Kahal Imrei Chaim Ltd v Revenue & Customs [2006] UKVAT V19625 (15 June 2006)

                                                                                                  19625

VALUE ADDED TAX – Zero-rating - Value Added Tax Act 1994, Sch 8, Group 5, Building works – Supply of services in the course of construction of a new synagogue in garden of old synagogue and house next door – Whether zero-rated? – Held yes – Appeal allowed

LONDON TRIBUNAL CENTRE 						   LON/2004/1186

KAHAL IMREI CHAIM LIMITED	Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS	Respondents

Tribunal:	ADRIAN SHIPWRIGHT (Chairman)
CATHERINE FARQUHARSON

Sitting in public in London on 26 April 2006

Daniel Kalderimis of Freshfields Bruckhaus Deringer, for the Appellant

Nicola Shaw, Counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION
Introduction
1.	This is an appeal by Kahal Imrei Chaim Limited (“the Appellant”) against a decision of the Respondents (“HMRC”) dated 29 July 2004 that certain building works were standard rated and not zero-rated. 
The Issue 
2.	In essence, the issue in this case is whether the works in question fall within Group 5 Schedule 8 VATA and so are to be zero-rated as a new building intended for use solely for a relevant charitable purpose.
3.	This raises certain further questions including the following.
	a.	What are the existing buildings or building to be considered?
	b.	Was the existing building enlarged or extended?
	c.	Was there a non-qualifying annexe?
The Law and Authorities
The Legislation  
4.	The relevant legislation is to be found in Item 2 Group 5 Schedule 8 VATA. In so far as is relevant it provides for the zero rating of:
“The supply in the course of the construction of— 
 (a) a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose; or
 …,
of any services other than the services of an architect, surveyor or any person acting as consultant or in a supervisory capacity.”
5.   Note 16 to Group 5 provides:
“(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. 

6.	Note 17 to Group 5 provides:
“(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; 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 Authorities 
7.	We were provided with copies of the following decisions and other matters.
Value Added Tax Act 1994 section 30
Value Added Tax Act 1994 Schedule 8, Group 5
HMRC Notice 48 Extra Statutory Concessions
Cantrell and another (trading as Foxearth Lodge Nursing Home) v Customs and Excise Commissions [1999] STC 100
Cantrell and another (trading as Foxearth Lodge Nursing Home) v Customs and Excise Commissions (No. 2) [2003] EWHC 404 (Ch)
Waterways Services v The Commissioners of Customs and Excise (1990) Decision number 4643
Associated Nursing Services Plc v The Commissioners of Customs and Excise (1993) Decision number 11203
Bryan Thomas MacNamara v The Commissioners of Customs and Excise (1999) Decision number 16039
Grace Baptist Church v The Commissioners of Customs and Excise (1999) Decision number 16093
Woodley Baptist Church v The Commissioners of Customs and Excise (2002) Decision number 17833
Torfaen Voluntary Alliance v The Commissioners of Customs and Excise (2004) Decision number 18797
Allan Water Developments Ltd v Her Majesty’s Revenue and Customs (2005) Decision number 19131
Henshaw’s Society for Blind People v The Commissioners for Her Majesty’s Revenue and Customs (2005) Decision number 19373
Chacombe Park Developments Services Ltd v Her Majesty’s Revenue and Customs (2005) Decision number 19414
Shorter Oxford English Dictionary definition, “Enlargement”
Shorter Oxford English Dictionary definition, “Extension”
Shorted Oxford English Dictionary definition, “Annexe” 
Evidence 
8.	A bundle of documents was produced.  No objection was raised to any of them and they were all admitted in evidence.
9.	No oral evidence was given. Witness statements were produced for:
a.	Yakov Yosef Neiman, the Gabbai of the Synagogue;
b.	John Richard Stebbing, the Architect for the new structure.
10.	The witness statements were not objected to and were admitted in evidence. The Respondents confirmed that they did not wish the witnesses to attend to give evidence in person or to be cross-examined. Accordingly, the witnesses did not attend and were not cross examined.
11.	It is common ground that:
(1)	the building works in question do not include the services of an architect, surveyor or consultant; 
(2)	the Appellant is a charity; and
(3)	there was no dispute as to “Relevant Charitable Purpose”.  It was accepted that there was a “Relevant Charitable Purpose” in the present circumstances.
Findings of Fact 
12.	From the documents and evidence we make the following findings of fact.
The Appellant and 121 and 123 Clapton Common
(1)	 The Appellant is a company involved with religious and charitable activities including a synagogue.
(2)	The Appellant acquired 121 Clapton Common, London E 5 in 1982 ("number 121").  This is the building that was used in part as a synagogue.
(3)	The Appellant acquired 123 Clapton Common, London E 5 later ("number 123").  Number 123 was apparently rented out or left vacant.
(4)	Numbers 121 and 123 are adjoining terraced Victorian properties.  They are of four storeys and each consist of a basement with three storeys above.
(5)	The Appellant used part of number 121 as a synagogue. The other part is let out to third parties to produce an income for the Appellant.
(6)	Number 123 is let out to produce an income for the Appellant.
(7)	The Appellant is concerned with the Orthodox Jewish religion. It has particular reliefs, rituals and customs.   
(8)	In particular, it considers that men and women should only meet in certain circumstances and there should not generally be any physical contact. 
(9)	For the purposes of worship men and women are segregated. The men enter the synagogue or “Schul”. The women have a separate gallery overlooking the Schul, which they are not to enter. The gallery is not part of the Schul and is screened from it by a pierced screen.
Planning Permission
(10)	The Appellant applied for planning permission for "the new synagogue and the hall with a two-bedroom flat in the existing buildings and ancillary accommodation".
(11)	In a letter dated 10 March 2000 Hackney Regulatory Services gave permission for "the erection of a two storey rear building for use as a synagogue use of part of 1st floor as a flat + elevational alterations".
(12)	Various conditions were applied to this permission including the following.  There was a time limit of three years for the start of the works in question.  External finishes were to match the existing buildings.  Certain windows on the East elevation were to be glazed in obscured glass and kept fixed shut.  No amplification equipment was to be used and no music was to be played on the premises.  
(13)	In addition it was provided "The extension shall not be used to hold weddings and may only be used in connection with the existing main premises as a synagogue".
The Works 
(14)	The building works in question ("the Works") had to be funded and the money raised.  The Works were to be carried out in phases.
(15)	The original plan was for the Works to be carried out in three phases.  There was no dispute as to this nor that this was intended at the start and we so find.
(16)	The Works included the construction of a new structure in the gardens of Numbers 121 and 123.  This was the bulk of what was to be done and comprises most of the Works.  The third phase was to involve some ancillary works to the existing buildings.
(17)	There was also some standard rated work carried out to convert the two top floors of number 121 into residential accommodation.  This previously comprised the Womens Gallery, a kitchen and women's lavatories.  The work relating to this conversion does not form part of the matters under appeal.
(18)	Phase 1 consisted of the construction of the shell of the new structure.  It was started in about June 2000 and was completed in March 2003.
(19)	There is a party wall shared by number 121, and the new structure at ground and basement level.  There is an opening at each of the ground and basement levels.  This seems to have been knocked through later.
(20)	Phase 2 included fitting out the new structure to make it usable as a synagogue.  It is not clear when this work was started.  It stopped in March 2004 because of financial considerations.  However, despite this the new structure is being used as the synagogue notwithstanding that the Works are not complete.
(21)	Phase 3 has yet to be started.  It will include the construction of a new mikvah.
(22)	It is understood that there is some 20% of the plan still to be completed.
The Mikvah
(23)	The old synagogue contained a Mikvah. This is a Jewish ritual bath 
traditionally for women.  However, here the Mikvah was intended for use by men.  It was one of the unusual features of the particular synagogue.  A new Mikvah was intended as part of the Works.
The Position before the Works 
(24)	Before work started part of number 121 comprised the synagogue and Womens gallery.  The rest of number 121 was let out apart from the area use for the mikvah.  Some of the changing rooms would be in number 121 but we find this does not mean that there an extension.
(25)	In essence, number 123 was a financial asset of the Appellant.  It was let out and did not feature as part of the synagogue other than to provide it with income.  
(26)	Access to the synagogue was through number 121.
(27)	We do not consider that there was a "Synagogue Complex".  We find as a primary fact that there was not a Synagogue complex consisting of numbers 121 and 123.
The Position after the Works 
(28)	The intention after completion of the Works was in broad terms that there should be a new bigger synagogue in what had been the gardens of Numbers 121 and 123.  
(29)	The new structure did not enlarge or extend number 121.  The access to the new structure was not dependent on numbers 121 or 123. Access was possible through number 121. The main access was elsewhere and we find this as a fact.
(30)	We consider that "what [was] in the course of construction at the date of supply [was as] in the ordinary case the building subsequently constructed i.e. the separate new Hall and synagogue.
(31)	Having regard to the similarities and differences in appearance, the layouts and how the building or buildings are equipped to function we consider that the new structure is a separate self sustaining and functioning building which although accessible from number 121 is a new and separate building from it.  Number 121 remained the same size.  The Works were not an enlargement or extension of number 121 nor an annexe to it.  The new structure did not make number 121 bigger by enlarging it nor did it extend it in the sense of a new wing or something equivalent.  The new building was capable of functioning on its own as a self-contained entity and currently does so.  We find this is a fact.
(32)	The effect of what was done was that the synagogue had moved from number 121 to the separate new structure which was what was intended at the start and during the various phrases of construction.
HMRC’s visit 
(33)	The HMRC officer visited the builder and examined records there. There was no evidence led that HMRC ever visited the Synagogue. 
Conclusions on fact
(34)	We find (as findings of fact, if not already so found) that:
		a.	Before the Works there was no Synagogue complex;
	b.	Number 123 was a financial asset separate from number 121;
c.	Number 121 was the relevant building to be the existing building for the purposes of comparison;
		d.	Number 121 was not physically enlarged or extended;
e.	The new structure was not dependent on or ancillary to number 121;
f.	The new structure was a separate new building capable of functioning as a standalone building with its own separate access;
g.	There was access from number 121 but this was not the primary access nor is such link sufficient to make the new building part in any way of number 121 or for there to be an enlargement, extension or annexe ;
h.	No ordinary person would consider after an objective examination of the physical characters of the building or buildings at the two points in time having regard (inter alia) to similarities and differences in appearance, the layout, the uses for which they are physically capable of being put and the functions which they are physically capable of performing that there was an enlargement or extension of number 121 or that there was an annexe to number 121 by reason of the Works.
i.	We have noted the terms of planning permissions, the motives behind undertaking the Works and the intended or subsequent actual use.  These have not informed our decision save possibly to illuminate the potential for use inherent in the building or buildings.
Parties Submissions 
The Appellant’s Submissions in outline
13.	In essence, the Appellant’s submission was that the new structure was a new building and so zero-rated.
(1)	It was not an enlargement, as it did not make an existing structure bigger. It was a stand-alone separate new building.
(2)	It was not an extension of an existing building in the sense of a new wing or the like. It was factually simply not the case.
(3)	It was not an annexe as a matter of fact. The new structure was not ancillary or subordinate to anything that continued. 
(4)	Even if it were an annexe (which was not admitted) it was a qualifying annexe.
HMRC’s Submissions in outline
14.	In essence HMRC’s submission was that the new structure was an extension to a   complex of buildings forming a synagogue facility.
(1)	The approach to be adopted required a before and after consideration.
(2)	The starting point was to consider what the existing matters were that were extended. Here the starting point was number 121 and 123 which together formed a synagogue complex.
(3)	The new structure was an extension of the existing synagogue complex. This was because of the structural and functional integration of the new and existing structures. It provided the same facilities before and after but over a larger site.
(4)	Therefore there was a standard rated extension.  
Discussion 
Introduction
15.	There is no real dispute as the law to be applied here.  It is found essentially in the Cantrell decisions ([1999] STC 100 and [2003] EWHC 404 (Ch)).  It requires a  before and after an approach to be taken.  The real dispute is as to the application of the law to the facts of this case.

Cantrell
16.	To assist us in our deliberations we remind ourselves of what was said in the Cantrell decisions.
17.	Lightman J said in the first case at paragraph 4:
“The two-stage test for determining whether the works carried out constituted an enlargement, extension or annexe to an existing building is well established. It requires an examination and comparison of the building as it was or (if more than one) the buildings as they were before the works were carried out and the building or buildings as they will be after the works are completed; and the question then to be asked is whether the completed works amount to the enlargement of or the construction of an extension or annexe to the original building (see Customs and Excise Comrs v Marchday Holdings Ltd [1997] STC 272 at 279). I must however add a few words regarding how the question is to be approached and answered, for this has been the subject of some lack of clarity (if not confusion) in a number of the authorities cited to me and it is the failure to approach and answer the question in this case in the correct way which flaws the decision. First the question is to be asked as at the date of the supply. It is necessary to examine the pre-existing building or buildings and the building or buildings in course of construction when the supply is made. What is in the course of construction at the date of supply is in any ordinary case (save for example in case of a dramatic change in the plans) the building subsequently constructed. Secondly the answer must be given after an objective examination of the physical characters of the building or buildings at the two points in time, having regard (inter alia) to similarities and differences in appearance, the layout and how the building or buildings are equipped to function. The terms of planning permissions, the motives behind undertaking the works and the intended or subsequent actual use are irrelevant, save possibly to illuminate the potentials for use inherent in the building or buildings”.

18.	Sir Andrew Morritt V-C in essence approved this and said in the second case at paragraph 11:
" In its second decision the Tribunal set out the relevant facts and quoted the material parts of the 1994 Act. They referred to the decision of Lightman J and recorded certain matters which were not and are not in dispute (see para 23). Those matters may be summarised as follows: (a) the words used in Note (16) are not terms of art; (b) in applying them it is necessary to adopt a two-stage approach, first identify the existing buildings as they were before the construction work began and, second, determine whether the new construction satisfies all or any of the terms in Note (16); (c) cases decided on the provisions in force before 1 March 1995 are of doubtful help; (d) whether or not the construction works fall within Note (16) is a question of fact and degree as held in Customs and Excise Comrs v London Diocesan Fund [1993] STC 369 at 380 and Customs and Excise Comrs v Marchday Holdings Ltd [1997] STC 272; and (e) terms used in the grant of planning permission are not determinative of the nature of the works permitted by the VAT legislation".

Identification of the existing building
19.	We have already found that there was no synagogue complex including numbers 121 and 123.  The existing building before construction with which the new structure has to be compared is number 121.  This is because essentially number 123 was a financial asset.  It was let out to produce income.  It was not part of what number 121 was used for in the sense of being part of the synagogue.  It was next door to number 121 but this did not make a part of a complex merely because it was contiguous.  Number 123 was in no different class from a building two streets away or in a different town which was let to produce an income for the Appellant.  We find that the existing building to consider is number 121.  It is not number 121 and number 123 together which have to be considered for these purposes as they do not form a complex or similar entity.

Was there a conversion, reconstruction or alteration of an existing building?
20.	It was not argued that there was a conversion, reconstruction or alteration of an existing building.  For the sake of completeness we find that this was so.
Was there an enlargement of an existing building?
21.	Number 121 remained the same size before and after the Works.  No part of number 121 was made bigger or enlarged. There was nothing equivalent to making existing synagogue building bigger.  Number 121 was not enlarged and we find this is a fact.  Accordingly, we find that there was no enlargement of number 121.  We find this is a fact.
Was there an extension to an existing building?
22.	We have already found that the new structure was a separate new building capable of functioning as a standalone building with its own separate access and that any linkage was not sufficient to make the new building part in any way of number 121 or for there to be an enlargement, extension or annexe.  What was done here was not the equivalent of adding an extra wing to a house.  We find that there was no extension of number 121. We find this is a fact.
Was there the construction of a non-qualifying annexe?
23.	Sir Andrew Morritt V-C said at paragraph [17] in the second Cantrell case "An annexe is an adjunct or accessory to something else, such as a document. When used in relation to a building it is referring to a supplementary structure, be it a room, a wing or a separate building".  Accordingly we ask ourselves is there is supplementary structure here?  We have already found that the new structure was not dependent on or ancillary to number 121.  We consider that the new structure cannot be said to be supplementary to number 121.  In so far as any building is supplementary to another number 121 might be said to be supplementary to the new structure.  However, this does not infer or imply that the new structure is not a separate standalone new building which we have found to be.  We find as a matter of fact that the new building is not supplementary to number 121 and accordingly is not an annexe to number 121.
24.	This means it is not necessary for us to consider whether the annexe was a qualifying annexe or not and so we have not done so. However, in our view the new structure if it were an annexe (which we find as a fact it was not) we consider it would be a qualifying annexe as it fulfilled the conditions of a separate main entrance etc.
Overview
25.	Overall we find that:
a.	Number 121 was the existing building to be considered when making the two stage comparison;
b.	As a matter of basic fact Number 121 was not enlarged or extended; and
c.	As a matter of basic fact there was no construction of a non-qualifying annexe.
Accordingly, the Works fall within Group 5 Schedule 8 VATA and are zero-rated.

Conclusion
26.	For the reasons given above we find that the Works fall within Group 5 Schedule 8 VATA and are zero-rated.  Accordingly, the appeal is allowed.

ADRIAN SHIPWRIGHT

CHAIRMAN
RELEASE DATE:15 June 2006
LON/2004/1186