20810

VALUE ADDED TAX – registration  – whether Appellant intended to make exempt or zero-rated supplies -  whether construction of new flats in the roof space of a block of flats was “converting .. a non-residential part of a building into a building designed as … a number of dwellings” – yes – appeal allowed – VATA 1994 S 30 and Sch 8 Grp 5 Item No. 1(b) and Notes (7)(a) and  (b), (8) and (9) 

LONDON TRIBUNAL CENTRE

MERLEWOOD ESTATES LTD 

Appellant

 - and -   	

THE COMMISSIONERS FOR HER MAJESTY’S 
REVENUE AND CUSTOMS 
Respondents

Tribunal: DR A N BRICE
 MISS S C O’NEILL

Sitting in London on 17 September 2008 

Tim Brown, Counsel, instructed by Constable VAT Consultancy LLP, for the Appellant 

Alexander Ruck Keene, Counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The appeal
1.	Merlewood Estates Limited  (the Appellant) appeals against a decision of the Commissioners for Her Majesty’s Revenue and Customs (HMRC) dated 8 November 2007. The decision was to refuse the Appellant’s application to register for value added tax. HMRC made that decision because they took the view that the Appellant was making and intending to make entirely exempt supplies. The Appellant appealed because it considered that it was intending to make taxable (zero-rated) supplies. 

2,	It was not disputed that the Appellant intended to construct new flats in the roof spaces of five blocks of flats and then to grant a major interest of each new flat. The Appellant argued that it was “converting .. a non-residential part of a building into a building designed as … a number of dwellings”  within the meaning of Item 1(b) of Group 5 of Schedule 8 of the Value Added Tax Act 1994 (the 1994 Act) and so the supplies it intended to make were not exempt but taxable at the zero rate. 

The legislation
3.	Section 30(2) of the 1994 Act provides that a supply of goods or services is zero-rated if the goods or services are of a description specified in Schedule 8. Group 5 of Schedule 8 specifies certain supplies relating to the construction of buildings and Item 1 specifies:

“1.	The first grant by a person- …
(b)	converting a … non-residential part of a building into a building designed as a dwelling or number of dwellings  … .”
of a major interest in, or in any part of, the building, dwelling or its site.”

4.	Notes (7), (8) and (9) to Group 5 clarify the extent of Item 1(b) and the relevant parts provide:

 “(7)	For the purposes of item 1(b) … a … part of a building is “non-residential” if- 
(a)	it is neither designed, nor adapted, for use- 
(i)	as a dwelling or number of dwellings, or ….
(b)	it is designed, or adapted, for such use but-
(i)	it was constructed more than 10 years before the grant of the major interest ; and
(ii)	no part of it has, in the period of ten years immediately preceding the grant, been used as a dwelling … .

(8)	References to … a non-residential part of a building do not include a reference to a garage occupied together with a dwelling. 

(9)	The conversion, … of a non-residential part of a building which already contains a residential part is not included within item 1(b) … unless the result of that conversion is to create an additional dwelling or dwellings.” 

The issue
5.	The Appellant accepted that, if it made wholly exempt supplies, then HMRC’s decision to refuse to register it for value added tax was correct having regard to the provisions of Schedule 1 of the 1994 Act. However, the Appellant argued that it intended to make supplies which were not exempt but taxable (zero-rated) within the meaning of Item 1(b) of Group 5 of Schedule 8 because the roof space was a non-residential part of each building which was to be converted into a number of new dwellings. HMRC argued that the supplies made by the Appellant did not come within the meaning of Item 1(b) because the roof space of an existing building was integral to the residential part of the building and was therefore not “a non-residential part of a building”. 

6.	Thus the issue for determination in the appeal was whether the roof space of each of the blocks of flats owned by the Appellant was “a non-residential part of the building” (as argued by the Appellant) or was not a non-residential part of the building because it was integral to the residential part of the building (as argued by HMRC). 

The facts
7.	A bundle of documents was produced from which we find the following facts.

8.	The Appellant trades as a property developer. 

9.	In 2006 the Appellant owned the freehold of five buildings known as Beechwood Court, West Street Lane, Carshalton, Surrey. Each of the five buildings was a block of flats. The occupants of the flats owned long leases and paid service charges to the Appellant. The supplies made by the Appellant for which it was paid the service charges were exempt.

Blocks 1 to 4 
10.	Blocks 1 to 4 were built in the 1930s as blocks of flats with flat concrete roofs. In the 1970s alterations were carried out to these four blocks and each roof was altered to become a pitched roof for aesthetic rather than structural reasons. Each block is a three-story building with two separate staircases serving six flats each. There are twelve flats in each block.

11.	In 2006 the roof space of each of these four blocks contained no water tanks, electricity or insulation and the only contents of the space were cables which were passed through for connection to roof-mounted television aerials. 

Block 5 
12.	Block 5 was built in the 1950s and was constructed with a pitched roof. It is a three-storey building with three separate staircases each serving six flats. There are eighteen flats in the block. 

13.	In 2006 the roof space of block 5 contained cables for connecting to television aerials. It also contained some water tanks that had in the past been used to provide water to the flats. However, these tanks had ceased to be used at some undetermined time in the past. They had not been removed because there was no advantage in removing them. 

The existing roof space 
14	Access to the roof space in each block was obtained by means of the communal staircases. The Appellant as freeholder owned the roof space and none of the long leaseholders of the flats had any rights of access to, or occupation or use of, the roof space. The Appellant was responsible for the maintenance of the roof space. 

The new flats 
15.	The Appellant proposed to construct new flats in the existing roof space of the five blocks. The proposal was to convert the existing roof space of each of blocks 1, 2, 3 and 4  into two flats and the existing roof space of block 5 into four flats making a total of twelve new flats in the five blocks. After the conversion the Appellant intended to grant a major interest (a lease in excess of 21 years) of each new flat.  

16.	In April 2006 planning permission was obtained for “the provision of dormer windows within the existing roof space of five buildings to provide twelve new self-contained flats”. 

The arguments 
17.	Mr Brown for the Appellant argued that the roof spaces were non-residential parts of the buildings because none of the leaseholders had the right of access to them. He mainly relied upon Note (7)(a) and argued that the roof space had not been designed or adapted for use as a dwelling and had not been lived in or regarded as home by any of the long leaseholders. Alternatively, he relied upon the provisions of Note (7)(b) and argued that the roof space had been constructed more than ten years before the commencement of the works of conversion and no part of it had been used in that ten years as a dwelling. Finally he argued that the purpose of the legislation was to zero-rate the construction of new dwellings and his interpretation was consistent with that purpose. He also referred to Note (8) and argued that the legislation had made specific provision for garages to be treated as residential and that the lack of a similar provision about roof space pointed to the conclusion that roof space was non-residential.  

18.	Mr Brown cited Amicus Group Limited v The Commissioners of Customs and Excise VAT (2002) Decision No. 17693 at paragraphs 2, 5 and 13 for the principles that the purpose of the legislation is to zero-rate the creation of new homes where none existed before; that Note (7) looks at how the building had been used in the past; and that “dwelling” is not a term of art but a familiar word which means the place where one lives, regarding and treating it as home. He cited Lightspace Partnership Limited v The Commissioners of Customs and Excise (2001) VAT Decision No.17393 at paragraphs 27 and 40 for the principle that when considering Note (7)(a) the question was whether the non-residential part had been lived in before the conversion.  He cited Customs and Excise Commissioners v Jacobs [2004] EWCA (Civ) 930 at [40] and [41] for the principle that zero-rating was authorised so long as it was for clearly defined social reasons and for the benefit of the final consumer and the creation of an additional dwelling or dwellings met the purpose of Note (9) of Schedule 8.   

19.	For HMRC Mr Ruck Keene argued that the supplies made by the Appellant did not come within the meaning of Item 1(b) because the roof space of an existing building was integral to the residential part of the building and was therefore not “a non-residential part of a building”. Normal buildings had roofs and, if the roofs were pitched, there was a void. It was artificial to separate that void from the rest of the building and he argued that the void was residential although it was not lived in. He accepted that he was introducing a new test but argued that this point had never been litigated before.  He went on to argue that Note (8) supported his case because it made it clear that a garage occupied together with a dwelling was residential and there was no reason why the same principle should not apply to a roof space.   

20.	Mr Ruck Keene accepted the principle in Jacobs that the purpose of the legislation was to encourage the construction of new homes where none had existed before. However, he argued that Jacobs concerned the interpretation of Note (9) which was not relevant in this appeal. In his view it would be arbitrary to allow the Appellant’s appeal and the integral test he proposed would give a fairer result for taxpayers overall. He distinguished the decisions in Amicus and Lightspace where the questions were whether bedrooms and bed sitting rooms were residential. He cited Neil and Jane Hicking v The Commissioners of Customs and Excise (2001) VAT Decision No. 17117 at paragraphs 9, 10, 14, 15 and 16 for the principles that a dwellinghouse was capable of including a house which was constructed or adapted for dwelling in although it may at the relevant time be vacant or even not fit and ready for occupation and that it was incorrect to regard a building as being something other than a dwelling just because there was some limitation as to the occupation of the building. Mr Ruck Keene argued that, by analogy, a part of a building could be a dwelling even if it was not lived in.  

Reasons for decision
21.	In considering the arguments of the parties we begin with the relevant facts which are that new dwellings were intended to be constructed in the existing roof space of buildings which were occupied as blocks of flats. Each block had three stories and contained either twelve or eighteen existing flats. Before the conversion the roof spaces were not owned or occupied by the residents of the flats who had no access to them. The roof spaces were effectively empty. This is not a case where the roof space of a building used as by single household and occupied with the rest of the house was converted.  

22.	We then have to ask whether the roof space in each of the buildings the subject of this appeal was “a non-residential part of a building” within the meaning of Item 1(b). Before referring to any of the Notes to Item 1(b) our preliminary view is that they were. They were empty; nobody lived or had ever lived in them; nobody regarded them or treated them as home; they were not and never had been habitable; the only person with access to them was the Appellant; and so in our view they could not be regarded as residential. Mr Ruck Keene argued that they were integral to the residential part of the building but that is not part of the statutory test. However, even if it were, we are of the view that, on the facts of this appeal, the roof spaces were not integral to the residential parts of the buildings. The roof spaces contained no utilities necessary for the residents to be able to dwell in the flats below; the residents could not use the spaces for storage or for any other reason; and the residents did not have access to the roof spaces. Item 1(b) refers to “a non-residential part of a building” which assumes that a part of a residential building could be non-residential. Some meaning has to be given to the words “non-residential part”. 

23.	With those views in mind we turn to consider the Notes to Group 5 and we begin with Note (7) (a). This provides that a part of a building is “non-residential” if it is neither designed, nor adapted, for use as a dwelling or number of dwellings. The roof spaces meet this test because, before conversion, they were neither designed nor adapted for use as a dwelling. 

24,	Note (7)(b) provides that a part of a building is non-residential if it is designed, or adapted, for use as a dwelling but was constructed more than 10 years before the grant of the major interest  and no part of its has, in the period of ten years immediately preceding the grant, been used as a dwelling. In our view Note 7(b) is not relevant to the facts of this appeal because the roof spaces were not designed or adapted for use as a dwelling. However, even if they were, the roof spaces meet the requirements of Note 7(b) because they were constructed more than ten years ago and have never been used as dwellings. 

25.	We have not relied upon Note (8) because it applies only to a garage occupied together with a dwelling and not to a roof space. The lack of any reference to a roof space is not conclusive. It could support the view that a roof space has to be treated differently from a garage (that is, that whereas a garage is to be treated as residential the roof space should be treated as non–residential). On the other hand it could support the view that the legislation assumes the roof space to be residential. We prefer to limit ourselves to applying the words of the legislation to the facts of this appeal where it is relevant that the roof spaces were not owned or occupied by any of the residents of the flats and were not occupied as part of any dwelling. From that we conclude that they were non-residential parts of the buildings.    

26.	Note (9) provides that the conversion of a non-residential part of a building which already contains a residential part is not included within Item 1(b) unless the result of that conversion is to create an additional dwelling or dwellings. Note (9) was considered in Jacobs which concerned a residential school which contained non-residential areas as well as a accommodation for the boys and a maisonette for the headmaster. The Court of Appeal held that Note (9) applied to the school and that the additional dwellings did not have to be created from the wholly non-residential parts of the building. Note (9) confirms our view that in this appeal the conversion of the roof spaces is included within Item 1(b) because the result of the conversion will be to create additional dwellings. It is also relevant that Note (9) assumes that there can be residential buildings with non-residential parts. 

27.	We have considered the Tribunal decision in Hicking which was cited by Mr Ruck Keene.  We accept that a dwelling house is capable of including a house which was constructed or adapted for dwelling in even though it may, at the relevant time, be vacant or even not fit and ready for occupation. We also accept that it may be incorrect to regard a building as being something other than a dwelling just because there is some limitation as to the occupation of the building. However, those principles do not persuade us that the roof spaces were residential parts of the blocks of flats. They were not constructed or adapted for dwelling in and had never been intended or used for residential occupation. Before conversion they were not dwellings or parts of dwellings.  

Decision 
28.	Our decision on the issue for determination in the appeal is that the roof space of each of the blocks of flats owned by the Appellant was “a non-residential part of the building” within the meaning of Item 1(b) of Group 5. That means that the intended supplies of the Appellant will be zero-rated taxable supplies and that the Appellant should be registered for value added tax. 

Costs
29.	WE DIRECT that the Respondents shall pay the reasonable costs of the Appellant of and incidental to and consequent upon this appeal the amount of such costs to be agreed between the parties. Failing agreement either party may apply to the Tribunal for a direction under either Rule 29(1)(a) or (b) no later than three months after the date of the release of this Decision.  

DR NUALA BRICE

CHAIRMAN

RELEASE DATE: 22 September 2008

LON/2007/1979
22.09.08