20981

VALUE ADDED TAX - zero rating - alteration of listed building – whether residential dwelling can be both separate from and ancillary to another dwelling – conduct needed before award of indemnity costs appropriate – appeal allowed – VATA 1994 Schedule 8 Group 6, Item 2 Notes 1, 2 & 6

LONDON TRIBUNAL CENTRE

STEVEN LUNN
Appellant

- and –

THE COMMISSIONERS OF HER MAJESTY’S REVENUE & CUSTOMS
(VAT)
Respondents

Tribunal: Malachy Cornwell-Kelly (Chairman)
John G Robinson 

Sitting in public in London on 26th February 2009

	Mr Oliver Jarratt of Deloitte LLP for the Appellant

	Mr Richard Smith of counsel for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Basis of the appeal

1 This appeal is against the refusal of the Commissioners on 12 September 2007 to accept that supplies to the Appellant of building services in respect of works to a listed building should be zero-rated.  The Appellant was the unregistered recipient of these services and accordingly not the person liable to account to the Commissioners for any tax on them.

Law

2 Under Item 2 of Group 6 of Schedule 8 to the Value Added Tax Act 1994 zero-rating applies to:

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 a consultant or in a supervisory capacity.

Note 1 says that a “protected building” is “a building which is designed to remain as or become a dwelling or number of dwellings (as defined in Note 2 below) …”.  

3 Note 2 provides that:

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 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.

4 “Approved alteration” is defined in Note 6.  It is common ground that that definition applied to the works at issue and that they fell within all the other requirements applicable, except for that in Note 2(c).  

Facts 

5 The facts in this case are not in dispute, and the parties furnished an agreed statement accordingly.  The appeal concerns a new building (“the Building”) within the curtilage of a property known as Radbrook Manor, which is a Grade II* listed building near Stratford-on-Avon; the Building is physically separate from the Manor, and the freehold of both the Manor and the Building is owned by the Appellant.

6 The Building consists of a ground floor and a first floor, and comprises self-contained living accommodation as follows: a lounge, a bar and dining area, an entertainment area, a study, five bedrooms, two bathrooms, a dressing room, a shower and WC, a kitchen and a preparation kitchen, a personal gym, a boiler room and a garage.  The planning and listed building consents for the Building as it now stands were dated 13 May 2005 and 6 April 2006.  The planning approval was subject to this condition:

The development hereby permitted shall only be used for purposes either incidental or ancillary to the residential use of the property known as Radbrook Manor and shall not be used for commercial purposes.

7 The development, which is now complete, is constructed from a former cottage and pigsties, and an earlier addition to them known as ‘the country club’ (demolished in the course of the reconstruction).  It is common ground that listed building consent was needed and obtained, and that the requirements of the planning and listed building consents have been complied with.  

Issues
8 Agreement between the parties helpfully narrowed the core issue to whether the “separate use or disposal” of the Building was prohibited by the statutory planning consent under which the works required for it were permitted; in other words, whether the case fell within Note 2(c) of Item 2 of Group 6, cited above.   

9 As we have seen, the permission stipulated that the dwelling created should only be “used for purposes either incidental or ancillary to the residential use of the dwelling known as Radbrook Manor”.  (There is no issue with regard to the further condition that the new dwelling was not to be used for commercial purposes.)  Putting the wording of the consent alongside the wording of the tax statute, the essential question becomes whether the “separate use or disposal of the dwelling is … prohibited by the terms of any … statutory planning consent”.

10 The Commissioners contended that the terms of the planning consent did amount to a prohibition on the use and/or disposal of the building, and they cited definitions of ‘ancillary’ and ‘incidental’ in the Concise Oxford Dictionary (10th Edition).  Thus, ‘ancillary’ is ‘providing support to the primary activities of an organisation; additional; subsidiary’; and ‘incidental’ is ‘occurring as a minor accompaniment; occurring by chance in connection with something else; liable to happen as a consequence of’.  It was contended that the use of these words presupposed a close connection with the use of Radbrook Manor, and meant that the Building was not to be used separately, in the sense that ‘separate’ meant different or distinct and not joined.

11 The Appellant by contrast argued that the use restriction in the planning permission, as Mr Jarratt characterised it, should not be confused with a prohibition, the absence of which was a requirement of the tax statute; and, since there was no prohibition as such, Note 2(c) was not contravened.  

12 The Appellant relied heavily on the wording used by the Tribunal in Nicholson v CCE (2006 VAT decision 19412) where the issue was similar.  In that case, the planning permission stipulated that the building approved should be “used only for purposes incidental to the enjoyment of the dwelling house as such and shall not be used for any business, commercial or industrial purposes whatsoever”.  Effectively, the new building in Nicholson was in two parts, the ‘north wing’ and the ‘south wing’, each of which was physically capable of being used as a dwelling on its own but each of which was physically joined to the other.  

13 On this, the Tribunal, having heard what had clearly been extensive argument on behalf of the Commissioners, approached the question thus:

Can a use of residential accommodation be only incidental to the use of another dwelling, yet also be a separate use?  We believe it can.  …. The planning permission, which relates to the specific design of two separate wings, has permitted one new family dwelling that allows the separate use of the two wings by different members of the family.

14 The Commissioners in this appeal roundly criticised this decision as “simply wrong as a matter of statutory interpretation” and contended in terms that it was confused and inconsistent with the facts found.  In particular, they submitted that: ‘Something which is ancillary or incidental to something else cannot be separate from it.  In this fundamental respect the tribunal in Nicholson was wrong.”.

15 We will come back later, on the subject of costs, to the significance to be attached to previous tribunal decisions, but it suffices at this point to say that we accept the view advanced by the Commissioners that the facts of Nicholson were very different from the facts of the present case, and that we would not see it as determining the matter – with or without the status of an authoritative precedent.  Both the Appellant and the Commissioners have seen the words used by the tribunal in Nicholson: “Can a use of residential accommodation be only incidental to the use of another dwelling, yet also be a separate use?  We believe it can.”, as seeking to establish the correct statutory interpretation of Note 2(c) in general terms.

16 A number of other Tribunal decisions were cited by the Commissioners in support of their submission that Nicholson was wrongly decided, and they pointed out that none of them appeared to have been taken into account in that case.  We now refer to them briefly.  

17 The first is Ford v CCE (1999 VAT decision 16271), which concerned the conversion of a barn “for use as a granny annex” and for which planning consent was given in these terms:

The barn conversion to form a granny annex herby permitted shall be occupied solely for purposes incidental to the occupation and enjoyment of  Poplars Place as a dwelling and shall not be used as a separate unit of accommodation. (emphasis supplied)

18 The Appellant pointed out that the words italicised had no equivalent in the consent given in the present case, and put the intention of this consent beyond dispute.  The tribunal (at paragraph 24 of the decision) seemed nonetheless uncomfortable in holding that the condition of Note 2(c) was not satisfied, remarking that “Note 2(c) is itself something of an anomaly in that it provides in (a) for a ‘self-contained dwelling’, and (c) envisages the prohibition of its separate use.”

19 The second case is D & L Clamp v CCE (1999 VAT decision 16422). This case also concerned the conversion of a barn, referred to in the planning documents as the ‘annex’.  The planning approval was effectively contained in an agreement made under section 106 of the Town and Country Planning Act 1990, the relevant clause of which was:

That the annex shall only be used for ancillary accommodation in association with the main dwelling and for no other purpose whatsoever and in particular shall not be occupied as an independent unit of residential accommodation. (emphasis supplied)

20 In this case also, the Appellant urged that the words italicised left no room for discussion and have no equivalent in the consent for the Appellant’s Building.  The tribunal did not accept that the conditions of Note 2 were satisfied. 

21 Thirdly, we were referred to Milligan v HMRC (2005 VAT decision 19224).  Planning consent was given for the construction of a small bungalow within the curtilage of a house and containing a bedroom, a sitting room, a kitchen and a garage.  The consent was subject to the condition:

The accommodation hereby approved shall be occupied solely in connection with and ancillary to the main dwelling at 176 Long Street, Atherstone, and shall not be occupied as an independent dwelling house. (emphasis supplied)

22 Again the Appellant made same comment as before with regard to the words in the consent which are italicised, and again the tribunal did not accept that the conditions of Note 2 were satisfied.

23 The Commissioners relied in particular on the fourth case we were referred to, Thompson v CCE (1998 VAT decision 15834), where Note 2(c) was held not to have been satisfied.  In that case the consent contained the condition that:

The living accommodation hereby approved shall be used as a self-contained unit of occupation, ancillary to the associated main household, and shall not be severed as an independent and unconnected residence. (emphasis supplied)

24 The new building authorised was physically separate from the main house and consisted of a hall, a shower room and lavatory, a kitchen, lounge and dining room all in one, a bedroom, bathroom and one further unclassified room.  On these facts, the tribunal posited the question as follows:

Then does the planning permission prohibit the separate use or the separate disposal of the new building?  In my judgment it prohibits both.  By its terms, the new building must be used as “a self-contained unit of occupation, ancillary to the associated main household”. In my judgment, the use of the words “ancillary”, “associated” and “household” means that the use to which the new building is to be put is to be connected with, and not separate from, the use of the main household.  As to disposal, the planning permission requires that the new building “shall not be severed as an independent and unconnected residence”.  The Appellant submitted that “severed” meant “physically separated”, for instance by a wall.  In my judgment however “severed” refers to title rather than to physical features and this part of condition 2 is intended to ensure that the main house and the new building do not pass into different ownerships. 

25 The Appellant again relied on the addition of the words italicised to distinguish the facts in Thompson from those in this appeal, and cited finally the decision in Sharples v HMRC (2008 VAT decision 20775), where the planning condition in question was that “the sheltered housing units to be constructed pursuant to this permission shall only be occupied by persons aged 55 or over”.  We agree with the Commissioners’ comment on this that the nature of that condition is so different from that under appeal that the decision is of no assistance to us.

26 As the Appellant pointed out, these cases all involved differently worded planning restrictions, and the first four contained wording which went clearly beyond that in the present case.  But, having examined them, it seems clear to us that the decisions do no more than relate the statutory wording to the precise facts found in each instance, and that they do not seek to establish a definitive interpretation of the statute in general terms, as both the Appellants and the Commissioners contended should be done or had been done.  We see no more reason, for example, to regard the tribunal’s comments in Thompson as being intended to lay down a fixed interpretation of Note 2(c) as a matter of law than those of the tribunal in Nicholson, although they could be contrasted – out of context – as supporting different approaches to the matter.

27 Since planning restrictions are always designed to meet the circumstances of particular cases, it is unlikely that there can be a single ‘correct’ interpretation of Note 2(c) which can be applied to every case, as it were mechanically, and without taking into account individual circumstances. As the Commissioners acknowledged, there is in any event no case law on the interpretation of Note 2(c) which is binding on the tribunal, and we proceed on the basis that each case must be decided on its facts in the light of the policy of the statute.

28 To that end, we have sought to identify the meaning which parliament intended to give to Note 2(c), bearing in mind that is part of a provision relieving the full effect of taxation and that regard must therefore be had to its purpose in so far as that can be deduced from the statutory wording.  For his part, Mr Smith argued that unless the view that he contended for – that something which is ancillary or incidental to something else cannot be separate from it – were to be accepted, the wording of Note 2(c) would be rendered a nullity.  We therefore asked him to indicate what the Commissioners saw the policy of this legislation as being.

29 After taking instructions, Mr Smith replied that the intention of Note 2 was to give relief to new housing stock supplied to the open market, and that the line was specifically drawn to deny relief to added accommodation within existing housing stock, including annexes that might be physically separate from existing units but which have to be used in connection with existing units.

30 We found this difficult to follow.  If what the Commissioners suggest was indeed the purpose of Note 2, it is surprising that the statutory wording did not make it clear.  As it is, the Note is not confined to the accommodation provided being necessarily new accommodation; there is no reference to the open market as such being a necessary feature of the situation; and there is no reference to added accommodation within (or connected with) existing housing stock being disqualified from relief.  By contrast, the ordinary un-glossed meaning of the statutory words appears designed to give relief to the provision of distinct self-contained dwellings which are not part and parcel of another dwelling, either physically or for reasons of provisions of private or public law.  It is consistent with an overall policy of simply encouraging the provision of self-contained units of housing accommodation.  

31 If that is right, then the question for the tribunal is: do the facts of this case, including the terms of the planning conditions, fall within precise the relief provided by the statute?  It is not in dispute that the Building as it now stands is self-contained living accommodation, nor that there is no question of internal access to any other dwelling.  It cannot be that the distinct use of the new building is prohibited by the planning consent, because it is manifestly adapted for such use and there would otherwise be no purpose in the limitation in the consent to the use being “incidental or ancillary to … Radbrook Manor”; if the Building could only be used as incidental or ancillary, these words would be otiose.  

32 Against that background, we are not aware of any proposition of law that an incidental or ancillary use can never be a separate use.  Common observation suggests that there are many examples of such situations, a frequent one being found where there are ‘tied’ cottages adjoining or close to a farm and reserved for occupation by the workers whose work requires them to live on site.  The fact that the use of the Building “for commercial purposes” is prohibited does not alter the analysis; though it clearly limits the scope of what can be done with it, there are several possibilities, among which are the use of the Building as accommodation for the house guests of the owner of Radbrook Manor, or its use as accommodation for dependent relatives of the owner.  No doubt there may be others.  

33 We do not see therefore that separate use as such is prohibited by the terms of the planning consent and we conclude that the condition in Note 2(c) is met.

34 Turning the possibility of separate disposal, the Commissioners accepted that their case as to this being prohibited was “more difficult to make as, unlike use, disposal is not expressly mentioned in the planning condition”; the Commissioners had only addressed the point because the Appellant’s argument had dealt with it.  In the course of the hearing, indeed, Mr Smith was unable to advance any reason why a gift to a relative of the ownership of the new building (to take just one example) should not be made by the owner of Radbrook Manor.   

35 Other situations in which the titles to the properties might diverge are easily envisaged, and we have no difficulty in rejecting the contention originally made by the Commissioners that the planning consent amounted to a de facto prohibition on disposal; and it clearly does not contain such a prohibition in terms.  As the Appellant in fact conceded that the conditions in Note 2(c) as use and disposal were cumulative, we have no need to address that question. Accordingly, we find that in regard to the ‘disposal’ point also the condition in Note 2(c) is met.

36 For these reasons, we allow the appeal against the Commissioners’ refusal, contained in their reconsideration letter of 12th September 2007, to allow zero-rating of the relevant supplies to the Appellant.

Costs 

37 The Appellant argued strongly that the circumstances of his case were clearly covered by the decision of the tribunal in Nicholson and that the Commissioners had behaved reprehensibly in not acknowledging that to be so, over a significant period of time, and in forcing the Appellant to a hearing before the tribunal in order to get justice.  On that basis, the Appellant sought an award of costs against the Commissioners on the indemnity basis.  There is, we were told, some £150,000 of tax at issue and that the taxpayer acts in his private capacity and not as a matter of business; accordingly, it is said, the injustice of the course of conduct adopted by the Commissioners bears the more heavily upon him and strengthens the case for redress.

38 We are obliged to say of this application that we regard it as misconceived.  The application rests upon the premise that the Commissioners have inexcusably ignored or chosen to re-litigate a decided point of law, namely the rule which the Appellant claims that the tribunal established in Nicholson. It will be apparent from what has gone before that we do not accept that Nicholson, or any other of the cases cited to us, establishes a relevant point of law which the Commissioners could have ignored.  As we have said, each case turns on its facts in the light of the statutory wording, which is no doubt why the Commissioners did not appeal the decision in Nicholson - as the Appellant says that they should have done if they were not going to follow it.

39 That said, we accept that there is a clear public interest in the consistency of tribunal decisions, and that if this were a case in which a line of decisions pointed in one way only there could be an argument that the Commissioners should stand back and consider their position before maintaining opposition to an appeal. But such is not the case here, and although we have concluded that the Appellant’s contentions are well-founded on the substance of the case, that does not mean that it was in any sense wrong or improper for the Commissioners to require that the matter should come to a hearing.  

40 This conclusion is underscored by reference to the authorities on the award of indemnity costs to which we were referred: The Funding Corporation v HMRC (2006 VAT decision 19525); Harrods (UK) Ltd v HMRC (2005 VAT decision 19318); H&B Motors (Dorchester) v CCE (1993 VAT decision 11209); Bookit Ltd v CRC [2006] STC 1367. Mr Jarratt’s submission summed up the effect of them by saying that “the tribunal must be satisfied that the Respondents acted disgracefully so as to justify an award of costs on the indemnity basis.”.  Or, putting the matter another way, the authorities amount to saying that indemnity costs should be awarded in an appeal where the it is clear that a matter should never have reached the tribunal, at least in the way it did, if it had been properly dealt with by the Commissioners.  

41 It is true that the Commissioners appear to have been relatively slow to engage with the Appellant with regard to the reasons why they considered that Nicholson did not dispose of the issue, but the dates show that this delay was all within the period of the formal appeal: the base decision appealed against was taken on 11th July 2007, and it was only in seeking a reconsideration of that decision that the Appellant raised the relevance of the decision in Nicholson with the Commissioners; the latter gave their reconsidered decision on 12th September 2007, which was then formally appealed.  

42 While battle on the core issue could indeed have been joined more quickly by the Commissioners thereafter, there is nothing in the exchange of opposing views with the Appellants over the next twelve months, until the Commissioners finally adopted a definite position with regard to Nicholson in August 2008, that can be characterised as “disgraceful”. The Appellant also complained that the Commissioners were unreasonably slow to make a site visit, being invited to do so in January 2007 but not actually doing so until July 2008.  It is quite possible that an earlier site visit would indeed have helped to clarify the factual situation sooner and to abbreviate the whole process, but we have to bear in mind that resources in the public service are not limitless and that a decision not to prioritise an early site visit can scarcely be stigmatised as “disgraceful”.

43 Finally, we must address the Appellant’s complaint that the Commissioners declined to say whether they had received advice as to their chances of success in the appeal being more or less than 50%.  At paragraph 21 of their published Litigation and Settlement Strategy, the Commissioners say:

Litigating where our chances of success are less than 50% would need to be justified by the particular circumstances, such as a very large amount of tax at stake (in the case itself or from immediate precedent value) or a fundamental point of principle at issue.

44 Mr Smith objected that to answer this question would have been to disclose the purport of litigation advice, which is classically the subject of legal professional privilege.  That may well be the case, but it is not in any event within the jurisdiction of the tribunal to examine whether or not the Commissioners have abided by their published Strategy, even in the course of dealing with an application for indemnity costs.  It may be that the issue could be the subject of judicial review or investigation by the Parliamentary Commissioner for Administration, but that will be for others to determine.

45 We are satisfied that the justice of the matter will be adequately met by an award to the Appellants of their costs of and incidental to and consequent upon this appeal on the standard basis, to be taxed if not agreed, and we so direct.  

Interest 

46 Section 84(8) of the 1994 Act provides that interest may be awarded where tax has been paid but is found not be payable “at such rate as the tribunal may determine”.  We have not heard argument on this and we bear in mind the unusual situation of the appeal not being by the person accountable for the tax referred to at the outset.  In the circumstances, we direct that there be liberty to apply for a further hearing and directions in relation to the payment of interest, and any connected matter. 

Malachy Cornwell-Kelly (Chairman)

RELEASED: 20 March 2009

LON/2007/1795