DECISION
Background
1. Mr
and Mrs Wright bought and made their home at “Thornlea,” a detached, three
bedroomed, seventeenth century manor cottage in the village of Woodbury in Devon. In 2006, having lived at the property for approximately 20 years they
decided to undertake a speculative building project, with a view to a profit,
by turning their home into two separate semi-detached houses and selling one of
the houses whilst continuing to live in the other.
2. Although
there was not sufficient land on either side of the house to build a second
property it was possible to create two semi-detached properties by building on
each side of the existing house. The project consisted of:
(1)
building on to both sides of the existing property to create additional rooms
and create a symmetrical look to the building;
(2)
raising the height of the four outside walls of the property by
approximately four feet to give both dwellings an additional floor;
(3)
the construction of a party wall just to the left of the front door of
the existing property; and
(4)
the construction of a new roof.
In addition the internal fabric of the existing building
was almost completely gutted and the existing internal walls, floors, windows
and the old roof were removed.
3. The
end result was the creation of two semi-detached properties, “Thornlea” with
three bedrooms and an additional floor, which was retained as a home by Mr and
Mrs Wright and “Well Court”, a five bedroom property consisting of a ground,
first and second floors which they sold. Approximately 35% of the total floor
space of Well Court had previously been part of the existing building with the
remaining 65% being newly constructed.
4. In
order to recover input tax attributable to Well Court Mrs and Mrs Wright
applied to HM Revenue and Customs (“HMRC”) to be registered for VAT as
“intending traders” on 2 March 2010.
5. The
application was refused by HMRC on 4 June 2010 on the grounds that Mr and Mrs
Wright were “making or intending to make entirely exempt supplies”. The
decision to refuse VAT registration was formally reviewed and subsequently
confirmed by HMRC on 19 August 2010.
6. This
is an appeal by Mr and Mrs Wright against the decision to refuse their
application to register for VAT.
Law
7. Section
25 of the Value Added Tax Act 1994 (“VATA”) provides that a “taxable person”
is “entitled to credit for so much of his input tax as is allowable under
section 26 [VATA].”
8. Insofar
as it applies to the present case s 26 VATA entitles a “taxable person”
to credit input tax on supplies received that are attributable to “taxable
supplies” made by him “in the course or furtherance of his business.”
9. A
“taxable person” is defined by s 3 VATA as someone who “is, or is
required to be registered under this Act.”
10. Paragraph 9 of Schedule
1 VATA provides:
Where a person
who is not liable to be registered under this Act and is not already so
registered satisfies the Commissioners that he–
(a) makes
taxable supplies; or
(b) is carrying
on a business and intends to make such supplies in the course or furtherance of
that business,
they shall, if he so requests,
register him with effect from the day on which the request is made or from such
earlier date as may be agreed between them and him.
11. Section 4(2)
VATA defines a “taxable supply” as “a supply of goods and services
made in the United Kingdom other than an exempt supply”.
12. An “exempt
supply” is, according to s 31(1) VATA, a supply of goods or services if it
is of a description specified in schedule 9 VATA. This includes the “grant
of any interest in or a right over land” (see Item 1 Group 1 schedule 9
VATA).
13. Section 30(1)
VATA provides:
Where a taxable
person supplies goods or services and the supply is zero-rated, then, whether
or not VAT would be chargeable on the supply apart from this section–
(a) no VAT shall
be charged on the supply; but
(b) it shall in
all other respects be treated as a taxable supply;
and accordingly the rate at which
VAT is treated as charged on the supply shall be nil.
14. A zero-rated
supply, which is to be treated as a taxable supply, is a supply of goods or
services of a description specified in schedule 8 VATA (see s 30(2) VATA).
15. Item 1 of Group
5 schedule 8 VATA provides:
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 purpose 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 a 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 or its site.
16. However,
the Group is to be read subject to the Notes appended to it. The relevant Notes
in this case are Notes 10 and 16. Note 10 states:
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.
17. Note 16, so far
is it is relevant to the present case, provides:
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) ... the construction of an annex to an
existing building."
18. The question of
whether works carried out fell within Note 16(b) were considered in Cantrell
and another (trading as Foxearth Lodge Nursing Home) v Customs and Excise
Commissioners [2000] STC 100 (“Cantrell”). In that case Lightman J
referred to the two-stage test for determining whether works carried out
constituted an enlargement, extension or annexe to an existing building saying
of the test, at [4], that:
“It requires an examination and comparison of the
building as it was or (if more than one) the buildings as they were before the
works were carried out and the building or buildings as they will be after the works
are completed; and the question then to be asked is whether the completed works
amount to the enlargement of or the construction of an extension or annexe to
the original building (see Customs and Excise Comrs v Marchday Holdings Ltd
[1997] STC 272 at 279). I must however add a few words regarding how the
question is to be approached and answered. First the question is to be asked as
at the date of the supply. What was in the course of construction at the date
of supply is in any ordinary case (save for example in case of a dramatic
change in the plans) the building subsequently constructed. Secondly the answer
must be given after an objective examination of the physical characters of the
building or buildings at the two points in time, having regard (inter alia) to
similarities and differences in appearance, the layout and how the building or
buildings are equipped to function. The terms of planning permissions, the
motives behind undertaking the works and the intended or subsequent actual use
are irrelevant, save possibly to illuminate the potentials for use inherent in
the building or buildings.”
Submissions
19. The primary case
advanced by Mr Shea, for HMRC, is that if the two-stage Cantrell test is
applied the work undertaken by Mr and Mrs Wright must be a “conversion,
reconstruction or alteration” of an existing building as before the work
commenced there was a single detached dwelling and after there were two
semi-detached dwellings each of which included a substantial proportion of the
original dwelling.
20. This, he
submits, brings it within Note 16(a) and as such it cannot be the “construction
of a dwelling” within Item 1 of Group 5 and is not a a zero-rated but an exempt
supply being a “grant of any interest in or a right over land” within
Item 1, Group 1 of schedule 9 VATA.
21. Alternatively
HMRC contend that if the works were an extension or enlargement of an existing
building they are nonetheless excluded from zero-rating by Note 16(b) itself. In
support of this argument we were taken by Mr Shea to Item 1(a) of Group 5
schedule 8 VATA which refers to “a building” whereas Item 1(b) refers to
“part of a building” and Item 3(a) to “a building or part of a
building”.
22. This, Mr Shea
submits, makes it clear that the draftsman has used the expression “a
building” quite deliberately and that if it had been intended that Item
1(a) should apply to part of a building it would have been expressly stated. Insofar
as Note 16 applies to Item 1 it must be in relation to a building and not part
of a building and therefore apportionment cannot apply. Also, as Note 16 does
not refer to “part of a dwelling” Mr Shea contends that unless the extension or
enlargement, of itself, creates an additional dwelling any such dwelling formed
in part of an existing building and in part of an extension or enlargement
cannot meet the conditions of zero-rating.
23. In the
circumstances, as Mr and Mrs Wright were not making or intending to make
taxable supplies, Mr Shea contends that HMRC were right to refuse their
application to register for VAT.
24. Mr Alexander,
who appears for Mr and Mrs Wright, contends that they enlarged or extended an
existing building and thereby created an additional dwelling which is a
zero-rated supply by virtue of Item 1 of Group 5 schedule 8 VATA as interpreted
in accordance with Note 16. He cites the decision of the VAT and Duties
Tribunal in Michael, Gillian and Norman Smith v Customs and Excise
Commissioners (Decision No 17035) (“Smith”) to counter HMRC’s
argument that the additional dwelling must fall wholly within the footprint of
the extension or enlargement to qualify for zero-rating. In that case the
Tribunal Chairman (Mr C P Bishopp) said, at [15]:
“… I see no reason to import the notion that the additional
dwelling must be incorporated wholly within that enlargement or extension.”
25. In addition Mr
Alexander relies on the decision of this Tribunal in Ali Kia Jahansouz v
HMRC [2010] UKFTT 355 (TC) (“Jahansouz”) in which this issue was
considered and in which the Tribunal Judge (Paulene Gandhi) observed, at [46], that
“Note 16(b) itself does not contain the words ‘wholly’.”
26. Mr Alexander also
submits that if it is appropriate to do so it is possible to rely on Note 10
(to Group 5 of schedule 8 VATA) to apportion the input tax between the work
undertaken on the construction of the zero-rated enlargement or extension and
that attributable to the existing property.
27. Mr Shea sought
to distinguish Smith and Jahansouz on the facts and noted that
despite the comments of the Tribunal Judge in Jahansouz the new dwelling
in that case was wholly within the extension or enlargement. Alternatively,
relying on the “part of a building” argument Mr Shea contends that Smith
was wrongly decided.
Discussion and Conclusion
28. The issue we
have to determine is whether Mr and Mrs Wright intended to make taxable, which
include zero-rated, supplies when they applied to be registered for VAT as “a
person constructing a building” designed as a dwelling within Item 1 of
Group 5 schedule 8 VATA. It is clear from Note 16 that the construction of a
building does not include the conversion reconstruction or alteration of an
existing building. It also does not include the enlargement of, or extension
to, such a building “except to the extent” that this creates an “additional
dwelling or dwellings”.
29. We first consider
Note 16 and whether the work undertaken by Mr and Mrs Wright amounts to a
conversion reconstruction or alteration of the existing building within Note
16(a) as Mr Shea submits or, as Mr Alexander contends, it is the enlargement of
or an extension to that building within Note 16(b).
30. This requires
the application of the Cantrell two-stage test. As the Tribunal Chairman
said in Smith, at [11]:
“It is well established that, when considering Note
(16) in its application to cases of this kind, it is necessary first to determine
precisely what has been done. To do so, one should examine the original
building and then the finished development and, by comparing the two, put
oneself in a position to determine whether the result amounts to 'the
conversion, reconstruction or alteration of [the] existing building', on the
one hand, or the 'enlargement of, or extension to, [the] existing building', on
the other; and if the answer is the latter, one must then move on to consider
the proviso to paragraph (b) of the Note.”
31. Having
considered the work undertaken and compared the original building and the
completed project (as described in paragraphs 2 and 3, above) we find that,
given additional rooms have been built on each side of the original property which
has also been increased in size by the creation of an additional floor, there
has been an enlargement or extension as opposed to a conversion, reconstruction
or alteration of the existing building.
32. Although we have
found the work undertaken by Mr and Mrs Wright to be an enlargement or extension
of an existing building (for the purposes of this decision it is not necessary
for us to determine which) it is only “to the extent” that it “creates
an additional dwelling or dwellings” that it becomes the zero-rated
construction of a building. In regard to this we agree with and adopt the words
of the Tribunal Chairman in Smith where he said, at [15]:
“In my view, the natural meaning of the words used
in Note (16) is that an enlargement or extension qualifies for zero-rating if
it creates an additional dwelling.”
33. We therefore
need to consider whether the enlargement or extension of the existing building
by Mr and Mrs Wright created an additional dwelling.
34. Clearly not
every extension or enlargement to an existing building will result in the
creation of an additional dwelling. The division of a detached house into two
semi-detached dwellings could be enlarged or extended by the addition of a
porch to one or both of the new properties and in such a case it is extremely
unlikely that such an extension would be enough to create an additional
dwelling. However, as in Smith, a “small” part of an existing building
may be incorporated into a new property which becomes an additional dwelling. It
must therefore be a matter of fact and degree, in the light of all the
circumstances of the particular case, whether an enlargement of or extension to
an existing building creates an additional dwelling.
35. In the present
case it is clear that an additional dwelling been has created from an existing
building. We find that this would not have been possible without the enlargement
of, or extension to, the existing property and, to this extent, the additional
dwelling has been created by the enlargement or extension. That it is not
incorporated wholly within the enlargement or extension does not, in our view,
preclude us from concluding that it falls within the Note 16(b) and therefore
included within the meaning of “construction of a building” for the
purposes of Item 1 Group 5, schedule 8 VATA.
36. As the Tribunal
Judge observed in Jahansouz, Note 16(b) does not contain the word
“wholly” requiring the additionally created dwelling to be wholly within the
enlargement or extension. This is consistent with the decision of the Tribunal
Chairman in Smith who saw “no reason to import the notion that the additional
dwelling must be incorporated wholly within that enlargement or extension.” He
went to say, at [15 - 16]:
“[15] … it seems to me that the draftsman has quite
deliberately used the expression 'except to the extent that' because it refers
back to Note (11), which Mr Poole [for HMRC] dismissed as irrelevant. Note (11)
reads
"Where a service falling within the description
in items 2 or 3 is supplied in part in relation to the construction . 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."
[16] The supply in this case falls within item 2,
which I have set out above. Mr Smith has constructed a new dwelling; it is
zero-rated in principle (item 2) but excepted from zero-rating because it is an
extension (Note (16), up to the opening words of paragraph (b)), but then taken
out of the exception 'to the extent the enlargement or extension creates an additional
dwelling'; and where, as here, the development consists partly of zero-rated
new building and partly of standard-rated 'conversion, reconstruction or
alteration', Note (11) requires an apportionment to be made. This
interpretation, it seems to me, also caters for a case where an extension has
been built which contains both a new dwelling and some additional rooms for the
existing dwelling and addresses too Mr Poole's point about possible absurdity
since zero-rating would be available only to the extent that there was new
work, incorporated in a new dwelling. There may well come a point where the new
work is so limited that it cannot realistically be described on an extension or
enlargement, but that is plainly not the case here.
37. However, the
present case concerns Group 1 which, unlike Groups 2 and 3, is not specifically
included in Note 11. Although Mr Alexander submitted that apportionment was
possible in the present case under on Note 10 (which we have set out in paragraph
16, above) we disagree. Note 10 applies when a part of a building that is
constructed is designed as a dwelling and part of the building is not. In the
present case the entire building has been designed as a dwelling and therefore does
not fall within the circumstances envisaged by Note 10.
38. This raises the
issue of whether there is any other provision under which apportionment is
possible in the present case.
39. As in Smith
Mr and Mrs Wright have constructed a new dwelling. This is zero-rated in
principle (Item 1) but excepted from zero-rating because it is an enlargement
or extension (Note 16, up to the opening words of paragraph (b)), but then
taken out of the exception “to the extent the enlargement or extension creates
an additional dwelling”.
40. However, the
development in the present case consists partly of zero-rated new building and
partly of an exempt supply of land (ie the part of the existing building
incorporated into the new dwelling). In the circumstances and in view of the
use of the words “except to the extent” in Note 16, we consider that it
is appropriate for an apportionment to be made.
41. Although, as we
have already noted Note 11 does not apply in the present case, Item 1 of Group
5 provides for the zero-rating of the first grant by a person constructing a
building designed as a dwelling of a major interest in “any part of” the
dwelling. In our judgment this can be properly applied to that part of the
additional dwelling created by the enlargement or extension to the existing
building. As such zero-rating would be available but only to the extent of the new
work, incorporated in the new dwelling. It does not matter that we do not have
the information to be able to make an apportionment as this is not necessary
for the purposes of this appeal.
42. For the above
reasons, we find that Mr and Mrs Wright did intend to make taxable, zero-rated,
supplies and not exempt supplies when they applied to be registered for VAT. As
such they were entitled to be registered under VATA. The parties have agreed
that if we find, as we have, for Mr and Mrs Wright the effective date of
registration is 1 October 2006.
43. The appeal is
allowed.
44. This document
contains 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.
JOHN BROOKS
TRIBUNAL JUDGE
RELEASE DATE: 27 October 2011
