[2009]UKFTT 349 (TC)

TC00287
Appeal number TC/2009/0407

	VAT – DIY builders scheme – invoices charged at 17.5% - whether qualifying services for qualifying conversion with reduced VAT rate – HMRC only liable to repay VAT “chargeable”

FIRST-TIER TRIBUNAL

TAX 

	SUSAN FRANCES NIKE	
Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS 	
Respondents

				TRIBUNAL: 	B Mosedale (Chairman)
						R J Freeston (Member)

Sitting in public in Manchester on 14 August 2009

The Appellant appeared in person.

Mrs K Tilling, officer of HMRC, appeared for the Respondents.

© CROWN COPYRIGHT 2009

DECISION

The facts

1.	The facts were undisputed.  The Appellant owns a farm and lives in the farmhouse.  There was a barn at the property, known as Greenhill Barn, in very poor condition. She had previously used it as a chicken run.  Then she decided to convert the barn into a dwelling for the use of her daughter and her daughter’s family.  She spent all her savings on it.
2.	The Appellant employed an eco designer on whose invoices she does not seek to recover VAT.  She then used a separate company, Dales (Contracts) Ltd, to carry out the conversion works and a plumber called R A Pickup to do the plumbing and heating works.  Both these contractors charged the Appellant VAT at 17.5% on their invoices.  The bulk of the work was done in 2004.  It seems – in the words of the Appellant - that the builder lost interest near the end of the project and the Appellant herself was short of funds.  So by the end of 2004 the building was unfinished but near completion.  Occupation of the property by her daughter commenced on 30 October 2005.  Ultimately the Appellant took out a loan and the building was finished by another contractor in 2007.  The building’s completion certificate was not issued until 30 July 2007.  
3.	The Appellant had asked HMRC for the DIY Builders Scheme leaflets on 29 April 2004.  She submitted her DIY claim form (form 341) on 14 August 2007.  HMRC wrote back asking for more information which the Appellant provided.  The claim was for the VAT charged on some 43 invoices, which included 12 invoices from Dales (Contracts) Ltd, 5 invoices from R A Pickup and 2 invoices submitted by Pendle Council.  On 19 October 2007 HMRC made the decision which has led to this appeal.  They refunded VAT on all the invoices except they refused to repay the VAT on  the Pendle Council invoices in their entirety, and refused to repay the VAT on the Dales and Pickup invoices to the extent the VAT charged exceeded 5%.
4.	The Appellant accepts that the VAT on the invoices from Pendle Council (amounting to £168.32) is not reclaimable and is not contesting HMRC’s decision not to repay this.  
5.	The VAT on the remaining 17 invoices in so far as it exceeded the 5% rate is in dispute.  This amounts to £11,967.02.  The invoices were produced at the hearing to us.  The 12 invoices from Dales (Contracts) Ltd contain very little detail – each was clearly a stage payment and was stated to be for “work to the above and materials on site”.  The “above” referred to the title which was “Barn Conversion – Greenhill Barn Barrowford”.  The first was dated 11 February 2004 and the last 8 September 2004.  The remaining 5 invoices were from R. A Pickup Plumbing and Heating Engineer.  These were as follows:
•	15 March 2004  “To fitting underfloor heating as agreed to barn conversion groundfloor”
•	29 March 2004 “To first fix plumbing and heating to first floor”;
•	28 July 2004	“To work carried out on Barn conversion.  Fitting tanks etc”
•	30 September 2004 “To work carried out on Plumbing and Heating works.  Extras as requested supply Room stats for underfloor heating.”
•	6 December 2004 “To Complete Plumbing and heating works as per estimate Extras as Requested.  Supplying Globe bath taps Supplying and fitting radiator in existing bedroom”

6.	The invoices on which HMRC refunded VAT at 17.5% appeared to be solely for goods (as opposed to goods and services) supplied in connection with the conversion.
7.	The Appellant requested a review of HMRC’s decision.  After the review, HMRC upheld their decision and this was notified to the Appellant by letters on 28 May 2008 and 11 December 2008.  The Appellant appealed on 20 March 2009.
The law

8.	The legal provisions on the DIY scheme start with Section 35 Value Added Tax Act (“VATA”) 1994 which provides (in so far as relevant):
“(1C)  Where – 
(a)	a person (“the relevant person”) carries out a residential conversion by arranging for any of the work of the conversion to be done by another (“a contractor”),
(b)	the relevant person’s carrying out of the conversion is lawful and otherwise than in the course or furtherance of any business,
(c)	the contractor is not acting as an architect, surveyor or consultant or in a supervisory capacity, and
(d)	VAT is chargeable on services consisting in the work done by the contractor, 
the Commissioners shall, on a claim made in that behalf, refund to the relevant person the amount of VAT so chargeable.”

9.	The critical word for this case is the last one: “chargeable”.  S35 VATA 94 goes on to provide:

(1D) For the purposes of this section works constitute a residential conversion to the extent that they consist in the conversion of a non-residential building….into – 
(a)	a building designed as a dwelling or a number of dwellings;….”

10.	It was accepted by HMRC that the Appellant’s claim fell within this.  It was a residential conversion as the barn (previously used as a chicken run) was to be converted into a building for someone to live in.  We did ask in the hearing whether it was in fact used other than in the course of a business as on the Appellant’s own evidence her daughter rather than herself occupied it.
11.	The Appellant’s evidence was that her daughter gave her money when she could – but  it is neither regular nor substantial sums of money and there is no rental agreement.  The Appellant estimates she receives about £300  per year which she declares on her income tax forms.   HMRC were content not to make an issue of this and we are content to find on these uncontested facts that there was no real commercial activity and that the conversion was therefore “otherwise than in the course or furtherance of any business” within the meaning of 35(1C)(b) above.
12.	The problem for the Appellant is that S35(1C) only makes HMRC liable to repay VAT which is “chargeable” – see S35(1C)(d) and the following end of that section.  So the Tribunal then considered what VAT was properly chargeable.  It is not disputed that 17.5% VAT was both charged and paid.
13.	S29A VATA 94 (which came into force on 1 October 2001) provides:
“(1) VAT charged on –
(a)	Any supply that is of a description for the time being specified in Schedule 7A, ….
shall be charged at the rate of 5%.”

14.	Group 6 of Schedule 7A of VATA 94 (which also came into force on 1 October 2001) provides:

“Residential Conversions.
Item no.
1.	The supply, in the course of a qualifying conversion, of qualifying services relating to the conversion.
2.	The supply of building materials if – 
(a)	The materials are supplied by a person who, in the course of a qualifying conversion, is supplying qualifying services related to the conversion, and
(b)	Those services include the incorporation of the materials in the building concerned or its immediate site.”

15.	The meaning of building materials is, by Note (12) to this Group the same as the meaning in notes (22) and (23) of Group 5 to Schedule 8.  Those two notes read as follows:
“(22)	“Buildings materials”, in relation to any description of building, means goods of a description ordinarily incorporated by builders in a building of that description, (or its site), but does not include – 
(a)	finished or prefabricated furniture, other than furniture designed to be fitted in kitchens,
(b)	materials for the construction of fitted furniture, other than kitchen furniture;
(c)	electrical or gas appliances, unless the appliance is an appliance which is – 
(i)	designed to heat space or water (or both) or to provide ventilation, air cooling, air purification, or dust extraction; or
…(not relevant)
(iii)	a burglar alarm, a fire alarm, or fire safety equipment or designed for the purpose of enabling aid to be summoned in an emergency; or
(iv)	a lift or a hoist;
(d)	carpets or carpeting material.
For the purposes of Note (22) above the incorporation of goods in a building includes their installation as fittings.”

16.	The effect of Group 6 as set out above is that qualifying services, including building materials supplied by the supplier of the services and incorporated into the building or its site by that supplier, supplied during a qualifying conversion are only subject to VAT at 5%.  The effect for the Appellant is that if the disputed 17 invoices relate to qualifying services during a qualifying conversion the correct VAT rate on them is 5% and not the 17.5% which was actually charged.
17.	The meaning of “qualifying services” is set out in Note 11.  It is (as with all these provisions) rather long so I here set out just the relevant parts:

“11 (1)	In the case of a conversion of a building, “supply of qualifying services” means a supply of services that consists in – 
(a)	the carrying out of works to the fabric of the building, or
(b)	the carrying out of works within the immediate site of the building that are in connection with – 
(i) the means of providing water, power, heat or access to the building,
(ii)the means of providing drainage or security for the building, or
(iii) the provision of means of waste disposal for the building.
(2)	(not relevant)
(3)	In this paragraph –
(a)	references to the carrying out of works to the fabric of a building do not include the incorporation, or installation as fittings, in the building of any goods that are not building materials;…”
18.	Building materials has the same definition as cited above.
19.	The meaning of “qualifying conversion” is set out in Schedule 7A Group 6 note (2) and (3), which are, in so far as relevant:

“2 (1) A “qualifying conversion” means – 
(a)	a changed number of dwellings conversion…
3 (1) A “changed number of dwellings conversion” is – 
(a) a conversion of premises consisting of a building where the conditions specified in this paragraph are satisfied, or
(b)…..
(2) The first condition is that after the conversion the premises being converted contain a number of single household dwellings that is-
(a) different from the number (if any) that the premises contain before the conversion, and 
(b) greater than, or equal to, one.
(3) The second condition is that there is no part of the premises being converted that is a part that after the conversion contains the same number of single household dwellings (whether zero, one or two or more) as before the conversion.”

20.	The effect for the Appellant is that her barn conversion is a qualifying conversion because the effect of the conversion was to make it a “changed number of dwellings conversion” – it went from not being a dwelling into becoming a single dwelling.  
21.	The Appellant’s claim was made within time.  The Value Added Tax Regulations at Regulation 201 provides that the claim must be made within 3 months of completion of the building and must include the certificate of completion.  In other words, no claim can be made before the building is finished, but must be made within 3 months of the finish.  The Certificate of Completion was issued on 30 July and The Appellant made her claim on 14 August 2007.  The claim documentation submitted did not include the planning permission (a document required by Regulation 201(b)(iv)) and HMRC requested this on 23 August 2007. The Appellant sent this on 29 August 2007.  
22.	The problem for the Appellant is that at the date of her claim most of the disputed invoices was more than 3 years old.  This does not prevent her claim under the DIY builders scheme  but it does mean that her suppliers were too late in respect of most of the invoices to reclaim for the excess VAT from HMRC as a three year cap does apply to them - Section 80(4) VATA 94 at the time in question imposed a three year cap on claims for overpaid output tax.  In practice, it seems from the Appellant’s evidence that she did not ask the suppliers at the time to credit her even on the few invoices which were still in time for a refund at the end of 2007:  rather she approached HMRC for reconsideration.  HMRC’s decisions on review were not issued until 2008 by which time all the invoices were out of date.
23.	Later, the Appellant did tell her supplier about the problem and he said he would see if he could get the money back off HMRC.  She has heard nothing further.   In law, of course, the 3 year cap does not apply to claims as between the Appellant and her builder.  Whether her claim arises under contract law or the law of restitution the time limit is likely to be no less than 6 years and so she is still (just) in time to take a private law action against him for the overpayment.  She was understandably very reluctant to do so:  by the date of the hearing all the invoices were out of time for the builder to reclaim from HMRC and so he might be expected to be less than willing to pay up without proceedings.  If HMRC are right to refuse the refund, it is clear that either the Appellant or her suppliers will be out of pocket.  
Appellant’s case

24.	The Appellant’s case is that her builder paid 17.5% VAT over to HMRC and yet she has only been refunded at 5%.  This is unfair.  Although she did not use these exact words, she was saying that HMRC should not have this windfall.
25.	The appellant also mentioned the delay by HMRC in approving her claim.  However this did not seem to be borne out on the facts in that her claim was made when she submitted her planning permission on 29 August 2007 and HMRC issued their decision on 19 October 2007.  This does not seem to involve undue delay.  Even if this was a delay, the Tribunal does not consider that it would be relevant on the law.  

26.	In a nutshell, her case is that she simply did not realise she had been overcharged VAT, she paid it, her builder has accounted for it to HMRC, and she believes that HMRC ought to refund it.  She asked us to exercise our discretion in her favour.
HMRC’s case

27.	HMRC accepted that this was a case of a non-residential building being converted into a new dwelling.  However, they only repaid the Appellant VAT at 5% on the grounds that that was the rate that the builder should have applied on his services to the Appellant.  In practice, he charged (and it is presumed accounted for to HMRC) at 17.5% and the Appellant paid at this rate.
28.	HMRC consider that it only has powers to refund VAT that was “chargeable” and not the VAT that was actually charged and paid.  
29.	HMRC say that they had notified the Appellant of the rules.  The claim form (VAT 431) requires a signature and that signature says that the signor has read the conditions.  The conditions includes one that only the correct VAT was charged.  (Mrs Nike said she did not notice this)  Notice 719 explains that residential conversions are charged at 5%.  It also states that VAT charged in error cannot be refunded.
30.	Mrs Nike’s response was that she didn’t fully understand the leaflets – they left her with the impression that the VAT rate should be 0%.
31.	This issue has been considered by the Tribunal before.  HMRC cited the cases of Aries VTD 12172, Allen VTD 17342 and  Williams TC 00064 in all of which cases the Tribunal held that HMRC were only liable to refund VAT under the DIY scheme insofar as it was “chargeable”.  VAT charged at higher than the proper VAT rate is not refundable.
Decision

32.	Firstly, we needed to decide whether any of the invoices in dispute were correctly charged at 17.5%.  This would be the case if they were not “qualifying services” as set out in Schedule 7A cited above. 
33.	We considered the 17 invoices.  None of the invoices on the face of them appeared to relate to anything other than services for the conversion of the barn.  In so far as materials were included these all appeared to be building materials as defined and supplied and incorporated by the person supplying the services. Mrs Nike agreed at the hearing that the work all related to the fabric of the building or its site. No evidence was given which suggested that any of the invoices were properly charged at 17.5%.  Although electrical or gas appliances were installed these all appeared to be for heating space or water.  We find that the services were qualifying services.

34.	We also find that the conversion was a qualifying conversion as it was a changed number of dwellings conversion, as set out above in our consideration of the law.
35.	Therefore we find that the invoices should have been charged at 5% VAT.  We also find that HMRC is only liable under s35 VATA 94 to refund VAT which is properly chargeable.
36.	We have no discretion.  We understand and sympathise with Mrs Nike’s position.  Neither she nor her contractors are experts in VAT law and neither of them realised that the invoices should only have been charged at 5%.  The law in giving these services a lower VAT rate of 5% as a relief has actually done nothing to help the Appellant.  And this mistake over the VAT rate in combination with the DIY scheme under which claims can only be made when the building certificate is issued, meant that by the time the mistake was spotted it was too late to put it right.  The Appellant does not (understandably) consider this fair and we have great sympathy for her position.  But we have no discretion to do other than apply the law, which means that we do not order HMRC to refund the overcharged VAT.  This appeal is dismissed.
37.	The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules.   The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

TRIBUNAL JUDGE
RELEASE DATE: 3 December 2009