was the result of a proper application of the relevant Group 6 provisions to the facts of the case and it was consistent with the broader policy underlying the legislation.
The decision
14.	It is our decision that the appeal by the Appellants should be dismissed.
15.	In order for the relevant supplies to the Appellants to be zero-rated within Group 6 of Schedule 8 VATA it must be shown that they are made in the course of an approved alteration of a protected building.  In this case the works in question were carried out in altering the utility room at Somerset Lodge so as to turn it into a guest bedroom incorporating an en suite shower room and wc.  It is accepted by the Commissioners that the works which were carried out comprised, for the purposes of Item 2 of Group 6, “an approved alteration”.  The issue is whether what was altered was a “protected building”, as that term is defined for the purposes of Item 2.
16.	That requires that we should first identify the building to which the alterations were made – was it the utility room alone, or was it the entirety of the Somerset Lodge property, that is the range of buildings (“main house”, conservatory, garage, stables and utility room) which form the courtyard as described at para. 3(2) above?  We find that the building to which the alterations were made was the utility room alone.  
17.	First, as a matter of physical structure, the utility room was (and remained so following the alteration works which converted it into a guest bedroom) a building in its own right separate from and independent of the remaining building or structure comprising Somerset Lodge.  The utility room stands apart from the main building and is not dependent upon, or integrated structurally in any way with, the main building.  This was the clear evidence of Mr Horsfall.  The utility room is linked to the main building by a high wall which is integral in the sense that it was built (in all likelihood) at the same time as the utility room and the main building and as part of the overall design, but on the basis of Mr Horsfall’s evidence that wall serves no structural purpose in relation to the utility room – the demolition of the wall would not result in the structural impairment of the utility room.  Questioned by Miss Shaw as to whether in his view the utility room is a separate building, Mr Horsfall agreed that it is, and in our view it would be difficult to come to any other conclusion.
18.	Secondly, and having regard to the clear decision on the point in the House of Lords in Customs and Excise Commissioners v Zielinski Baker & Partners Ltd, we do not consider that a separate building can be treated for the purposes of Item 2 of Group 6 as part of a principal house (so that together they are regarded as a single building for those purposes) even where together they comprise a “listed building” and where the separate building has a function as part of the principal dwelling house, sharing the same utilities, services and so on.  The Appellants argued that the tribunal decision in the Forman Hardy case is authority for the proposition that for the purposes of Item 2 a separate, subsidiary, building can be treated as an integral part of the principal house where the subsidiary building is used as part of the dwelling.  That approach, or something like it, found favour in the Court of Appeal when it decided in favour of the taxpayer in the Zielinski Baker case (reported at [2002] STC 829).  But it was decisively rejected by the majority in the House of Lords upon appeal and we agree with Miss Shaw that the decision of the tribunal in the Forman Hardy case can no longer stand as authority.  The point is dealt with by Lord Hope of Craighead in the Zielinski Baker case at [18]: “The first step is to identify the building in connection with which the supply is made.  There is no room for doubt as to how one must go about this exercise.   It is the building which is being reconstructed or altered (or each building, if the supply is made in connection with more than one building) that attracts the provisions for zero-rating in Group 6.”  He then continues, in relation to the facts of that case (at [21]):  “The house and the outbuildings are in the same occupation, they are occupied together as a single dwelling and both buildings fall within the definition of a listed building for the purposes of the [Planning (Listed Buildings and Conservation Areas) Act 1990].  Prior to the abolition of the rating system for domestic properties by the Local Government Finance Act 1988 they would have been entered in the valuation list as a single hereditament.  But there is no getting away from the fact that it is only the outbuilding and not the house that is being altered, and that it is the house and not the outbuilding that has been listed.”  In the present appeal, as in the Zielinski Baker case, it is the outbuilding alone, the utility room, which is the building which must satisfy the relevant conditions to qualify as a “protected building” if the alteration works are to be zero-rated.
19.	To qualify as a “protected building” the utility room must be a “listed building” (and that it is so is common ground in this appeal) and also it must be “a building which is designed to remain as or become a dwelling or number of dwellings…after the reconstruction or alteration” – Note (1) to Group 6.  Note (2) tells us that even if a building remains or becomes a dwelling after the alteration, three further conditions must nevertheless be satisfied if a building is to be regarded for these purposes as “designed to remain as or become a dwelling”.  In the circumstances of this appeal the critical condition is that “the dwelling consists of self-contained living accommodation” – the remaining two conditions can be regarded as being satisfied.
20.	It is our decision that the utility room is not designed to remain as or become a dwelling after the alteration for these purposes, and is not therefore a “protected building”.  We do not consider that the utility room was a dwelling, nor that it was designed to become a dwelling after the alteration works;  even if, contrary to our view, in some way the converted utility room could be regarded as a dwelling, we do not consider that it was a dwelling which consists of self-contained living accommodation, so that the condition to this effect required by Note (2) is not satisfied.
21.	The Appellants case in relation to this issue is that, with minimal modification to the guest bedroom created out of the utility room so as to install basic cooking, food preparation and sink facilities, the building could be used as a self-contained unit of living accommodation, for example for the use of staff or a dependant relative of the Appellants.  The Appellants do not contend, as we understand it, that, as originally conceived in planning the conversion of the utility room and as it now (in its converted state) stands, the building can be regarded as a dwelling, that is, as someone’s home, or a place where someone can live.  The evidence of Mr Horsfall was quite clear that the intention of the Appellants in carrying out the alteration works to the utility room was to create an additional bedroom with en suite shower and wc facilities which would be used by their guests when they came to visit the Appellants.
22.	It is clear to us that the point at which it is necessary to determine whether or not a building “is designed to remain as or become a dwelling…after the alteration” is the time at which the relevant supplies were made – at that time (and taking account of the alteration works effected by those supplies) was the utility room designed to become a dwelling?  It was at that time designed to become an additional bedroom for the use of guests staying with the Appellants, and that, we were told, is how it has been used.  There was no evidence that guests of the Appellants used the bedroom other than as a bedroom with its en suite facilities, and no doubt during the day the guests are entertained in the “main house” and that is where they take their meals.  Anyone using the bedroom would have to have recourse to the other living facilities available only in the “main house”:  their “dwelling” would be the “main house” together with the bedroom.  As Miss Shaw put it: if you ask the question, “Was the utility room designed to become the home of anyone?”, the answer is, “No, it was designed to become the guest bedroom of Somerset Lodge”.  In no sense, it seems clear to us, could it be said that, in converting the utility room into the bedroom which resulted from the alteration works, the building became a “dwelling”, a place in which someone would dwell, or live as their home – much less a dwelling which consists of self-contained living accommodation, which is the condition required by Note (2).
23.	It does not assist the Appellants’ case that, with further work, even of a relatively minor nature, the guest bedroom could be turned into a bed-sitting room with cooking and related facilities.  That is as may be, but that is not what the utility room was designed to become at the time when it is necessary to determine these matters (i.e. when the relevant supplies were made), and that disposes of the point:  we have to concern ourselves with what the building was designed to become, not with what it could have become.  But in case the Appellants feel that they could have saved themselves a not insignificant amount of VAT had they had the forethought to make minor changes to the design and fittings of the conversion, we can add that it is not simply that the utility room should become a dwelling, but that it should satisfy the condition in Note (2) that “the dwelling consists of self-contained living accommodation”.  Had the utility room been converted into a bed-sitting room with kitchen facilities it would be a question of fact whether it then comprised self-contained living accommodation in circumstances where the converted utility room would be wholly dependent on the “main house” for heating, utilities and other services (assuming that the conversion in this respect followed the arrangements made in the actual conversion to the guest bedroom) – it is by no means certain that such question would be decided in the Appellants’ favour.  Furthermore, if the utility room had been converted into self-contained living accommodation to be used as such a different issue might have arisen, namely whether planning permission would have been required, and if so, whether any consent given would have prohibited the disposal of the converted utility room independently of the “main house” – the relevance of this is that a further condition of Note (2) is that, for a dwelling to qualify as a “protected building”, its separate use or disposal must not be prohibited by the terms of any covenant , statutory planning consent or similar provision.
24.	In summary, therefore, we dismiss the appeal on the grounds that the building to which the approved alteration was made was the utility room alone, and that since that building was not designed to remain as or become after the alteration a dwelling which consists of self-contained living accommodation, it is not a “protected building” for the purposes of Item 2 of Group 6 of Schedule 8 to VATA, and therefore the supplies made in the course of its alteration do not qualify for the benefit of zero-rating.
25.	We make no direction as to costs.

EDWARD SADLER

CHAIRMAN
RELEASE DATE: 7 January 2005

LON/2001/1210