[2011] UKFTT 381 (TC)

TC01236

Appeal number TC/2010/06782

DIY BUILDERS – refund of Vat – prohibition on separate disposal in planning permission – construction single farmhouse adjacent to farm buildings –whether “separate use or disposal” prohibited- yes- appeal dismissed VAT Act 1994 s 35 and schedule 8 

FIRST-TIER TRIBUNAL

TAX 

	MR DAVID SHERRATT AND MRS ELIZABETH SHERRATT	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL: DAVID S PORTER (JUDGE)
                                  DEREK ROBERTSON (MEMBER)

					
Sitting in public at Phoenix House, Birmingham on 19 April 2011

John Harris, FCA, of Berry accountants, for the Appellant

Christopher Shea, an officer of HMRC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	Mr David Sherratt and Mrs Elizabeth Sherratt (together referred to as the Sherratts) appeal against the Respondents’ (HMRC) refusal to allow a refund of £13,082.81 of VAT arising from the self-build of a farmhouse at Brickyard Farm, Pincet Lane, North Kilworth, Lutterworth. The Sherratts say that there is no limitation in the planning preventing their right to sell the property. HMRC say that there is.
2.	 Mr John Harris, FCA accountant, appeared on behalf of the Sherratts and produced a skelton argument. Mr Chrisptopher Shea, an officer of HMRC, appeared on behalf of HMRC and produced a document and authorities bundle and a skeleton argument. 
3.	We were referred to the following cases:-
(1)	J S Sherwin  & R K Green 16396 
(2)	Revenue and Customs Commissioners v Lunn [2010] STC 486
(3)	Paul Cussins 20541
The facts
4.	The facts were not disputed. The Sherratts had constructed a farmhouse adjacent to farm buildings within the terms of a planning permission dated 5 December 2006 and numbered 06/01381/OUT for:
“the erection of an agricultural dwelling all matters reserved.(resubmission of 06/00837/OUT)”.
 Drawings were produced to the Tribunal showing a substantial building with 5 bedrooms standing in its own grounds with no other dwellings near by. The only other buildings consisted of:
•	2 Open sided steel sheds
•	3 Steel containers
•	A building housing a generator.
•	A mobile home
The Sherratts contend that they do not amount either to ‘pre-existing buildings’ nor ‘a dwelling’
5.	We were also supplied with a breakdown as to the make up of the claim for £13082.81 which is not disputed. The original planning permission contained (amongst others) the following conditions:
5.	The occupation of the dwelling shall be limited to a person solely or mainly employed, or last employed, in the locality in agriculture as defined in section 336(1) of the Town and Country Planning Act 1990, or in forestry, or a dependant of such person residing with him/her, or a widow or widower of such person .
10.	The proposed development shall always remain ancillary to the existing agricultural use of the site and shall not be sold, leased nor otherwise disposed of separately from, the remainder of the premises.
6,	The reason given for the restriction at 5 above is :-
5.	The site lies in an area within which the District Planning Authority would not normally grant permission for residential development. This permission is therefore granted only because of the special agricultural need of the applicant and the premises should accordingly only be occupied by a person connected with agriculture to ensure compliance with Strategy 1 and 4 of the Leicestershire Structure Plan and Policies EV/1, EV/5 and HS/15 of the Harborough District Plan.
10.	Although the vehicular access is adequate to cater for traffic generated by use of the premises, it is inadequate to cater for additional traffic that sub-division of the site could bring about.
7.	The Approval of reserved matters contained the following condition:-
           “Statement of reason for grant of Planning Permission(Article 22 of the Town and Country Planning (General Development Procedure) order 1995)
	In the opinion of the local planning authority, the proposal fails to comply with PPS7 annex A in that the financial test in paragraph 8 shows that the enterprise cannot sustain the size of the dwelling proposed. Nevertheless, it is considered that the requirement for the functionality of the farm business, (our emphasis) the small increase in size and mass over the existing temporary dwelling together with the personal circumstances of the applicant, sufficiently outweigh this policy objection to enable permission to be granted.
	4.  This condition repeated condition 5 above.
	10 This condition repeated condition 10 above.
The reason given for the restriction under condition 4 in the Reserved matters repeats reason 5 above.
8.	Mrs Sherratt gave evidence as to her understanding of the restrictions. She indicated that the local planning authority would only allow 5 dwelling to gain access to Pincet Lane. The Old Farmhouse obtained access to the lane through the site the subject of this appeal. There are 3 other houses having access to the lane, so that the construction of the new farmhouse would extend the access to 5 dwellings. As a result the authority did not want any other dwellings to be erected with access to the lane. This was the reason for the restrictions on subsequent disposal. Mr Sherratt told us that the farm was over 100 acres and that the old farmhouse, which had belonged to his father, had been sold without any restriction, as there had been no similar planning restriction in relation to that building. We do not accept Mrs Sherratt’s proposition. It is clear from the planning permissions, conditions and the reasons that the local planning authority wishes to retina the agricultural nature of the area..
The Law
8.    Section 35 Value Added Tax Act 1994 ( the Act) states:
   35(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 the section applies are –
(a)	the construction of a building  designed as a dwelling or number of dwellings
(b)	…..
(c)	……….
9.    Section 35 is designed to place do-it –yourself builders in the same position as  commercial builders so that they can recover the VAT they incur in paying for the building work, and is not constructed in the course or furtherance of a business. The section incorporates (and gives statutory effect to) the notes to Group 5 of schedule 8 of the Act. Those notes impose a number of conditions which are to be satisfied if the Sherratts are to recover the VAT incurred.
10.	Part 11 The Groups [Group 5 – construction of buildings etc)
NOTES.
Amendment
Substituted by SI 1995/280. art 2
[Item No
….4. (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 permission 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 parties accept that all the provisions of the notes have been complied with save that HMRC say that condition 4 (2) (c) has not been.
The Submissions
9.	Mr Shea submitted that the DIY house builders Scheme allows a person to claim VAT back on building materials they have purchased when building a new house, provided they meet the strict terms of the scheme. HMRC say this scheme is permissive and exceptional in the framework of VAT and under the general law such exceptions are to be interpreted strictly. The planning permission (at clause 10) and the reserved matters (at clause 9) contained a prohibition that the proposed development shall always remain ancillary to the existing agricultural use of the site and shall not be sold, leased nor otherwise disposed of separately from, the remainder of the premises. Note 2 of Group 5 of Schedule 8 sets out conditions for a building to be considered as a dwelling. Condition (c) requires that the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision.  
10.	The wording of Note 2 (c) is such that the planning consent need only prohibit one of either the separate use or separate disposal of the property for it not to be considered a dwelling for the purposes of section 35 of the Act. HMRC says that the conditions restrict both. The Sherratts suggest that Note 2 (c) does not apply to as the new house is not connected to an existing dwelling or building. In the decision of Paul Cussins 20541 the Tribunal said:
“ Further we do not accept Mr Flint’s submission that separate use means separate from any other dwelling neither condition 8 of the planning permission nor Note 2 (c) to group 5 of Schedule 8 limits the separate use to a use separate to any other dwelling. That would in our view be an impossible construction of and would defeat the wider purpose of condition 8”.
HMRC say this supports their contention that there is nothing that restricts the application of Note 2 (c) to the connection of the new house to an existing dwelling or building.
11.	The meaning of ‘separate use’ was considered by the Upper Tribunal  (Tax and Chancery Chamber) in Revenue and Customs Commissioners v Lunn . the Tribunal concluded:
	“These considerations all point to the ‘separate from’ meaning of ‘separate use’ and we conclude that this is the correct meaning. On that basis the planning restriction in this case means that the building cannot be used separately from that of Radbrook Manor. Note 2 (c) is not satisfied and therefore the building services in this case are not zero rated.
The planning restriction clearly prohibits the use of the new house ‘separate from’ the agricultural use of the remainder of the property and condition 2 (c) is not satisfied. The building does not therefore qualify under section 35 of the Act and no repayment can be made.
12.	Mr Harris submitted that common sense requires that as the Sherratts have built a farmhouse, surrounded by farm buildings they should not be denied the relief provided by section 35 of the Act. The case law has developed from HMRC’s wish to prevent ‘granny annexes’ or improvement schemes qualifying as self-build schemes. Essentially they are looking to prevent the recovery of input VAT that otherwise would be irrecoverable as HMRC seek to classify the new builds as ‘improvement’ to existing buildings rather than a new build. He submitted that the appeal needs to be decided on the law and procedure at the time of the application for the relief. He submitted that the claim form provided for the Sherratts at the time of their application asked-
“Do the terms of your planning permission prevent the separate disposal, or separate use, of the new building from any other pre-existing buildings?” 
The Sherratts answered “no” as the separation is linked to the use not the building. There were no pre-exiting buildings as the only ‘building’ as such was the building housing the generator. The mobile home was to be removed once the farmhouse was completed. The legislation anticipates that the new farmhouse should be ancillary to an existing dwelling house or substantial buildings. This farmhouse stands alone on its own plot.
This requirement has recently been amended to read -
“If the building…. cannot be disposed of or used separately from another dwelling…”
Mr Harris submitted that the incorporation of ‘dwelling’ is a new concept to ‘pre-existing buildings’. There is no other ‘dwelling’ on the site. In those circumstances he cannot see how the restriction can affect this development
13.	 Mr Harris submits that the restriction in the planning permissions was added as a result of an input from the Highways Authority to restrict further development obtaining access to the Lane and was not designed to prevent the separate sale of the farmhouse. Note 10 indicated that the access was inadequate for additional traffic that a subdivision of the site could bring about. The reference to ‘the site’ is to the land the subject of the planning application. That development is to remain ancillary to the existing agricultural use. It is therefore possible to dispose of the farmhouse so long as it remains ancillary to the existing agricultural use. The farmhouse cannot be ancillary to any other buildings as there are none.  It has been created as a building in its own right. HMRC suggested that as Note 13 of VAT431 NB provides at paragraph 4 applies ;
“If the property is an annexe, extension, or any other form of ancillary structure or building which cannot be disposed of or used separately from another building, then it does not have independent status and cannot qualify for a refund under this Scheme”
He submits that the new building is not an annexe, extension, or any form of ancillary structure or building. Conditions 9 and 10 restrict the use of the property- its status as an independent building is unaffected. They have been included to create an agricultural tenancy in effect and do not prevent the separate sale of the farmhouse for agricultural purposes. In all the circumstances the appeal should be allowed.
The decision
14.	We have considered the law and the facts and have decided that condition 10 of the original planning permission and condition 9 of the reserved matters prevent the sale of the farmhouse other than with the rest of the farm. As a result section 35 of the Act does not apply and the supplies are to be standard rated. The Planning permissions were granted in exceptional circumstances and contrary to the overall planning requirements of the area. There is no doubt that the planning authorities are concerned that the farming activity, which the property supports, should continue. In Revenue and Customs Commissioners v Lunn [2010] STC 486 Judges Avery Jones and Shipwright decided that ‘separate use’ in note 2 (c) means separate from. In that case the planning restriction meant that the building could not be used separately from the manor house. In J S Sherwin & R K Green 16396 the chairman Stephen Oliver confirmed that he agreed with chairman A W Simpson that condition (c) refers to separate use and to separate disposal.
15.	The planning restriction is that:
“The proposed development shall always remain ancillary to the existing agricultural use of the site and shall not be sold, leased nor otherwise disposed of separately from, the remainder of the premises.
We have decided that the proposed development may not be separately sold leased or otherwise disposed of without the remainder of the premises. We have been told by Mr Sherratt that the farm consisted of over 100 acres and is being farmed by him and the family. The planners clearly want to retain the agricultural nature of the area and could not allow the farm land and the out buildings to be separated from the new farmhouse. We have no doubt in light of the comments as to the functionality of the farm business referred to in the Reserved Matters that the farmhouse is part of a working farm. As a result we do not think that it was inappropriate for the planning authority to require the entire site (the remainder of the premises) to be a single unit and to be disposed of accordingly. The lack of any other building on the remainder of the premises does not affect the construction of the prohibition in the planning consents.As a result Note 2 (c) applies as the planning permission and reserved matters prohibit the separate disposal of the new building. We therefore dismiss the appeal. We were not asked to make any award of costs and we do not do so.
16. This document contains the full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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: 9 June 2011