Everard & Anor v Revenue & Customs [2006] UKVAT V19626 (12 June 2006)

                                                                                                         19626

VAT – refund of tax to “do-it-yourself” builders – building of extension – later decision to demolish house and build a new house within existing footprint – one wall and chimney stack retained – whether conditions for relief fulfilled – no – whether discretion exercisable by Tribunal – no – appeal dismissed

LONDON TRIBUNAL CENTRE

PETER AND STEPHANIE EVERARD	Appellants

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS	Respondents

Tribunal:	JOHN CLARK (Chairman)
SHEILA WONG CHONG FRICS

Sitting in public in London on 18 April 2006

Peter Everard in person for the Appellants

Richard Smith, counsel, instructed by the Acting Solicitor for Her Majesty’s Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	Mr and Mrs Everard appeal against the decision of the Respondents, referred to in this decision as “Customs”, to reject an application for repayment of VAT incurred in the process of building work at a property formerly owned by Mr and Mrs Everard. The claim was made under what is generally known as the “do-it-yourself builders scheme”.
The law
2.	Section 35 of the Value Added Tax Act 1994 (“VATA 1994”) provides:
“(1)   Where—
	(a)  a person carries out works to which this section applies,
	(b)  his carrying out of the works is lawful and otherwise than in the 	course or furtherance of any business, and
	(c)  VAT is chargeable on the supply, acquisition or importation of 	any goods used by him for the purposes of the works,
the Commissioners shall, on a claim made in that behalf, refund to that person the amount of VAT so chargeable.
(1A) The works to which this section applies are—
	(a)  the construction of a building designed as a dwelling or number 	of dwellings;
	. . .
. . . 
(4) The notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group . . . ”
3.	The following Notes to Group 5 of Schedule 8 VATA 1994 are relevant:
“(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 . . . ”
(18) A building only ceases to be an existing building when:
	(a)  demolished completely to ground level; or
	(b)  the part remaining above ground level consists of no more than a 	single facade or where a corner site, a double facade, the retention of 	which is a condition or requirement of statutory planning consent or 	similar permission.”
The facts
4.	The parties provided an agreed statement of facts, which stated:
(1)	The Appellants are Mr Peter Everard and Mrs Stephanie Everard of [address]. They are private individuals not registered for VAT.
(2)	On 14 December 2004, the Appellants submitted a claim under the DIY Converters Scheme for refund of VAT in the amount of £110,058.74. The claim related to the demolition and rebuilding of Farley (Cross) House, Farley, Salisbury, Wiltshire.
(3)	The house was lived in for 18 months before construction work commenced. While the work was ongoing, the family lived in a converted garage and a mobile home on the site. The Appellants’ original intention had been to build an extension to Farley House and they obtained planning permission for that. However during the course of construction it became apparent that the original house was not structurally able to support the new extension and would have to be almost entirely rebuilt, which the Appellants did. No fresh planning permission was required for the rebuild work because it could be classified as “maintenance of an existing structure”.
(4)	As a condition of funding by their lender, the Appellants were required to demolish only the southern side of the building initially, thereby retaining some value in the remaining building during the construction period. After some work on the southern side was completed the northern side of the house was demolished and rebuilt.
(5)	The finished house as rebuilt retains one external wall and chimney stack from the original house, as an internal wall. The retention of this wall was not a condition of planning permission. Otherwise nothing of the original house remains.
5.	Mr Everard also gave information in the course of putting his case, but not by way of formal evidence. We have taken this information into account in reaching our decision. He also provided a bundle of documents containing a memorandum setting out the history of the project, and photographs of the project at various stages. In addition the bundle included plans. He also submitted agents’ particulars for the property, both for the original house as purchased by the Everards, and for the house in its rebuilt form (known as “Farley House”).
Arguments for the Everards
6.	Mr Everard explained that when they had purchased the house, they had commissioned an architect, who drew up designs for a new house to be built in the middle of the garden area. This had been their original intention. The concept drawings had been taken to Salisbury District Council to discuss the principles. This would have required the footprint of the old house to be shifted to the centre of the 3.6 acre plot, to allow for the building of a new house. The Council had decided that the proposal would not be in keeping with the current policy for the area, but that general consent would be likely, if the new build could be within a ten-metre radius of the existing footprint. The proposed designs did not lend themselves to this option, as this would have created a restricted vehicular access and would have rendered the project unworkable.
7.	The Everards needed to extend the house because of their large family. They applied to the Council for planning permission for an extension. New drawings were submitted to the Council, based on the existing footprint. Subject to minor changes, the designs were accepted and full planning consent granted. They appointed a new architect, a structural engineer, and builders. Mr Everard decided to manage the project himself.
8.	The terms of the funding from the original provider dictated progress; as finance could only be provided as phases of the project were completed, only a part of the house could be demolished at a particular stage. The Council’s building control officer found a section of the southern side of the house with very little by way of footings or foundations. The project had to proceed or value would have been lost, adversely affecting the funding. When the northern section of the house was investigated, this was found to be unstable. The southern part was also subject to subsidence. The northern part would have to be demolished.
9.	Discussions with the planning officer and the building control officer had resulted in advice which was totally prejudicial to the Everards’ interests. The advice was that they could demolish and rebuild the house as long as the rebuilt house was within the original footprint. They were unaware of the zero-rated status for new build projects. It was not mentioned that a planning application could have been made for a new build property. They had gone to the lenders, and explained that the plan was to knock down the existing house and rebuild. The lenders said that there was insufficient value, and that the project would have to be phased to ensure that there would be a residual value in the property to allow for drawdown of funds.
10.	The Everards had subsequently found out that Customs had clear guidelines, and that there were precedents relating to part of a building being retained not being within the scope of the relief for do-it-yourself builders. Mr Everard accepted that a chimney stack had been retained, but pointed out the extensive works carried out throughout the house. Nothing had been left apart from the chimney stack; he questioned whether they would have retained it if they had been advised differently.
11.	They had subsequently taken VAT advice. Their first adviser had advised them to seek zero-rating. The second adviser had questioned whether the Tribunal had jurisdiction to base a decision on facts rather than guidelines and to consider whether a house was effectively a new build but fell outside zero-rating. Mr Everard described it as a “mistake” to have kept some bricks up; had they known, they would have conducted themselves differently and demolished the stack.
12.	He explained that he had gone to the planning officer to consider the possibility of a retrospective planning application. The officer had said that this was very unlikely, as the Everards no longer owned the house. The VAT appeal had taken 18 months to reach the present stage.
13.	Mr Everard asked the Tribunal to consider the facts, and whether on those facts the Tribunal could decide that the refund could be made.
14.	In his reply to Customs’ arguments, he acknowledged the difficult position in which the Everards found themselves. In two of the cases referred to as precedents, the individual claimants had had opportunities on many occasions to seek consent. The planning officers had rejected the applications involved. The Everards had not had that opportunity.
15.	He referred to the Chairman’s introduction before the start of the hearing, stressing the independence of the Tribunal. He questioned whether the Everards’ appearance before the Tribunal was a little futile. The summary of their case was that it was based on what was fair. The VAT office had been given a chance to inspect the works. They had not done, stating that the project did not meet the criteria. The Everards had asked the VAT Consultancy to inspect, which they had done. The subject of new build had been mentioned at the point of closing, but would have been highly irregular; if it had been mentioned earlier, at the appropriate time, it would have received favourable consideration. He questioned whether the process of supporting self build was diminished if the claimant had no knowledge of the VAT rules.
Arguments for Customs
16.	In Mr Smith’s view, the point at issue was very narrow. As the chimney remained standing, the existing building had never been completely demolished, and therefore the Everards had never been entitled to reclaim the VAT.
17.	Mr Everard had explained the difficulties that the Everards had encountered. The planning authority and the building control officers had given them advice. Their sense of frustration could be understood. However, that did not change the position for Customs or the Tribunal. This was not the forum to complain about advice from other “arms of government”.
18.	The Everards’ original plan had been to build an extension to the existing property; this was what planning permission and building regulations approval had initially been granted for. The plans had then changed and it had then been decided that the existing house had to be almost totally demolished. The demolition work had been treated as repair work. It was not clear whether there had been retrospective planning permission, or no requirement for such approval, but the project had not been built in accordance with the plans submitted for initial approval, which were the only plans that had been provided to Customs.
19.	The finished project had resulted in almost the entire house being rebuilt. One external wall and chimney stack had remained from the old building, which formed an internal wall within the new building. This wall had not been retained as a result of a requirement of any planning permission.
20.	The essence of the Everards’ case appeared to be what was set out at paragraph 6 of their then representatives’ letter of 14 October 2005, which had stated:
“Our argument is that, whereas the VAT legislation sets down requirements for when a building ceases to be en existing building and this must be viewed in line with the rules, the reality of particular circumstances should be taken into account in order to determine the correct treatment. Therefore, although the retention was not a requirement of planning consent in this case (because the replacement of the existing house was not envisaged at the time of the planning consent), this surely cannot prevent application of this part of the legislation as what was undertaken in reality actually caused the existing building to cease as a building in its own right. In other words there was the construction of a building designed as a dwelling in this case.”
21.	Mr Smith submitted that the legislation did not permit any scope for the importation of a test of “the reality of the particular circumstances”. In order for the Everards’ project to have come within the definition of “the construction of a building designed as a dwelling” within section 35(1A)(a) VATA 1994, it would have been necessary for there to have been a complete demolition of the existing building to ground level, or retention only of a façade required by the planning permission.
22.	This had not happened, and a wall and chimney of the former house remained standing as part of the building. This meant that the requirements of Note 18 had not been met, and the former house had not ceased to be an existing building. In those circumstances Note 16 had become relevant; it provided that the reconstruction or alteration (and the full panoply of works possible) of an existing building were not included within the definition of “construction of a building” under section 35 VATA 1994.
23.	Mr Smith drew our attention to three appeals in which this issue had been considered by VAT Tribunals; these were Alec A Bugg v Commissioners of Customs and Excise (1997) VAT Decision 15123, Bruce Pugh v Commissioners of Customs and Excise (2000) VAT Decision 17013, and Philip Evans v Commissioners of Customs and Excise (2001) VAT Decision 17264. In each of these cases the respective appellants had built dwellings on the sites of existing buildings, retaining some part of those existing buildings. Each appeal had been dismissed by the Tribunal.
24.	In Bruce Pugh a new house had been built on the site of a small bungalow, retaining only the floor slab and, importantly for the appeal, part of the front wall. Much of the new house had been built off the floor slab, and it rose to three storeys so was quite different from what had been there before. In dismissing the appeal against the refusal of a refund under section 35 VATA 1994, the Tribunal had said:
“Although it seems to me obvious, by any objective standard, that Mr Pugh is building a new house, and the incidental incorporation of a small part of the old is inconsequential, the legislation is quite unambiguous, neither the Commissioners nor I have any discretion in the matter, and the conclusion is therefore inescapable: the Commissioners’ decision was right and the appeal must be dismissed.”
25.	Although the present Tribunal was not bound to follow this decision, it had significant persuasive weight. Mr Smith submitted that it set out the right approach to be taken in interpreting this legislation; it had been cited and approved in the Philip Evans appeal.
26.	Mr Smith argued that the building work by the Everards on the property did not entitle them to a refund pursuant to section 35. Mr Everard had said that the result of the work had in fact been a completely new house. Mr Smith accepted that this would be the case on any objective basis, but this was not the way in which the legislation worked.
27.	Mr Everard had indicated that the Tribunal could consider the matter on the facts. Mr Smith submitted that this was not the case; the Tribunal was bound to consider the unambiguous provisions of VATA 1994. Mr Smith had great sympathy with the Everards. They had had to go through the complexities of the building requirements, the planning requirements, then also VAT. However, this did not mean that they were entitled to repayment of the VAT on the costs of building. The Tribunal was bound to conclude that VAT was not repayable under these circumstances.
28.	Mr Smith mentioned that Customs had not carried out any further investigations into the way in which the construction work had been done. It was apparent from the information provided at the hearing that contractors had been used. If the Tribunal were to decide the repayment issue in favour of the Everards, it would be necessary to look at how the VAT had been dealt with. However, this point was ancillary to his main submission, that the proper application of the legislation in the Everards’ case should result in their appeal being dismissed.
Discussion and conclusions
29.	It may be helpful to put the claim in the present case into a more general context. In Mr R and Mrs L Watson (2004) VAT Decision 18675, the Tribunal (chaired by the present Chairman) set out the background to the relief under section 35 VATA 1994:
“In considering a claim to relief, we think it helpful to have in mind the reasons for the existence of the relief. The supply of a newly constructed dwelling is zero-rated, assuming that the relevant conditions are met. The policy reason is that consumers are not expected to suffer VAT on the supply to them of domestic accommodation. The do-it-yourself builder would therefore be at a disadvantage as compared with the purchaser of a zero-rated dwelling, as the former would have to suffer the cost of the VAT on all the supplies relating to the building or conversion of the property. Giving the right to recover the VAT is therefore a way of equating the do-it-yourself builder's position to that of a purchaser, as the do-it-yourself builder is not making any supply for VAT purposes and could not bring himself within the conventional rules relating to the recovery of input tax by taxable persons. The scheme provides a special form of relief, taking into account that do-it-yourself builders are not part of the normal VAT system.”
30.	In Bruce Pugh, the Tribunal referred to the relief as “zero-rating”. We doubt whether it should strictly be described as such, as do-it-yourself builders in these cases are not registered taxable persons. We regard the relief as being a repayment relief; for the reasons quoted above, it is designed to put the builder in the same position as if zero-rating had been available.
31.	The above quotation refers to conversion. We comment that the question of conversion does not arise in the present case, as the previous house was already a “residential building”. The conditions to be met are therefore those relating to “ . . . the construction of a building designed as a dwelling . . . ” It is necessary for the legislation to differentiate between cases which amount to construction, and those amounting to alteration of an existing building, however extensive the alterations may be. Note 16(a) of Group 5 Schedule 8 VATA 1994 precludes relief under section 35 for anything that amounts to “the conversion, reconstruction or alteration of an existing building”. Note 18 of that Group restricts to a very few circumstances the cases where a building is regarded as ceasing to be an existing building. The purpose is to limit the cases where relief is available. It is confined to those cases where the building work equates to the production of an entirely new dwelling.
32.	As the availability of the relief has to be strictly controlled, there is unfortunately no room for discretion in applying the conditions which apply to it. This means that there will inevitably be cases close to the borderline, which in terms of objective merit may be felt to be within the spirit of the relief, but which do not fulfil the restrictive conditions for the relief to be available.
33.	We take the same view as to the Everards’ claim in the present case as the Tribunal did in relation to the claim in the Bruce Pugh case. The words in paragraph 7 of that decision are equally apposite here. The decision is not binding on us as such, but we consider it entirely appropriate to adopt the same reasoning here. We have great sympathy with the predicament in which the Everards found themselves, but as indicated, we have no means of applying any discretion in relation to the strict conditions laid down for the application of the relief.
34.	This means that it is not necessary for us to consider Mr Smith’s additional point concerning the involvement of contractors. We do not think it appropriate to respond to the argument to indicate what our view would be on it in the event of our being held to have arrived at an incorrect decision on the main issue. In order to consider this argument properly, we would have required detailed evidence as to the basis on which VAT was charged. In the absence of any such evidence, we think it better not to comment at all on this additional point.
35.	It was clear that what the Everards had been hoping for by bringing this appeal was to have their case reviewed on the basis of applying some discretion in relation to the facts. We have explained why the Tribunal, as an independent forum for the consideration of such disputes, is not in a position to apply any discretion; the statutory conditions are restrictively drafted, and relatively clear in their application. We would comment that if the Everards had requested a review by Customs of the decision to refuse the relief, as was done in Bruce Pugh, this would not have resulted in any form of discretion being exercised; the same reasoning would have applied. Our remaining comment is that we find it surprising that the question of the VAT implications does not appear to have been raised at a suitably early stage by the professional advisers involved with the project. It might have been possible to assess the prospects of any form of relief being available, and if appropriate to change the form of the project to improve those prospects.
36.	We are grateful to Mr Everard for his clear exposition of his case, and for the documents and photographs supplied by him in support of that case. We should also record Mr Smith’s fair-minded acknowledgment, in the course of putting the case for Customs, of the objective merit of the Everards’ case.
37.	While expressing our continued sympathy for the Everards, we have no alternative but to dismiss their appeal. There was no application for costs, so we make no order in relation to costs.

JOHN CLARK

CHAIRMAN
RELEASE DATE:12 June 2006

LON/2005/0667