19190

VALUE ADDED TAX — zero-rating — substantial demolition and rebuilding of church with ancillary facilities — new facilities including a nursery — use for relevant charitable purpose agreed — whether an annexe — no, merely part of a single building — VATA 1994 Sch 8 Group 5 Item 2, Notes (16), (17), (18) — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

	TRUSTEES OF ELIM CHURCH, TAMWORTH
	and THE MANNA HOUSE (TAMWORTH) CO	Appellant

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

			Tribunal:	Colin Bishopp (Chairman)

Sitting in public in Birmingham on 6 June 2005

Reverend Stephen Jonathan, Pastor and Trustee, for the Appellants

James Puzey, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	The Appellants are two linked registered charities together occupying land and buildings at Tamworth, Staffordshire. Neither charity is registered for VAT, although they make taxable supplies of modest value. In early 2002 they obtained planning permission for the carrying out of various building works on the land they occupy. The issue in this appeal is whether, and if so to what extent, any of the work is zero-rated. The Appellants originally argued that the entirety of the work was zero-rated but later (though in some respects not before the hearing had begun) accepted that not all of the work could be zero-rated. The Respondents’ position throughout has been that all the work is standard-rated.
2.	The Appellants were represented by one of their trustees, and the pastor of the church, the Reverend Stephen Jonathan. The Respondents were represented by James Puzey of counsel. The facts were, for the most part, agreed and I heard no oral evidence, although Mr Puzey asked Mr Jonathan a few questions to clarify some matters of detail. I had plans and photographs illustrating the works, and a bundle of documents.
3.	The Appellants’ premises, before the work began, consisted of a church building, containing the auditorium itself with a number of adjacent rooms, and a separate complex, the “Manna House”, whose function is to provide facilities by which the elderly may be cared for in the community. The works were extensive, affecting the whole of the site, but I am now concerned with only one item, the construction of a new day nursery, containing a kitchen, staff room, laundry, office and toilets, and some rooms used for the nursery itself on the ground floor, with further nursery rooms and children’s toilets on the first floor. The new construction was carried out in phases, so that at all times there was sufficient accommodation to allow the Appellants to continue to provide their normal facilities. Overall, the existing buildings were demolished in stages (though the demolition was not complete) and a new building, or buildings, was, or were, erected in the place of the old, incorporating such parts of it as were not demolished. Before the work began, the nursery was housed in a much smaller building than the premises it now occupies, adjacent to the church and connected to it by a door. 
4.	In order to succeed, the Appellants must show that the construction of the new nursery falls within Item 2 of Group 5 of Schedule 8 of the Value Added Tax Act 1994, as a “supply in the course of the construction of … a building … intended for use solely for … a relevant charitable purpose”. The Respondents accept that the intention for use requirement is met, at least so far as the new construction is used as a nursery, but they argue that what the Appellants have done does not meet the special definition of “construction of a building” as it is set out in Notes (16), (17) and (18) to the Group. So far as material they read:
“(16)	For the purpose of this Group, 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.
(17)	Note 16(c) above shall not apply where the whole or a part of an annexe is intended for use solely for a relevant charitable purpose and—
(a)	the annexe is capable of functioning independently from the existing building …”
(18)	A building only ceases to be an existing building when:
(a)	demolished completely to ground level …”
5.	Mr Jonathan acknowledged that Note (18) was not satisfied, and I do not need to deal with that point, save to comment that, if Note (18) is not satisfied, the Appellants, in order to succeed, must demonstrate that the part of the new construction housing the nursery is an annexe capable of functioning independently from the church building: nothing else will secure for them the benefit of zero-rating.
6.	At this point, it is necessary to apply the test described by Lightman J in Cantrell and another (trading as Foxearth Lodge Nursing Home) v Customs and Excise Commissioners [2000] STC 100 at 103, that is to examine the buildings before and after the carrying out of the works, and to ask oneself what is the result taking into account a number of matters including, of particular relevance to this case, the layout and how the building or buildings are equipped to function. The Appellants had, before any work was started, a church building which contained an auditorium and a number of other rooms, with a further room, or rooms, attached at one side, housing the nursery and, as I have said, sharing one wall with the church and with internal access between the two available by means of a doorway. What they have now is not fundamentally different. The works of demolition and construction were planned to take place in phases but, as Mr Jonathan agreed, there was in reality a single project. The external appearance of the new building, or buildings, is similar throughout. That part of the new which houses the nursery and the church as reconstructed continue to share a common internal wall. The lavatories serving the church are within the nursery area, albeit separated internally from it by doors protected by security locks (for the safety of the children in the nursery). The nursery area also contains a kitchen which is so designed as to be available for use both for the church and for the nursery even if, as Mr Jonathan told me, it has not in fact been used for church purposes. There is occasional use of the nursery area by church youth groups but I accept Mr Jonathan’s statement that such use is rare and I am not persuaded that it is an important factor since the plans show clearly that the rooms in question are designed for nursery use and their being used for other purposes is no more than incidental.
7.	Mr Jonathan argued forcefully that, despite the external appearance of the new construction, and the fact that the church lavatories are in the nursery section, the nursery does in fact function quite separately from the church, and, by means of the security locks, is internally separated from it. (I should add, for completeness, although it is not relevant to the decision, that the church and the nursery have their own, quite separate, entrances). 
8.	Nevertheless, I am bound to agree with Mr Puzey that the Appellants have not constructed two buildings, one being an enlargement or extension of, or annexe to, the other, but a single building. It is true that the nursery is designed for a specific purpose but that is not sufficient to make that part of the building which houses it into an annexe. As the tribunal explained, in Macnamara v Customs and Excise Commissioners [1999] V&DR 171 at 176, in a passage which has been generally accepted as a useful and correct analysis, “The term annexe connotes something that is adjoined but either not integrated with the existing building or of tenuous integration”. It is, in my view, quite impossible to say that the nursery has no more than tenuous integration with the remainder of the building. There is substantial structural integration. There is also functional integration in that — and disregarding the fact that the nursery is run by the church — the church lavatories are housed within it and the church has, even if it has not availed itself of it, use of the kitchen. It would not help the Appellants if one were to treat the nursery accommodation alone, and to regard the lavatories and kitchen as part of the church, since the structural integration would then be even greater. The only reasonable conclusion is that the Appellants have constructed a single building.
9.	In these circumstances, it is unnecessary to look further; if the nursery is not an annexe and is not (as was conceded) a new building within the meaning of the legislation it necessarily follows that its construction is standard-rated. The appeal must accordingly be dismissed.
10.	I add only, by way of postscript, and in case that conclusion should elsewhere found to be wrong, that I do not agree with Mr Puzey that the use by churchgoers of the lavatories has the consequence that the requirements of Note 17(a) are not satisfied. The focus of the Note is not the ability of the principal building to function separately, but of the annexe (assuming it to be an annexe) to do so. It may be that blocking off the access between the church and the nursery would have an adverse effect on the use of the church; but it would have none on the operation of the nursery which, I am satisfied, is capable of functioning independently.
11.	Mr Puzey did not seek a direction in respect of costs.

COLIN BISHOPP

CHAIRMAN
RELEASE DATE:  20 July 2005

MAN/03/0177