[2010] UKFTT 49 (TC)

TC00362
					
Appeal Number: LON/2009/0341

VAT- section 35-DIY Builders- claim in relation to a dwelling which was affected by use prohibitions falling within Note (13) of Group5 Schedule 8 VATA- whether Note (13) affects the construction of section 35 –section 35(4)- Held:no –appeal allowed.

FIRST-TIER TRIBUNAL
TAX CHAMBER

Appellant

MRS IRENE SUSAN JENNINGS

	- and -

Respondents

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	

			Tribunal:	CHARLES HELLIER (Judge)
					NIGEL COLLARD

Sitting in public in London on 18 December 2009

Mr Jennings for Mrs Jennings 

Denis Edwards, counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

 DECISION
Introduction
1.	The supply of most goods and services is subject to VAT which forms part of the cost borne by the final consumer. Schedule 8 VATA however provides for the zero rating of certain supplies. Group 5 of schedule 8 provides for the zero rating of certain supplies connected with the construction of dwellings. This means that the consumer of such supplies will not bear VAT on them because the VAT paid at an earlier stage in the chain of supply will be recoverable by the supplier, and no VAT will be chargeable on the making of such a supply.
2.	Group 5 has four Items or headings. Item 1 zero rates the supply by a developer of a dwelling; Item 2  the supply of construction services in constructing a dwelling; Item 3 certain services supplied to housing associations in the course of converting buildings into dwellings; and Item 4 the supply of building materials made along with construction services within items 2 or 3. 
3.	As a result:
(1)	if a person buys a new dwelling from a developer, Item 1 will generally mean he bears no VAT (the developer will also be able to reclaim the VAT he suffered on inputs used for the building)
(2)	if a person has a plot of land and gets a contractor to build a dwelling on it he will bear no VAT on the construction services (Item 2);
(3)	if a person has a plot of land and gets a contractor to build a dwelling and also receives building materials supplied by that contractor he will bear no VAT on those materials (Item 4).
4.	But if a person arranging the construction of a dwelling pays a contractor for building services (zero rated within Item 2), but himself buys from someone else the materials which are supplied to him and which are to be incorporated into the dwelling, then the supply of those materials is not zero rated by any of the items of Group 5, and in the absence of any relief he bears VAT on them.
5.	Section 35 VATA, “Refund of VAT to persons constructing certain buildings”, also known as the DIY builders provision,  provides some relief. It permits the VAT on building materials for a dwelling to be recovered. As a result it puts a person who pays a contractor and also buys his own materials for the dwelling in the same position as regards the VAT he would have borne as if he had fallen within category (2) and the contractor had provided all the materials, or if he had fallen within category (1) and he had bought the completed dwelling from a developer.
6.	Section 35(4) provides that the notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group. The issue in this appeal arises because the four Items of Group 5 of schedule 8 are followed by 24 notes which affect the interpretation of the relevant items (section 96(9) VATA). Among these is Note (13) which removes the zero rating applicable to Item 1 -- the sale by a developer -- if the building is subject to certain restrictions on use including a restriction on use as a principal private residence or on use throughout the year. The note does not affect the other items in Group 5. In this decision we term a building which is within note (13), a "Note 13 building". The effect of note (13) gives rise to two categories of first consumer of a Note (13) building in relation to the VAT born on its construction costs:
(1)	Category I: those persons who purchase a Note (13) building from a developer. In this case the purchaser bears the VAT chargeable on the supplies to the developer which the developer will not have been able to recover because his supply of the building will have been exempted under Group1 of Schedule 9 VATA,
(2)	Category II: those persons who get a contractor to construct the Note (13) building. In this case the construction costs are zero rated. The owner bears no VAT.
7.	In these circumstances the question arises as to whether the effect of section 35 is to align the VAT attributable to separately acquired materials with Category I, rather than Category II. It is that question with which this appeal is concerned.
The Facts
8.	There is no dispute about the facts. In November 2007 Mrs Jennings arranged the construction of a log cabin. (As it happened it was the second time she had done so: the first cabin was destroyed in an arson attack). The cabin was a dwelling for the purposes of Group 5 of schedule 8. She paid builders to construct it, but, because the builder was unable to fund the purchase of certain materials, also paid directly for materials used in its construction which were supplied to her and incorporated into the cabin. The builders who undertook the construction (or most of them) eventually zero rated their supplies to her. Item 2 of group 5 applied to their services. On 3 November 2008, when the log cabin was finished, she made a claim under section 35 for the repayment of VAT on the materials supplied to her (including the wood which came from  Finland and bore 22% Finnish VAT). 
9.	Planning permission for the reconstruction of the log cabin had been given to the appellant by Kings Lynn and West Norfolk Council on 12 March 2007. The permission was subject to conditions. Included in those conditions were:
(1)	“the log cabin hereby approved shall not be occupied during the month of February in any calendar year”;
(2)	“any individual must not occupy the unit hereby approved for more than a single stay of 28 consecutive days”; and
(3)	“the unit hereby approved shall be used as holiday accommodation and at no time shall be the sole or main residence of any of the occupants”.
10.	On 12 January 2009 HMRC refused Mrs Jennings claim. They said that Note (13) must be read into section 35 so that no repayment of VAT was due if the building was subject to the Note (13) restrictions, and that it was clear that the restrictions applied. Mrs Jennings appealed.
11.	On the appellant's behalf Mr Jennings said that this was unfair: there were 34 other log cabins on the same site that had been built for the site owners by builders who had zero rated their supplies, and those supplies had included all the materials. He told us that the other log cabins were subject to the same planning restrictions. On that basis they were Note (13) dwellings. He told us that the owners of these log cabins had borne no VAT on the materials. Mrs Jennings, simply because she bought materials herself, would, if HMRC were right, have to bear VAT on them. 
12.	Thus HMRC say that on a true construction of section 35 Mrs Jennings should be aligned with category I as regards the costs of materials, rather than with category II. Mrs Jennings says that is unfair. Mr Jennings did not adduce detailed evidence of the facts surrounding all these other log cabins; it is not necessary for the purposes of this appeal to make findings of fact in relation to the other cabins; but we accept the nature of the comparison he makes.
The Statutory Provisions
Omitting the immaterial parts, section 35 provides as follows
(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;
(b)the construction of a building for use solely for a relevant residential purpose or relevant charitable purpose; and
(c)a residential conversion.

(1B) For the purposes of this section goods shall be treated as used for the purposes of works to which this section applies by the person carrying out the works in so far only as they are building materials which, in the course of the works, are incorporated in the building in question or its site. 

(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. 

(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, or a non-residential part of a building, into— 
(a)a building designed as a dwelling or a number of dwellings;
(b)a building intended for use solely for a relevant residential purpose; or
(c)anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings.

(2) The Commissioners shall not be required to entertain a claim for a refund of VAT under this section unless the claim— 
(a)is made within such time and in such form and manner, and
(b)contains such information, and
(c)is accompanied by such documents, whether by way of evidence or otherwise, as the Commissioners may by regulations prescribe or, in the case of documents, as the Commissioners may determine in accordance with the regulations.

(3) This section shall have effect— 
(a)as if the reference in subsection (1) above to the VAT chargeable on the supply of any goods included a reference to VAT chargeable on the supply in accordance with the law of another member State; and
(b)in relation to VAT chargeable in accordance with the law of another member State, as if references to refunding VAT to any person were references to paying that person an amount equal to the VAT chargeable in accordance with the law of that member State;
and the provisions of this Act and of any other enactment or subordinate legislation (whenever passed or made) so far as they relate to a refund under this section shall be construed accordingly. 

(4) The notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group. 

(4A) The meaning of “non-residential” given by Note (7A) of Group 5 of Schedule 8 (and not that given by Note (7) of that Group) applies for the purposes of this section but as if— 
(a)references in that Note to item 3 of that Group were references to this section, and
(b)paragraph (b)(iii) of that Note were omitted.

(5) …”

We set out Group 5 of Schedule 8 in full in the Appendix to this decision as some of the detail of its provisions is relevant to some of the arguments. We set out below those parts of it directly relevant to this appeal:

“Item No:
1 The first grant by a person—
(a)     constructing a building—
(i)     designed as a dwelling or number of dwellings; or…
of a major interest in, or in any part of, the building, dwelling or its site.
2 The supply in the course of the construction of—
(a)     a building designed as a dwelling or number of dwellings …
of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.
3 The supply to a [relevant housing association] in the course of conversion of a non-residential building or a non-residential part of a building into—
(a)     a building or part of a building designed as a dwelling or number of dwellings; or…
of any services related to the conversion other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.
4 The supply of building materials to a person to whom the supplier is supplying services within item 2 or 3 of this Group which include the incorporation of the materials into the building (or its site) in question.

“Notes:…
 (13)     The grant of an interest in, or in any part of—
(a)     a building designed as a dwelling or number of dwellings; or
(b)     the site of such a building,
is not within item 1 if—
(i)     the interest granted is such that the grantee is not entitled to reside in the building or part, throughout the year; or
(ii)     residence there throughout the year, or the use of the building or part as the grantee's principal private residence, is prevented by the terms of a covenant, statutory planning consent or similar permission….”

13.	The Cases
14.	Mr Edwards referred us to two Court of Appeal decisions: C&E Commrs v Blom-Cooper [2003] STC 665, and C&E Commrs v Jacobs [2005] STC 1518. Both related to claims under section 35. At this stage it is necessary only to summarise Blom-Cooper. 
15.	In that case a claim under section 35 related to the conversion of a building which already contained a residential part into a single dwelling. Note (9) of group 5 provided that:
(1)	“ the conversion ... of a non-residential part of a building which already contains a residential part is not included within item 1 (b) or 3 unless the result is to create an additional dwelling ...”
16.	As a result if the work had been carried out by developer the conversion would not have been zero rated within item 1 (b).
17.	The tribunal held that the drafting of note (9) -- its limitation to items 1 (b) and  3 meant that there was no way it could be applied to section 35. In the High Court the judge said that note 9 had no application in the context of section 35.
18.	In the Court of Appeal Chadwick LJ indicated that the relevant statutory question on the application of section 35 was the same as that for item 1(b) and 3. That question was answered by considering note (7) which was restricted by the application of note 9. He then said
“[25] It is pertinent to have in mind that the only items in Group 5 to which note (7) can have any application are items 1(b) and 3. Those are the only items in which the phrase ‘non-residential’ appears., ….  The stated object of note (7) is to give meaning to the phrase ‘non-residential’ in relation to a building or part of a building. And the only context in which that phrase needs to be given meaning it as part of the expression [which occurs] in items 1 (b) and 3. The words ‘ included within items 1 (b) or 3’ which appear in note (9) are not themselves restrictive; they do no more than identify the only two items to which note (7) -- and note (9), which (taken as a whole) restricts the effect of note (7) -- can have any application. Note 9 would have exactly the same effect, as a note to Group 5 of schedule 8, if it read: ‘The conversion ... of a non-residential part of a building which already contains a residential part is not a conversion within this group unless ...’
“[26] So understood it is, to my mind, clear that the purpose and effect of note (9), in conjunction with note (7), is to give a restricted meaning to the[ relevant words] for the purposes of Group 5 of schedule 8.
“…[28] it follows that I think the judge was wrong to hold that note (9) to Group 5 had no application to the construction of s35(1D) ... He overlooked, as it seems to me, the fact that there are no items in group 5 (other than items 1 (b) and 3) to which notes (7) and (9) can have any application.”
19.	It seems to us that the same analysis is not available to the respondents in this case. Note (13) operates directly and only in relation to item 1. The purpose and effect of note (13) is not to give a restricted meaning for all the purposes of group 5, but for the purposes of item 1 only. The reference to "item 1" in note (13) is in this case restrictive rather than identifying.
20.	HMRC’s argument
21.	Mr Edwards said that, just as a developer's sale of the building will not be zero rated if one of the conditions of note 13 are satisfied so also, by the operation of section 35(4), a DIY builder or developer will not be entitled to a refund of VAT incurred on supplies if one of the conditions of note 13 is satisfied. He said that the purpose of section 35 and the DIY builder scheme is to place the DIY builder in broadly the same position for VAT purposes as developers selling zero rated dwellings.
22.	Mr Edwards referred us to paragraph 7 in Jacobs where Ward LJ says:
“When the builder or developer sells the building in the course of his business, he can recover his input tax if he can bring himself within Group 5. The so-called do it yourself housebuilder who is not engaged in the building business would not ordinarily be entitled to deduct the input tax because he is treated as the ultimate consumer who has to bear the VAT burden himself. That may be harsh, especially if he employs builders to do the work for him. No doubt to alleviate that hardship section 35 of the 1994 act allows him to claim a refund of VAT in certain circumstances.”
23.	Mr Edwards said that section 35 must be construed in the light of the harshness it is intended to alleviate, and that harshness arises in the comparison of the DIY builder with the purchaser from a developer. He says that the effect of subsection (4) is to incorporate the purpose and effect of the operation of group 5 into section 35.
24.	He said that the object of Note 13 was to deny relief to the purchaser of a Note 13 dwelling. That object should be carried across to section 35: it would be anomalous if the DIY builder of a Note 13 dwelling bore no VAT on the supply of materials used in that dwelling, but if the dwelling had been purchased from a developer the consumer would have borne VAT on those materials.
25.	He said that the harshness which section 35 was intended to alleviate was only that which would apply by virtue of item 1  on a comparison between a DIY builder and any purchaser from a developer. He said that there was no relevant harshness in any comparison between the user of item 2 or 4 supplies and a DIY builder. The purpose of section 35 had therefore to be limited to the comparison relevant to item 1. Item 1 was predominant in relation to section 35, and so, as it came with a note 13 qualification, so must section 35.
26.	However Mr Edwards agreed that Group 5 on its own places a DIY builder of a Note 13 building in a better position than the purchaser from a developer of such a building in circumstances in which  the DIY builder gets a contractor to supply building services and all the relevant materials to him so that the supplies fall within item 2 and item 4. 
27.	Discussion
28.	The log cabin was a Note (13) dwelling: “residence there throughout the year…[was] prevented by the  terms of a…statutory planning consent” within Note (13)(b)(ii) (see para[9](1) and (2) above). We make no finding in relation to the question of whether the log cabin also fell foul of the provisions relating to the “grantee” not being entitled to reside in the building throughout the year in (13)(b)(i) or use as the “grantee’s” principal private residence in (13)(b)(ii). There is to our mind some uncertainty as to whether the owner should be considered to be a “grantee” for the purposes of section 35 when that word does not play any part in any of the provisions of section 35, but such a finding is not necessary to this decision.
29.	We now turn to the question of whether note (13) is to be treated as constraining section 35. For the reasons which follow in more detail we conclude that it does not. Broadly, those reasons are that note (13) applies only to item 1 and either gives a particular meaning to phrases which are used only in the context of item 1 and not within section 35, or gives meaning to phrases in item 1 which are used elsewhere in group 5 that are not to be given that particular meaning; and that there is no compelling reason to apply the item 1 restriction created by note (13) to section 35 rather than the lack of restriction applicable to other elements of group 5.
30.	There seem to us to be three possible approaches to the exercise required by section 35(4) that the notes to Group 5 shall apply for construing that section "as they apply for construing that group":
(1)	The notes should be pasted into section 35 wholesale, and section 35 interpreted as if they formed part of it;
(2)	The meanings ascribed to particular phrases in Group 5 by virtue of the application of the notes should be given to the same phrases where they appear in section 35; and
(3)	The nature of the restriction (or extension) which arises by virtue of the application of the notes in the context of Group 5 should be carried across and applied as a restriction (or extension) in the operation of section 35.
31.	It seems to us that the second approach is the preferable one. That is because: (I) it is the approach adopted by Chadwick LJ in Blom-Cooper- see para 15 above-, and, to an extent, by Ward LJ in Jacob; (II) it is the approach which appears to be inherent in subsection (4) when read together with subsection (4A) -- see XX below; and (III) it reflects the natural meaning of "construing" -- a word which is normally used to describe the process of giving particular meaning to particular words.
32.	The first approach might however appear to be sanctioned by Ward LJ in Jacobs. At [38] he says that as a result of section 35(4) "one could easily paste the notes in as separate subsection of section 35. They should be so read in order to construe the section as a whole." Although Ward LJ then applies that approach he does so in the context of notes whose application is not limited by reference to particular provisions of Group 5, and he casts no doubt on the approach taken by Chadwick LJ in relation to the seeming limitation of note (9) to Item 1 (b) and 3 in which (see [25 and 28]  of Blom-Cooper) Chadwick LJ explains that that limitation is in fact without effect in Group 5 and is therefore to be treated as without effect in section 35. Thus it appears that the first approach might probably be understood to be a subset of the second approach.
33.	In Blom-Cooper it seems to us that Chadwick LJ adopts the second approach. He takes a linguistic approach to the task of determining how a note is applied in construing Group 5 for the purpose of transposing that construction to section 35: he seeks phrases used in Group 5 which are defined by the notes, and then construes the same phrases in section 35 in the same way. Thus:
(1)	in [20] he says "Note (2) …gives meaning to the expression found both in item 1(a) of group 5 and in paragraph (a) of section 35 (1D), "a building designed as a number of dwellings"";
(2)	in the same paragraph he says "Note (4) gives meaning to the expression, found in both item 1(b) of Group 5 and in paragraph (b) of section 35 (1D), "use ... for irrelevant residential ... purpose".";
(3)	in [23]: "the question "into what has the non-residential building ... been converted?" arises in the context of section 35(1D). ... the same question would arise in the context of item 1(b) of Group 5 ... the same question would arise in the context of item 3 ...[ the answer] depends on the related question "has there been converted into a building designed as a dwelling something within the description "a non-residential building or a non-residential part of a building"?" ...[ 24] the answer to that related question is provided by note (7) ... which is applicable not only to the item in group 5 also section 35 ... note (7) is in these terms "... non-residential …means ...";
(4)	in Para [25]: "the stated object of note (7) is to give meaning to the phrase " non-residential" ...[ 27] if on a true analysis the purpose and effect of note (9) in conjunction with note (7) is to give a restrictive meaning to the expression "converting ... a non-residential building" the purposes of group 5 of Schedule 8 the same restrictive meaning must be given to that expression for the purposes of s 35(1D).".
34.	In each of these instances Chadwick LJ is identifying a particular meaning -- or manner of construing -- a particular phrase in Group 5 which results from the application of note, and applying that meaning -- that construction -- of that phrase to section 35.
35.	It seems to us that the same approach -- the fastening onto a particular word or phrase which by virtue of the notes is to be construed in a particular way is evident in paragraph [38] of Ward LJ’s judgement in Jacobs although, for reasons discussed at paragraph 32 above, his approach appears to be more to paste the notes into section 35 than to paste the way they apply in Group 5 into section 35.
Section 35 (4A)
36.	The approach taken by section 35 (4A) is relevant to the construction of section 35 (4). By subsection (4A) it will be recalled:
“(4A) The meaning of “non-residential” given by Note (7A) of Group 5 of Schedule 8 (and not that given by Note (7) of that Group) applies for the purposes of this section but as if— 
(a)references in that Note to item 3 of that Group were references to this section, and
(b)paragraph (b)(iii) of that Note were omitted.”

Thus note (7) is not to be applied. In its place note (7A) is to be applied. But note (7A) begins: --
(1)	"for the purposes of item 3, and for the purposes of these notes so far as having effect of the purposes of item 3, a building ... is non-residential if ..."
The application of note (7A) in the construction of Group 5 is thus restricted to Item 3. But the draughtsman wants it to have wider application in section 35. He therefore provides in subsection (4A) that the “meaning of”  non-residential  given by note (7A) applies for the purposes of section 35 as if references to  ‘item 3’  in the quote above were references to section 35.
37.	What is instructive in the drafting is (1) the expectation that the effect of section 35(4) is to import note (7A)' s meaning of non-residential into section 35 rather than some broader purposive effect, and (2) the recognition that where a note is expressly limited in its application to one item of Group 5, it needs to be extended in its application if it is to apply to the construction of  section 35.
38.	This second point indicates that if note (13) were to have application only in relation to construing, say, "dwelling" only in item 1 (and not in relation to that word in item 3), and if that application is to be transported into section 35, then words of express extension like those in subsection (4A) would be needed: in other words subsection (4A) suggests that section 35 is narrowly focused on the precise way in which a note is applied in construing Group 5.
39.	This indicates to us that the second approach to section 35 (4) is to be preferred. We discuss below the relevance of this approach in the context of note (9) which made express reference to items 1(b) and (3) but was held in Blom-Cooper to have wider application in the context of section 35.
Applying Each Approach
40.	On the first approach one asks what effect the words of note 13 would have if they were simply added as a subsection to section 35. The answer, it seems to us, is none. There is nothing in section 35 to which those words are relevant: there is no " grant of an interest" in any part of section 35, there is no reference to Item 1 in section 35.
41.	One might therefore ask whether a presumption against redundancy would prompt one to give a wider meaning to note (13) when pasted into section 35. But the scheme of the notes shows otherwise: for the redundancy applies in relation to many other of the notes which, on this approach, would be pasted into section 35. For example:
(1)	note 1: "Grant includes assignment or surrender". This is otiose in the context of section 35;
(2)	note 14 "where the major interest referred to in item 1 is a tenancy or lease ...". This has no application in section 35 at all;
(3)	note 15: "the reference in item 2 (B) of this group to the construction of a  civil engineering work does not include ...". This has no application in section 35;
(4)	note 19: "the caravan is not a residential caravan if ...": Caravans are irrelevant to section 35;

The lack of relevance of a particular note to section 35 does not seem to be a matter which calls for a wider interpretation of the language of the note than is apparent from its words. Thus we conclude that, in this context, simply because a note is otiose on its plain words is no reason to giving it a different or wider meaning.
42.	On the second approach one seeks a phrase which is given meaning by the relevant note, or a question to which it gives an answer.
43.	What meaning does note 13 confer on what words? It seems to us that the most obvious meaning it confers is on the words "the grant of an interest" and thus upon the words "The first grant ... of a major interest" in item 1. It has the effect that these words should be construed as not including a grant where the note 13 conditions apply. But the construing of the "grant of an interest" is not relevant to any of the provisions of section 35. Section 35 is not in any way concerned with the grant or transfer of an interest in land.
44.	On that view note 13 has no role in the construction of section 35.
45.	Is there any other way of treating note 13 as conferring meaning on particular words? The only other possibility appears to be that it is conferring a limited meaning on the words "a building designed as a dwelling ..." so that that phrase would be construed as not including a Note (13) building. If that is correct then, because those words appear in section 35, this construction would also apply to section 35 and a Note (13) building would not benefit from section 35 repayment. But that cannot be the effect of the application of note 13 in Group 5 itself and Mr Edwards accepted as much -- because clearly such a restriction is not intended to apply to items 2 or 3. The express reference to item 1 in the words of note 13 makes that clear.
46.	Thus note 13 does not apply in construing Group 8 to require " a building designed as a dwelling" to be restrictively construed. Accordingly that construction is not to be applied in construing section 35. The specific reasoning of Chadwick LJ in Blom-Cooper in relation to Note (9) cannot therefore be applied to Note (13).
47.	Thus on the second approach we also find that note 13 does not affect the construction of section 35.
48.	The third approach is broadly that contended for by the respondents. They say that the effect of subsection 35 (4) is to incorporate into section 35 the purpose and effect of the operation of Goup 5. Group 5 contains four items. They say that section 35 cannot bite on anything in items 2 and 4-- it provides no recovery because those items are zero rated -- so the incorporation of the purpose and effect of group 5 into section 35 is only in relation to its purpose and defects as regards item 1, and in relation to item 1 Group 5 is limited by note 13 and that limitation should accordingly be read into section 35. As section 35 effectively extends Group 5 it must do so in a way which is consistent with it, and thus must be interpreted as including the note 13 restriction.
49.	We have already quoted the paragraph in Ward LJ's judgement in Jacobs in relation to hardship.
50.	We have two problems with this approach. First, Ward LJ does not say that the only purpose of section 35 is to alleviate such hardship and that there is no other hardship which arises if the restrictive approach is taken. It is not clear to us from the words of section 35 and group 5 that the only purpose of section 35 is to procure a level playing field between a developer and a DIY builder. Second even if the purpose of this section is so limited, that limited purpose can be given effect only if it is a permissible construction of the words used. 
51.	The other possible hardship is precisely that of which Mr and Mrs Jennings complain. If a DIY builder agrees with a contractor for the construction of the entire building, that supply is zero rated by item 2 and item 4 of group 5, both of which are unaffected by note 13. The materials used in the construction are effectively zero rated. On the other hand, if the DIY builder separately buys labour and materials, the labour will be zero rated but the materials will not be. By comparison that is also a hardship. There seems to be no reason to construe section 35 as not being intended to relieve that hardship. It is not clear that the alleviation of that hardship is not another purpose of section 35. It would be a purpose consistent with that of items 2 and 4 of group 5.
52.	The second problem is whether it is necessary to do violence to the words of section 35(4) in order to give it the effect for which Mr Edwards contends. It seems to us that one would have to read additional words into that subsection similar to those which appear in subsection (4A) in relation to note (7A). One would have to say that note 13 applies for the purposes of section 35 but as if the words "the grant of an interest in any part of" were omitted and the words "were within item 1" were replaced by "is not a building designed as a dwelling". That to our minds goes too far. 
53.	HMRC also say that to construe section 35 as giving relief to a DIY builder from materials for a note 13 building would be anomalous because it would give an advantage to a DIY builder over a person who bought such a building from a developer. But this seems to us to be flawed by the very problem identified in the preceding passage. The DIY builder of a note 13 building who buys the whole of his contracting service from a contractor is by virtue of item 2 and 4 given advantage over that person who buys from a developer. There appears to be no policy which proscribes the carrying over of that advantage into section 35.
54.	EU Considerations
55.	We asked Mr Edwards whether HMRC contended that the relevant EU directive required any particular approach to the construction of section 35: in particular, we asked whether, if section 35 represented a derogation from the principal requirements of the directive, what the authority of such derogation was, and whether it could therefore limit the construction of section 35.
56.	The Commissioners replied that they did not contend that section 35 represented a derogation from the requirements of EU law in respect of VAT. EU law required member states to collect VAT. In the case of supplies to a do it yourself builder the duty to collect VAT was complied with by virtue of the collection of VAT from the supplier of the goods to the builder (the consumer of the goods). 
57.	They say that EU law does not require member states to utilise VAT that has been collected in any particular way: once VAT has been collected in a member state is free to do as it wishes with that tax. 
58.	In implementing section 35 they say that Parliament gave effect to its decision to apply VAT that has been collected to reimburse do it yourself builders the VAT charged to them on the supply of goods. Parliament's purpose in implementing section 35 was to create a rough parity of treatment between a DIY builder of a new home and a purchaser who purchases from the developer a newly built home. There was no need for a derogation authorising implementation of section 35 because there was no requirement to which section 35 derogated.
59.	We have therefore not considered the provisions of the directives. We set out our views above as to whether the Parliamentary intention for which HMRC contend may be gleaned from the words of the provisions.
Finnish tax
60.	The VAT reclaim in relation to the supply of wood for Mrs Jenning’s log cabin was Finnish VAT rather than VAT within the meaning of the VAT Act. HMRC accepted that section 35(3)(b) permits the refund of an amount equivalent to VAT charged in accordance with the law of another member state.
Conclusion
61.	We allow the appeal in principle. VAT suffered on the supply to Mrs Jennings of building materials incorporated into her log cabin is recoverable under section 35. There was some suggestion that claims had also been made in relation to VAT on the provision of services to Mrs Jennings. The issue was not fully debated before us. To the extent that such VAT was properly charged section 35(1C) permits recovery only to the extent that the work was in the course of a residential conversion. There is no other provision in section 35 which would permit the recovery of VAT on construction services. The log cabin was not a conversion. To the extent therefore that the claim relates to supplies other than those of materials the claim should be disallowed.
62.	We adjourn the appeal to allow the amount allowable to be agreed between the parties; in default of agreement the parties have leave to apply to the tribunal for the resolution of such issues.
Rights to appeal
63.	The rights of the parties to appeal against this decision and the procedure for so doing are set out in the notice which accompanies this decision, and which to that extent forms part of it. 
64.	We make no direction as to costs.

CHARLES HELLIER
TRIBUNAL JUDGE
RELEASE DATE: 28 January 2010

APPENDIX :Group 5 and its Notes

By Group 5 of Schedule 8 the following Items are to be zero rated :

1 The first grant by a person—
(a)     constructing a building—
(i)     designed as a dwelling or number of dwellings; or
(ii)     intended for use solely for a relevant residential or a relevant charitable purpose; or
(b)     converting a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings or a building intended for use solely for a relevant residential purpose,
of a major interest in, or in any part of, the building, dwelling or its site.
2 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
(b)     any civil engineering work necessary for the development of a permanent park for residential caravans,
of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.
3 The supply to a [relevant housing association] in the course of conversion of a non-residential building or a non-residential part of a building into—
(a)     a building or part of a building designed as a dwelling or number of dwellings; or
(b)     a building or part of a building intended for use solely for a relevant residential purpose,
of any services related to the conversion other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.
4 The supply of building materials to a person to whom the supplier is supplying services within item 2 or 3 of this Group which include the incorporation of the materials into the building (or its site) in question.

Notes:
(1)     “Grant” includes an assignment or surrender.
(2)     A building is designed as a dwelling or a 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 term of any covenant, statutory planning consent or similar provision; and
(d)     statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.
(3)     The construction of, or conversion of a non-residential building to, a building designed as a dwelling or a number of dwellings includes the construction of, or conversion of a non-residential building to, a garage provided that—
(a)     the dwelling and the garage are constructed or converted at the same time; and
(b)     the garage is intended to be occupied with the dwelling or one of the dwellings.
(4)     Use for a relevant residential purpose means use as—
(a)     a home or other institution providing residential accommodation for children;
(b)     a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder;
(c)     a hospice;
(d)     residential accommodation for students or school pupils;
(e)     residential accommodation for members of any of the armed forces;
(f)     a monastery, nunnery or similar establishment; or
(g)     an institution which is the sole or main residence of at least 90 per cent of its residents,
except use as a hospital, prison or similar institution or an hotel, inn or similar establishment.
(5)     Where a number of buildings are—
(a)     constructed at the same time and on the same site; and
(b)     are intended to be used together as a unit solely for a relevant residential purpose;
then each of those buildings, to the extent that they would not be so regarded but for this Note, are to be treated as intended for use solely for a relevant residential purpose.
(6)     Use for a relevant charitable purpose means use by a charity in either or both the following ways, namely—
(a)     otherwise than in the course or furtherance of a business;
(b)     as a village hall or similarly in providing social or recreational facilities for a local community.
(7)     For the purposes of item 1(b), and for the purposes of these Notes so far as having effect for the purposes of item 1(b), a building or 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
(ii)     for a relevant residential purpose; 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 10 years immediately preceding the grant, been used as a dwelling or for a relevant residential purpose.
(7A)     For the purposes of item 3, and for the purposes of these Notes so far as having effect for the purposes of item 3, a building or 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
(ii)     for a relevant residential purpose; or
(b)     it is designed, or adapted, for such use but—
(i)     it was constructed more than 10 years before the commencement of the works of conversion, and
(ii)     no part of it has, in the period of 10 years immediately preceding the commencement of those works, been used as a dwelling or for a relevant residential purpose, and
(iii)     no part of it is being so used.
(8)     References to a non-residential building or a non-residential part of a building do not include a reference to a garage occupied together with a dwelling.
(9)     The conversion, other than to a building designed for a relevant residential purpose, of a non-residential part of a building which already contains a residential part is not included within items 1(b) or 3 unless the result of that conversion is to create an additional dwelling or dwellings.
(10)     Where—
(a)     part of a building that is constructed is designed as a dwelling or number of dwellings or is intended for use solely for a relevant residential purpose or relevant charitable purpose (and part is not); or
(b)     part of a building that is converted is designed as a dwelling or number of dwellings or is used solely for a relevant residential purpose (and part is not)—
then in the case of—
(i)     a grant or other supply relating only to the part so designed or intended for that use (or its site) shall be treated as relating to a building so designed or intended for such use;
(ii)     a grant or other supply relating only to the part neither so designed nor intended for such use (or its site) shall not be so treated; and
(iii)     any other grant or other supply relating to, or to any part of, the building (or its site), an apportionment shall be made to determine the extent to which it is to be so treated.
(11)     Where, a service falling within the description in items 2 or 3 is supplied in part in relation to the construction or conversion of a building and in part for other purposes, an apportionment may be made to determine the extent to which the supply is to be treated as falling within items 2 or 3.
(12)     Where all or part of a building is intended for use solely for a relevant residential purpose or a relevant charitable purpose—
(a)     a supply relating to the building (or any part of it) shall not be taken for the purposes of items 2 and 4 as relating to a building intended for such use unless it is made to a person who intends to use the building (or part) for such a purpose; and
(b)     a grant or other supply relating to the building (or any part of it) shall not be taken as relating to a building intended for such use unless before it is made the person to whom it is made has given to the person making it a certificate in such form as may be specified in a notice published by the Commissioners stating that the grant or other supply (or a specified part of it) so relates.
(13)     The grant of an interest in, or in any part of—
(a)     a building designed as a dwelling or number of dwellings; or
(b)     the site of such a building,
is not within item 1 if—
(i)     the interest granted is such that the grantee is not entitled to reside in the building or part throughout the year; or
(ii)     residence there throughout the year, or the use of the building or part as the grantee's principal private residence, is prevented by the terms of a covenant, statutory planning consent or similar permission.
(14)     Where the major interest referred to in item 1 is a tenancy or lease—
(a)     if a premium is payable, the grant falls within that item only to the extent that it is made for consideration in the form of the premium; and
(b)     if a premium is not payable, the grant falls within that item only to the extent that it is made for consideration in the form of the first payment of rent due under the tenancy or lease.
(15)     The reference in item 2(b) of this Group to the construction of a civil engineering work does not include a reference to the conversion, reconstruction, alteration or enlargement of a work.
(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.
(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.
(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.
(19)     A caravan is not a residential caravan if residence in it throughout the year is prevented by the terms of a covenant, statutory planning consent or similar permission.
(20)     Item 2 and Item 3 do not include the supply of services described in paragraph 1(1) or 5(4) of Schedule 4.
[(21)     In item 3 “relevant housing association” means—
(a)     a registered social landlord within the meaning of the Housing Act 1996,
(b)     a registered housing association within the meaning of the Housing Associations Act 1985 (Scottish registered housing associations), or
(c)     a registered housing association within the meaning of Part II of the Housing (Northern Ireland) Order 1992 (Northern Irish registered housing associations).]
(22)     “Building 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
(ii)     intended for use in a building designed as a number of dwellings and is a door-entry system, a waste disposal unit or a machine for compacting waste; or
(iii)     a burglar alarm, a fire alarm, or fire safety equipment or designed solely for the purpose of enabling aid to be summoned in an emergency; or
(iv)     a lift or hoist;
(d)     carpets or carpeting material.
(23)     For the purposes of Note (22) above the incorporation of goods in a building includes their installation as fittings.
(24)     Section 30(3) does not apply to goods forming part of a description of supply in this Group.]