[2010] UKFTT 476 (TC)

TC00737
Appeal Number: TC/2009/11830

FIRST TIER TRIBUNAL TAX

 VAT – DO IT YOURSELF BUILDERS SCHEME – Did the planning permission prohibit the separate use and disposal of the property – No – Was the construction carried out in the course or furtherance of a business – No – Appeal Allowed

DECISION NOTICE 
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

	MARGARET ELIZABETH WENDELS	Appellant

	- and -

         THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 
				      JOHN LAPTHORNE

Sitting in public Birmingham on 10 March 2010

Appellant appeared in person

James Puzey counsel instructed by the Solicitor’s office of HM Revenue & Customs, for HMRC

© CROWN COPYRIGHT 2010

DECISION
The Appeal
1.	Mrs Wendels was appealing against HMRC decision dated 22 June 2009 which refused a refund of VAT in the sum of ₤13,882.75 under the DIY Builders Scheme (hereinafter referred to as “the Scheme”). The Appeal concerned one of principle, namely whether Mrs Wendels met the eligibility requirements to make a claim under the Scheme. If the Appeal is successful, HMRC reserves the right to reconsider the question of quantum.
2.	The Appeal related to the construction of a dwelling house, known as Benaiah, on a plot of land within a former orchard just outside the village envelope of Southwell in Nottinghamshire. In the 1950’s the Grandfather of Mr Wendels (the Appellant’s husband) purchased the orchard which he intended to subdivide into building plots for members of his family. The family bungalow, The Appleyard, was built in the 1950’s which was still occupied by Mr Wendels’ mother. In 1983 the family established a cattery business on the orchard for Mr Wendels. In 1996 planning permission was granted without conditions for the erection of a dwelling house, known as Franklyn, which became the home of Mr Wendels’ brother. In 1998 Mr and Mrs Wendels married. On 28 March 2000 they applied for planning permission for the construction of another dwelling house on the orchard which was refused. A Planning Inspector confirmed the refusal on Appeal. On 26 February 2005 Mr and Mrs Wendels renewed their application which was successful on Appeal subject to a condition, namely, that the occupation of the dwelling shall be limited to a person solely or mainly employed or last employed in the cattery business or a widow or widower of such a person, or any resident dependants. Following the grant of conditional planning permission Mr and Mrs Wendels constructed a dwelling house, known as Benaiah, which they occupied in August 2008.
3.	The dispute in this Appeal concerned two separate issues:
(1)	Whether the planning condition prevented the separate use and or disposal of Benaiah?
(2)	 Whether the construction of Benaiah was carried out in the course and furtherance of the cattery business?
If the answer is yes to either of the two issues the Appeal fails. The two issues relates to specific provisions of section 35 of the VAT Act 1994 (section 35(1)(b) and Note (2)(c) to Group 5 of Schedule 8 to VAT Act 1994) which defines the eligibility requirements for VAT repayments under the Scheme.
The Legislation
4.	Section 35(1) and (1A) of the VAT Act 1994 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.
5.	Section 35(4) states that
(4)	The notes to group 5 of schedule 8 shall apply for construing this    section as they apply for construing that group. 
6.	Note 2 to group 5 of schedule 8 to the VAT Act 1994 provides as follows:
2)	      A building is designed as a dwelling or a number of dwelling 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.
The Policy Framework
7.	HMRC Notice 719 (May 2002) sets out the policy for dealing with VAT refunds for do it yourself builders and converters. The Notice carries no legal force. Paragraph 2.1 explains that the Scheme puts DIY builders and converters in a broadly similar position to a developer selling a zero-rated property, by refunding them the VAT on their main construction or conversion costs. 
8.	Paragraph 3.1 gives examples of persons who could not use the Scheme because their building would be used for a business purpose. A person who works from home, using one of the rooms in his home as an office was not one of the examples. Paragraph 3.1 stated that such a person could  make a claim under the scheme. 
9.	Paragraph 4.2 sets out HMRC’s view on what is meant by designed as a dwelling under note 2 to group 5 of schedule 8 to the VAT Act 1994. Paragraph 4.2.2 considers whether an occupancy restriction constitutes a prohibition on separate use or disposal (see Note 2(c) ). Paragraph 4.2.2 states that
“No. Occupancy restrictions are not prohibitions on separate use or disposal and do not affect whether a building is designed as a dwelling. Common examples of occupancy restrictions include those that limit the occupancy to people:
a)	working in agriculture or forestry, or
b)	over a specified age”.
10.	Paragraph 4.3 gives examples of works that are not within the Scheme. One example is a granny annexe which could not be use or disposed of separately from a main house because the annexe is not designed as a dwelling in its own right.
11.	The Planning Inspector’s Appeal decision dated 8 November 2006 which granted conditional planning permission for the construction of Benaiah sets out the planning policy considerations for the erection of isolated new houses in the countryside. Essentially planning policy prohibits the development of new dwellings in the countryside unless a special justification exists. The relevant tests for determining a special justification are defined in a National Planning Policy (PPS7). 
12.	Paragraph 10 of PPS7 states that
“Isolated new houses in the countryside will require special justification for planning permission to be granted. Where a special justification for an isolated new house relates to the essential need for a worker to live permanently at or near their place of work in the countryside, planning authorities should follow the advice in Annex A.”
13.	Paragraph 1 of Annex A provides that
“ One of the few circumstances in which isolated residential development may be justified is when accommodation is required to enable agricultural, forestry and certain other full-time workers to live at, or in the immediate vicinity of, their place of work”.
14.	Paragraph 3 of Annex A provides that
New permanent dwellings should only be allowed to support existing agricultural activities on well-established agricultural units, providing:
(1)	there is clearly established existing functional need;
(2)	the need relates to a full-time worker, or one who is primarily employed in agriculture and does not relate to a part-time requirement;
(3)	the unit and agricultural activity concerned have been established for at least three years, have been profitable for at least one of them, are currently financially sound, and have a clear prospect of remaining so;
(4)	the functional need could not be fulfilled by another existing dwelling on the unit, or any other existing accommodation in the area which is suitable and available for occupation by the workers concerned; and
(5)	other planning requirements, eg in relation to access, or impact on the countryside are satisfied.
15.	Paragraph 16 of Annex A states that
“Where the need to provide accommodation to enable farm, forestry or other workers to live at or near their place of work has been accepted as providing the special justification required for new isolated residential development in the countryside, it will be necessary to ensure that the dwellings are kept available for meeting this need for as long as it exists. For this purpose of planning permission should be made subject to appropriate occupancy conditions. DOE Circular 11/95 gives further advice and provides model occupancy conditions for agricultural dwellings and for other staff accommodation.
16.	The model occupancy conditions specified in DOE Circular 11/95 are   Agricultural Workers’ Condition (paragraph 45), and Staff Accommodation (paragraph 46).   The wording of the Staff Accommodation condition was applied to the planning permission for Benaiah.
17.	The terms of PPS7 were broadened in scope between Mr and Mrs Wendels’ unsuccessful application on 28 March 2000 and their successful one dated 26 February 2005. Originally the policy restricted the development of new houses to where there was a proven need for agricultural or forestry purposes. The policy was expanded around 2005 to certain other full-time workers to live at or in the immediate vicinity of their place of work.
The Facts
18.	The Tribunal heard evidence from Mrs Wendels. A bundle of documents was presented in evidence.
19.	The building, Benaiah, was located in the countryside outside the built up area of Southwell.  The development was subject to strict planning control which required a special justification for its construction. The Planning Inspector who granted permission for the development was satisfied that such a justification existed, namely, that there was a clear functional need for a full-time worker to be in sight and sound of the cattery. The Inspector found that the cattery business was well-established, profitable, and financially sound. Further he decided that the cattery could not be run from the other properties on the orchard owned by Mr Wendels’ mother and brother because the properties had no functional relationship with the business. The Planning Inspector concluded that the need for a full-time worker at the cattery and the unavailability of suitable alternative accommodation constituted a special justification for the dwelling in relation to prevailing policies on residential development in the countryside.
20.	The Inspector imposed an occupancy condition to the planning permission  for , Benaiah,  which was 
“The occupation of the dwelling hereby permitted shall be limited to a person solely or mainly employed or last employed in the cattery business occupying the plot edged blue on drawing no. C27-05-01-1, dated 14 December 2005 and submitted with the Appeal, or a widow or widower of such a person, or any resident dependent”.
21.	Mr Forrester, Principal Planning Officer, confirmed in a letter dated 17 December 2009 that the occupancy condition was imposed because the dwelling was located in the countryside outside the development limits of Southwell where the building of new dwellings was not normally permitted under the planning regulations. Had the site fallen within the development limits it was unlikely that such an occupancy condition would be attached to the planning permission. Further, the dwelling which had been approved was quite obviously a three bedroom family home, and that its design could not be construed as anything other than a dwelling.
22.	Mr and Mrs Wendels ran the cattery business as a partnership. The business involved the boarding of cats whilst the owners were away from home. The cattery comprised 18 dens and licensed for 45 cats. The business was open to customers from 8am to 6pm, Monday to Saturday, and 9am to 9.30am and 2pm to 5pm on a Sunday. The cattery was located in separate premises away from Benaiah.  The terms of the licence to board cats required the presence of a fit and proper person at all times to exercise supervision and deal with emergencies. The annual turnover for the business was in the region of ₤30,000. 
23.	Mr Wendels started the cattery business in 1983, when he was single and living with his parents. The need for a separate home arose in 1998 when Mr and Mrs Wendels planned to marry. Initially they lived together in Mrs Wendels’ home located about one mile from the cattery. They ran the business from Mr Wendels’ mother’s house and relied on his brother to carry out the late night check on the cats.
24.	Mr and Mrs Wendels occupied Benaiah as their family home. The property was detached comprising three bedrooms, two bathrooms, sitting room, dining room, kitchen, utility area and a small office. The cost of the construction was in the region of ₤200,000 which was financed from the proceeds of the former matrimonial home and personal savings. Mr and Mrs Wendels did not use monies from the cattery business for the construction costs. The value of the house was not entered as a business asset in the accounts for the cattery.
25.	Mr and Mrs Wendels’ primary aim for the construction of Benaiah was to provide them with a home. The construction made no difference to the running of the cattery business from the perspectives of profitability and customer service. Mrs Wendels accepted that their occupation of Benaiah and its proximity to the cattery facilitated easier supervision of the cats and relieved the burden on other members of Mr Wendels’ family of looking after the animals during anti-social hours. The cattery, however, had been run successfully offsite for ten years by Mr and Mrs Wendels, and there was no reason why it would not have continued as a successful business if   Benaiah had not been built.
The Parties Submissions
The Appellant
26.	Mrs Wendels pointed out that the criteria for determining whether a building was designed as a dwelling were set out in note 2 to group 5 of schedule 8. Mrs Wendels noted that the sole dispute related to whether the requirements of note 2(c) were met. HMRC had conceded that the building met the conditions in notes 2(a), (b) and (d).
27.	According to Mrs Wendels, the issue under note 2(c) was whether the occupation condition imposed by the Planning Inspector prohibited the separate use or disposal of the property. If it did the Appeal would fail. Further Mrs Wendels accepted that the requirements of note 2(c) were met if the planning condition prohibited either separate use or disposal of the property.  In her view the condition placed a limitation on the use and or disposal of the property but did not prohibit the separate use or disposal of it. Mrs Wendels contended that a limitation was materially different from a prohibition. A limitation permitted something to happen within specific restrictions or boundaries. A prohibition, on the other hand, forbade the act in question.
28.	 Mrs Wendels argued that the condition imposed by the Planning Inspector did not prohibit the separate use of Benaiah as a dwelling. She pointed out that the condition allowed a widow, widower or resident dependant to live there while having no involvement with the cattery business. Further although a disposal of Benaiah might be affected by the condition, its separate disposal was not prohibited absolutely, which was confirmed by the planning authority, Newark and Sherwood  District Council in a letter dated 4 June 2009,  stating that
“Planning controls cannot cover property ownership which is why this is not referred to in this condition. It would, therefore, be possible, for example for the applicant or their dependant to occupy the dwelling having sold the freehold interest in it”.
29.	Mrs Wendels disputed that Benaiah was constructed in the course or furtherance of the cattery business. She referred to HMRC Guidance on Business/Non Business which sets out the six indicators of business use from the Lord Fisher case. Mrs Wendels contended that the relevant supply caught by section 35 of the VAT Act 1994 was the carrying out of the construction of the dwelling. In her view the question of business use had to be tested against the supply of construction works not the reasons for planning permission, and the subsequent use of the building. Mrs Wendels pointed out that before commencing the build they discussed with their accountant the option of registering the cattery business for VAT with a view to reclaiming the VAT on the construction costs. Their accountant advised Mr and Mrs Wendels that they would have great difficulty arguing that the construction costs were for the purposes of the cattery business even in the light of the planning condition. At the most they would only be able to reclaim a small proportion of the VAT which related to the use of the room within the house as the office for the cattery.
30.	Mrs Wendels concluded that the work of constructing Benaiah was a separate activity from the business activities of the cattery. The primary purpose of the construction was to provide Mr and Mrs Wendels with a home on land they owned. The needs of the adjacent cattery business provided them with the opportunity to obtain planning permission for the development subject to an occupancy condition. The finished property enabled Mr and Mrs Wendels to supervise the cattery more easily without having to rely on other members of the family. None of these factors, however, established that the construction works were a business activity of the cattery or any other business.
HMRC
31.	Mr Puzey for HMRC pointed out that the wording of note 2(c) to group 5 of schedule 8 was an either/or situation. The Tribunal only had to be satisfied that the planning condition prohibited either the separate use or the separate disposal of the property in order to defeat Mrs Wendels’ claim under the Scheme. Further  the application of note 2(c) can only be assessed against the facts at the date of the planning consent, not at some undefined future point in time
32.	Mr Puzey argued that that it was clear from the planning condition that the use of Benaiah was restricted to those persons who had a connection with the cattery business. HMRC’s interpretation was supported by the Planning Inspector’s decision which found that it was the needs of the business that enabled planning permission to be granted for the property. The condition imposed in respect of Benaiah was materially different from the occupancy condition referred to in HMRC Notice 719, in which HMRC expressed the view that a condition restricting occupancy to a class of person such as an agricultural or forestry worker was not a restriction on the separate use or disposal of the property within the meaning of note 2(c). In this Appeal the condition was of an entirely different character, in that the property could only be occupied by a person who worked in a specific identified business, and that Benaiah would not have been built there if it had not been for the cattery.
33.	Mr Puzey contended that the planning condition also had the effect of prohibiting the separate disposal of Benaiah because in practical terms it could not be sold without the business. The terms of the planning condition prevented the occupation of the property by persons unconnected to the cattery which effectively prohibited its separate disposal from the business. Mr Puzey considered that Mrs Wendels stretched the different meanings of limitation and prohibition. In this Appeal the limitations imposed by the planning condition operated as prohibitions on separate use and disposal of the property.  
34.	 Mr Puzey referred to the VAT and Duties Tribunal decision of Cussins v HMRC (2008) VAT Decision No 20541 in which the Tribunal considered the effect of a planning condition:“The residential accommodation hereby permitted shall only be occupied in conjunction with the commercial use hereby approved”. The Tribunal decided that the wording of the planning condition established a close nexus between the residential and commercial premises, which meant in practice that the use and disposal of the residential accommodation could not be separated from the business accommodation.  Mr Puzey considered that in this Appeal the planning condition revealed a similar close nexus between Benaiah and the cattery.
35.	Mr Puzey submitted that the expression in the course or furtherance of business was a broad one. Mr Puzey relied on the findings of the Planning Inspector which showed that the property would not have received planning permission but for its connection with the cattery. The principal reason for the permission was the functional need for a full-time worker to be in sight and sound of the cattery. The Inspector also found the existing properties on the orchard had no binding functional relationship with the cattery. Mr Puzey considered the facts that the construction was funded from Mr and Mrs Wendels’ private resources, and that Benaiah was not a business asset in the cattery accounts were immaterial. Further the fact that only the office in the property was used on a day to day basis for the purpose of administering the business did not mean that it was not constructed in the course or furtherance of business.  Mr Puzey contended that this Appeal was a starker example of the application of the business requirement than the VAT Tribunal case of Poultries Al Hilal Ltd v HMRC (2007) VAT Decision No 20381. In that case planning permission was granted to a poultry farm business for a dwelling for an agricultural worker at the appellant’s farm. The Tribunal held that a claim under the Scheme could not succeed because the building had been constructed for agricultural purposes for the furtherance of the appellant’s business.
36.	Mr Puzey emphasised that the question of whether a planning condition prohibited separate use or disposal was a question that arose from the provisions of the VAT Act 1994 not planning law. Mr Puzey pointed out inconsistencies in the advice given by the Planning Authority, Newark and Sherwood District Council. Mr Forrester’s advice in his letter 17 December 2009 was contradicted by the advice of Ms Lockwood dated 12 May 2009 who stated that  “Benaiah could not be occupied independently from the cattery business”.
37.	Finally Mr Puzey stated that Mrs Wendels was treading a thin line in respect of her evidence. In his view, Mrs Wendels in this Appeal was seeking to minimise the impact of her representations to the Planning Inspector in which she placed great emphasis on the connection of the proposed development with the cattery business.
Reasons
38.	At the heart of this dispute is whether Mr and Mrs Wendels constructed a dwelling within the meaning of the VAT Act 1994. Before examining this issue the Tribunal intends to address the question of Mrs Wendels’ credibility which was challenged legitimately by Mr Puzey with his submission that she was treading a thin line in respect of her evidence. Mr Puzey suggested that Mrs Wendels in this Appeal downplayed the strength of the connection between Benaiah and the cattery upon which she placed great weight before the Planning Inspector. In response Mrs Wendels explained to this Tribunal that she was not retracting her statements to the Inspector but they were geared to the specific considerations of planning policy which required a special justification for the construction of a new dwelling house in the countryside. Mrs Wendels believed that her challenge to HMRC’s refusal of her refund claim involved different considerations which enabled her to highlight those features more in tune with the VAT Act 1994. The Tribunal accepted Mrs Wendels’ explanation. The Tribunal found her to be a truthful witness and a skilful advocate of her case. 
39.	The purpose of the Scheme is to put DIY builders and converters in a broadly similar position to a developer selling a zero-rated property, by refunding them the VAT on their main construction or conversion costs. In this respect section 35 of the VAT Act 1994 incorporates the notes to group 5 of schedule 8 to the VAT Act 1994 which zero rates the construction of buildings designed as dwellings. Note 2 defines what is meant by a dwelling by setting out four criteria, all of which must be met.
40.	In this Appeal it was accepted that Benaiah fulfilled three of the four requirements, namely that it consisted of self-contained living accommodation, no provision for direct internal access from Benaiah to any other dwelling or part of a dwelling, and that planning consent had been granted. The dispute related to whether the criteria of note 2(c) had been met, namely, whether the planning condition prohibited the separate use and or disposal of Benaiah from the cattery.
41.	  The Upper Tribunal decision in HMRC v Lunn (2009) FTC/06/2009 provides useful guidance on the purpose of note 2, albeit dealing with a similar worded provision under group 6 dealing with protected buildings. The parties did not refer to the decision before this Tribunal. 
42.	The Upper Tribunal accepted the submissions of HMRC counsel that Note 2(c) was an exception to an exemption and should be given a wide construction. Further the purpose of note 2 was to restrict the availability of zero-rating to separate dwellings which did not exist in a physically (Note 2(a) and (b)) or legally (Note 2(c)) dependent relationship with another dwelling. The Upper Tribunal decided at paragraph 11:
“The context of Note 2(c) is that it can apply only where the rest of Note 2 is satisfied, that is (a) that the dwelling consists of self-contained living accommodation, and (b) that there is no provision for direct internal access from the dwelling to any other dwelling (or part of a dwelling). Both of these consider the separateness of the dwelling from another dwelling, so that the dwelling in question must (a) contain all the necessary facilities for self-contained accommodation (and therefore not rely on any facilities in the main dwelling), and (b) not be interconnected with the main building. Interpreting Note 2(c) as the separate from meaning follows naturally from the foregoing parts of Note 2. It would be looking not at physical separation but separation in actual use”.
43.	The question in this Appeal is whether the relevant planning condition prevented separation in actual use of Benaiah as a dwelling from the cattery. In this respect it is necessary to set the findings of the Planning Inspector in its policy context. Although Mr Puzey for HMRC emphasised the importance of addressing the disputed question from the perspective of the VAT Act, he nevertheless placed considerable weight on the Inspector’s decision. 
44.	The above outline on planning policy showed that permission would only be given for the construction of a dwelling house in the countryside  if a special justification existed, which essentially related to whether there was a need to house workers engaged in rural industries.  This planning objective was reinforced by the imposition of conditions ensuring that dwellings in the countryside continued to be occupied by rural workers. Thus it followed from the analysis of planning policy that any new development involving a dwelling house would be connected in some way with a rural industry, which if decisive  would effectively rule out the application of the Scheme to dwellings in the countryside.  This would be an absurd conclusion which was recognised by HMRC Notice 719 declaring that occupancy conditions did not constitute a prohibition on the separate use and disposal of a building designed as a dwelling. The Tribunal, therefore, considers the findings of the Planning Inspector that there was a clear functional need for a full-time worker to be in sight and sound of the cattery and that the other properties on the orchard had no functional relationship with the business were not relevant in the sense that they deflected the Tribunal’s attention away from the correct method of interpreting note 2(c).
45.	In the Tribunal’s view the question whether the separate use or disposal of Benaiah was prohibited by the relevant planning consent should be determined by the proper construction of the wording of that consent, not by the extraneous circumstances surrounding the granting of the consent. Note 2(c) uses the phrase that the separate use, or disposal of the dwelling is not prohibited by the term of any statutory planning consent. The wording of the planning condition imposed in respect of the development of Benaiah restricted the occupation of the dwelling to a person solely or mainly employed or last employed in the cattery business or a widow or widower of such a person, or any resident dependent. The condition correctly construed placed no prohibition or even a restriction on the separate use and disposal of the property. The condition was in all respects an occupancy condition.
46.	The Tribunal considers it helpful to compare the wording of the condition imposed on Benaiah with that considered by the Upper Tribunal in Lunn which was: “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”.  It is clear from the wording of the Lunn condition that the use of the disputed development was subservient and connected to the residential use of the larger development known as Radbrook Manor. In contrast the condition imposed on Benaiah did not link its use or its disposal with the cattery business. The condition imposed related to the category of persons occupying the property, and in no way restricted its separate use or disposal as a dwelling house.
47.	The Tribunal’s approach of determining the issue on the construction of the wording of the condition results in legal certainty and ensures the straightforward application of the various criteria in note 2(c) for deciding whether a building is a dwelling. The Tribunal considers HMRC applied the same rationale in its advice in Notice 719 that occupancy restrictions are not prohibitions on separate use or disposal and do not affect whether a building was designed as a dwelling. 
48.	The alternative approach of deciding the issue on the extraneous facts surrounding the planning consent results in uncertainty of what constitutes a prohibition. The weakness with the alternative approach was demonstrated by the facts and arguments in this Appeal. The Appellant argued that it was possible to dispose of Benaiah separately from the cattery by some form of equity release or leaseback scheme, or even to a friend or family, while the occupancy of the dwelling remained unchanged. HMRC, on the other hand, contended that the occupation of the property by persons connected with the cattery effectively prohibited disposal of Benaiah separately from the business.  This line of argument generated an analysis of the word, prohibition, in the context of the practical difficulties associated with the disposal of the property, which corrupted its ordinary and natural meaning. In contrast there was no such ambiguity if the actual terms of the planning condition were considered. The condition did not  mention use and disposal of the property. 
49.	The remaining issue concerned whether the condition imposed in respect of Benaiah was in fact an occupancy condition. Mr Puzey submitted that the condition was materially different from that one described in Notice 719. The Tribunal disagrees with Mr Puzey’s analysis. The condition imposed followed the model wording of occupancy conditions as specified by the relevant planning policies. The fact that Notice 719 restricted its example to people working in agriculture or forestry may be a reflection that it was published before the change in planning policy extending the special justification to certain other full-time workers to live at or in the immediate vicinity of their place of work. Finally the actual wording of the condition gave no support to Mr Puzey’s submission, which clearly stated that it was a restriction on the occupation of the property.
50.	The Tribunal finds that
(1)	Benaiah was constructed some 25 years after the establishment of the cattery business.
(2)	Benaiah was constructed for the purpose of providing a home for Mr and Mrs Wendels.
(3)	The design of Benaiah replicated that of a typical dwelling house.
(4)	Benaiah consisted of self-contained living accommodation.
(5)	Benaiah was located physically apart from any other dwelling or the cattery. There was no direct internal access to the property from any other building.
(6)	Statutory planning consent had been granted for the construction of Benaiah as a dwelling. The property had been built in accordance with that consent.
(7)	The terms of the planning consent for the property did not prohibit its separate use or disposal as a dwelling. The planning condition imposed constituted an occupancy condition, not a prohibition on its use or disposal as a dwelling.
(8)	Benaiah was capable of existing as a dwelling in its own right.
51.	In view of its findings of fact the Tribunal decides that Benaiah was designed as a dwelling within the meaning of note 2 to group 5 of schedule 8 of VAT Act 1994.
52.	The second dispute concerned whether Benaiah was constructed in the course of or furtherance of any business. The starting point is the wording of section 35(1)(b) which provides that carrying out works is lawful and otherwise than in the course or furtherance of any business. Section 35(1A)(a) defines works as the construction of a building designed as a dwelling.  Thus the relevant  supplies  for this dispute were those concerned with the construction of Benaiah, which were the supplies of goods used by Mr and Mrs Wendels to build Benaiah.
53.	Mr Puzey argued that the term in the course of or furtherance of any business should be interpreted broadly, and but for cattery business, Benaiah would not have been constructed. Essentially Mr Puzey contended that as there was a link between Benaiah and the cattery business, the supplies were made in the in the course of or furtherance of any business. Mr Puzey relied on the findings of the Planning Inspector as proof of the link. The Tribunal considers Mr Puzey’s contention too simplistic. The fact that the planning consent was dependent on a functional link between the occupancy of Benaiah and the cattery was not determinative of whether the  supplies of building materials were for business or non-business use within the meaning of the VAT legislation.  
54.	De Voil at V3.125 explored the meaning of supplies made in the course or furtherance of business:
VAT is chargeable on taxable supplies only where they are made in the course or furtherance of business. 
Prior to 1 January 1978 the term "in the course of a business" was used in the legislation, and in considering the meaning of this phrase one tribunal chairman said--
"It seems to us that we must do our best with the phrase in the context where we find it, and we see no reason to give it either a narrow construction or a wide one. On that basis we think that for a supply to be made in the course of a business, the making of it must be part and parcel of the carrying on of that business. We do not really dissent from [Counsel for the Commissioners'] test that it must be a 'normal incident of the daily activities' of the business."
The term "in the course or furtherance of any business" was substituted with effect from 1 January 1978. The words "or furtherance" do not extend the ambit of VAT to supplies made by a taxable person who is not acting as such and who is not carrying on an economic activity within the meaning of EC legislation4. The words do, however, ensure that all business activities are brought within the scope of VAT (eg fringe activities carried on separately from a main business and transactions such as the sale of a delivery van by a retailer) which are related in some way to the main business but which differ in character from it5.
55.	Mrs Wendels stated that the decisions  in  Customs and Excise Commissioners v Lord Fisher [1981] STC 238 and Institute of Chartered Accountants in England and Wales v Commissioners of Customs and Excise[1999] 1 WLR 701 provided the tests for deciding whether the supplies involved in the construction of Benaiah were made for business use. The Lord Fisher case gave six tests for business use. The High Court in the Institute of Chartered Accountants highlighted the critical test as:
 “What was the real nature of the activity; is the real nature of the activity the making of taxable supplies for consideration or is it something else? Although a business activity must include the making of taxable supplies for consideration, activities carried out in preparation can be seen as business even if, in themselves, they did not involve the making of any supplies”.
56.	The Tribunal finds that the real nature of the activity involved in the construction of Benaiah was to provide a home for Mr and Mrs Wendels. It was a one-off activity. Mr and Mrs Wendels were not involved in the business of constructing properties. Mr and Mrs Wendels used their private resources to fund the construction. They did not apply revenues from the cattery business.  Benaiah was not included as a business asset in the accounts of the cattery. The supplies of building materials were not predominantly concerned with the making of taxable supplies for a consideration. The success of the cattery business did not depend on the close proximity of Benaiah. Mr and Mrs Wendels had run offsite the cattery business profitably for ten years. The facts that the location of Benaiah makes the supervision of cattery by Mr and Mrs Wendels easier, and that a room within Benaiah was used as an office did not detract from the overall finding that the construction of Benaiah was for a non-business purpose.
57.	The Tribunal’s finding that the Mr and Mrs Wendels constructed Benaiah as a dwelling house which was a non-business purpose is consistent with a line of Tribunal decisions holding that constructing or converting a property for personal occupation constituted a non-business purpose (see G Nixon (1975) VAT Decision No. 233; GWH Kelly VAT Decision (1977) No 598; Ronald Donald Elton (1993) VAT Decision 11590 and John Sawyer VAT Decision 18872). 
58.	The Tribunal disagrees with Mr Puzey’s assessment that this Appeal was a starker example of the application of the business requirement than the VAT Tribunal case of Poultries Al Hilal Ltd. The facts of Poultries Al Hilal Ltd were materially different from this Appeal which supported a finding of business use. In Poultries Al Hilal Ltd the Appellant was a limited company which had the development and sale of real estate as one of its business activities. The Appellant applied resources from the business to fund the construction. The building was not used as a private home but for one of its employees to supervise the farm.
59.	The Tribunal finds that the construction of Benaiah was not carried out in the course of or furtherance of any business.
Decision
60.	The Tribunal holds that
(1)	Benaiah was designed as a dwelling within the meaning of note 2 to group 5 of schedule 8 of VAT Act 1994.
(2)	The construction of Benaiah was not carried out in the course of or furtherance of any business.
61.	The Tribunal, therefore, holds that Mrs Wendels met the requirements for making a claim for a VAT refund under the Scheme in accordance with section 35 of the VAT Act 1994. The Tribunal notes that HMRC reserves its position on the quantum of the claim.
62.	The Tribunal allows the Appeal. 

             

                                     MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 8 June 2010

MAN/

Notes

1.	A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.