[2013] UKFTT 95 (TC)
TC02513
Appeal number:
TC/2012/02236
VAT – do-it-yourself
builders’ scheme – VAT Act s35, Sch 8, Group 5, Note 2 - “live-work” unit –
whether conditions for zero rating satisfied – no – appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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JOHN AND SUSAN
KEAR
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE NICHOLAS ALEKSANDER
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ROSALIND YOUNG
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Sitting in public at 45 Bedford Square, London on 23 November 2012
Michael J Flint, VAT
consultant for the Appellant
Philip Rowe, an officer of HM
Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2013
DECISION
Introduction
1.
This appeal concerns a claim by the Appellants for a refund of VAT incurred
by them in connection with the conversion of commercial buildings into a
dwelling. The amount involved is £12,681.34.
2.
In principle, a person who is converting a non-residential building into
a dwelling or a number of dwellings for non-business purposes is able to obtain
a refund of VAT incurred on buying building materials used in the conversion,
or, where he employs a contractor to do the work, on employing that contractor.
3.
The Appellants were represented by Mr Flint and HMRC was represented by
Mr Rowe. We heard evidence from Mrs Kear, one of the appellants. In addition
there were produced to us a bundle of documentary evidence and a bundle of
photographs.
The law
4.
Section 35(1),(1A) and (1D) 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;
(b) the construction of
a building for use solely for a relevant residential purpose or relevant
charitable purpose; and
(c) a residential
conversion.
(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.
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 facts
7.
We find the background facts to be as follows.
8.
The Appellants were the owners of a large house, formally known as
“Hathaways” and now known as “Greenwood”. They conducted their business from
five adjacent commercial buildings in the grounds of the house. These are
timber clad barn-like buildings.
9.
Following the sale of the business, the commercial buildings became
vacant and unused. The Appellants obtained planning consent to demolish two of
the five commercial buildings, and combine the remaining three into a
“live-work” unit. The plans show that the space occupied by one of the
buildings was to be converted into the business area and the other two
buildings were to be converted into the residential area. Subsequently the
planning consent was amended to allow (i) for the construction of a
conservatory at the far end of the residential area, and (ii) for the retention
of half of a building that was due to be demolished for use as a garage.
10.
The planning application was submitted on 18 September 2009 and consent
was granted on 13 November 2009. The amendments were submitted on 2 July 2010
and the amended consent was granted on 27 August 2010.
11.
The planning consent included the following conditions:
The business floor space of the livework unit shall
comprise at least 30% of the gross external floorspace of the building and
shall be finished ready for occupation before the residential floorspace is
occupied and the residential use shall not precede commencement of the business
use
The business floorspace of the livework unit shall
not be used for any purpose other than for the purpose within Class B1 in the
Schedule to the Town and Country Planning Use Class Order 1987, or in any
provision equivalent to that class in any statutory instrument revoking and re-enacting
that Order with or without modification
The residential floorspace of the livework unit
shall not be occupied other than by a person solely or mainly employed or last
employed in the business occupying the business floorspace of the unit, a widow
or widower of such a person, or any resident dependents
Notwithstanding the details shown on the application
plans, before development commences, details of the residential curtilage for
the livework unit shall be submitted to and approved by the Local Planning
Authority. The scheme shall be implemented and retained in accordance with the
approved details.
12.
Class B1 in the Schedule to the Town and Country Planning Use Class
Order 1987 is as follows:
Business Use for all or any of the following
purposes—
(a) as an office other than a use within class A2
(financial and professional services),
(b) for research and development of products or
processes, or
(c) for any industrial process,
being a use which can be carried out in any
residential area without detriment to the amenity of that area by reason of
noise, vibration, smell, fumes, smoke, soot, ash, dust or grit.
13.
The plans attached to the planning consent shows the business area as
being a single large open plan space to the right of the property when entering
by the front door. The residential area is to the left of the property when
entering by the front door, and comprises two bedrooms (with en suite
bathrooms) and a large open plan living/dining/kitchen area (with the
conservatory extending beyond). However the business area of the property was
never built in accordance with the plans. Instead the business area was
divided into two rooms separated by a passageway, with a toilet at the end of
the passageway. For reasons which will become apparent, we refer to the room
furthest from the front door as Christopher’s room, and the other room as
Richard’s room. We would note that although we were shown many photographs of
both the exterior and interior of the property, none of the photographs related
to the business area. Our findings in respect of the business area are
therefore made on the basis of the description given by Mrs Kear during the
course of her evidence.
14.
Sussex Building Control issued a certificate of completion on 9
September 2011. However the Appellants did not move into the property until
September 2012 following the sale of their house.
15.
When the completed property was inspected by the district valuer for the
purposes of assessing council tax and rates, the officer determined that the
commercial element of the property was too small to merit separate non-domestic
rating, and the whole property was assessed to council tax as being
residential.
16.
Mrs Kear told us when giving evidence that the Appellants have two
(adult) sons, Richard and Christopher. Richard is an oak framer and
Christopher is a chef and a musician (although the income he generates from
music is not sufficient to maintain him). Richard lives with the Appellants,
but Christopher does not (although he does stay with them from time to time).
When Christopher stays with the Appellants, he sleeps in the spare bedroom in
the residential part of the property or in his room. He uses his room as a
music practice studio. Richard lives in the property and uses his room as his
bedroom, from which he also manages his business. Files and other papers
relating to his business are kept in his room, as is his computer which he uses
in the management of his business. However his workshop is not at the property
and is located elsewhere. Mrs Kear helps Richard with his business from time
to time, but is not a partner or employee in the business.
17.
Although Richard undertakes some management of his business from his
room, we find that the room is not used solely for purposes falling within
Class B1, as it is Richard’s bedroom. We also find that neither of the
Appellants were solely or mainly employed (or last employed) in Richard’s
business. Although Mrs Kear helps Richard from time to time with his business,
she does so out of the love and affection she has as his mother, rather than by
being employed in the business.
18.
On 11 October 2011 the Appellants submitted a claim to HMRC for
repayment of the VAT incurred on the conversion. HMRC replied to the
application on 13 October 2011. They rejected it essentially on the grounds
that note (2)(c) to Group 5, Schedule 8 VAT Act 1994 was not satisfied, as
there was an implied condition in the planning consent preventing the separate
disposal of the business part of the property.
19.
On 10 November 2011 the Appellants asked HMRC to review that decision,
and the results of the review, rejecting the refund, were communicated in a
letter dated 21 December 2011. The review officer upheld the original decision
to reject the refund on the grounds that the requirements of note (2)(c) were
not satisfied as the planning consent prohibited both the separate use and the
separate disposal of the residential and business elements of the property. In
addition, the review officer noted that the Appellants may be in breach of
their planning consent if the property was not being used as live-work unit.
Submissions and Conclusions
20.
Mr Flint, for the Appellants, submits that there is no condition in the
planning consent preventing the separate disposal or use of the residential and
business elements of the property. Mr Rowe submits that such a condition was
implicit in the planning consent granted.
21.
We were referred to a number of cases, in particular to Holden v HMRC
[2012] UKFTT 357 (TC), Cussins v HMRC (2008) VDT 20541, Phillips v
HMRC [2011] UKFTT 372 (TC) and Sherwin & Green v HMCE (1999) VDT
16396. All of those cases relate to live-work units or other arrangements with
both residential and business elements. Mr Flint seeks to distinguish these
cases (other than Sherwin & Green) on the basis that in all of those
cases the business part of the development was independent of the residential
part – in particular they had separate entrances and had no internal access
from one to the other. It was therefore possible as a practical matter for the
separate elements of the development to be severed from one another, and for
the business element to be sold separately from the residential element (or
vice versa). That was not the case here, where the business and residential
element shared a common front door. In the Sherwin & Green case,
the tribunal held that the planning restrictions, when properly considered, did
not prohibit the separate disposal of the different elements of the
development.
22.
We agree that there is no express or implied condition preventing the
separate disposal of the residential and business elements of the property in
this case – although as a practical matter this could not be done without
further building work (possibly requiring planning consent) to provide (for
example) separate entrances. However we find that there was an express
condition preventing the separate use of the business and residential elements
of the property. The planning consent requires that the residential part of
the property can only be occupied by a person mainly or last employed in the
business carried on in the business part of the property (or widow/widower or
resident dependent). We agree with the Tribunal in Holden that
occupation and use of residential accommodation amount to the same thing, and
it therefore follows that condition (c) of note 2 cannot be satisfied.
23.
We also agree with the Tribunal in Holden that few (if any)
live-work units can qualify for zero-rating – and we consider that HMRC’s
guidance relating to live-work units in Public Notice 708 at paragraph 15.4 is
misleading.
24.
Mr Rowe also submitted that condition (d) of note 2 was not met, as the
conversion had not been undertaken in accordance with the planning consent
given. Mr Flint sought to persuade us that Class B1 of the Use Class Order was
very broad – and that modern offices could be furnished informally, to include
sofas and beds. So the fact that Richard’s room was used in part as his
bedroom did not prevent it from being an office within Class B1.
25.
We disagree.
26.
We find that:
(1)
The Appellants both occupy the residential part of the property;
(2)
Neither Appellant is a person solely or mainly employed or last employed
in Richard’s oak framing business, nor Christopher’s music business, nor are
they a widow or widower of Richard or Christopher, nor are they dependents of
Richard or Christopher; and
(3)
Richard’s room is used for a purpose other than for the purpose within
Class B1 in the Schedule to the Town and Country Planning Use Class Order 1987,
namely it used for residential purposes as his bedroom;
27.
Although Mrs Kear helps Richard with his business, we find that the help
she provides is out of the love and affection that she owes her son, and is not
sufficient to amount to her sole or main employment (or last employment).
28.
It is not clear to us whether an office within Class B1 of the Use Class
Order would include a music studio, but as we heard no argument on the point,
we make no finding in this regard. Irrespective of this, we are satisfied, and
find, that Christopher is not resident at the property.
29.
We therefore find that the Appellants occupy (and have always occupied)
the residential part of the property in breach of the planning consent, as
neither of them is a person solely or mainly employed or last employed in
either Richard’s oak framing business or Christopher’s music business, nor are
either of them a widow or widower of Richard or Christopher, nor are they
dependents of Richard or Christopher.
30.
We also find that the use of Richard’s room by him for residential
purposes is in breach of the planning consent, as the planning consent requires
that the business part of the property be used solely for purposes within Class
B1 of the Use Class Order.
31.
We also find that this usage of the rooms in the business part of the
property was always intended by the Appellants. Mrs Kear told us that although
the property was vacant at the time the Certificate of Completion was issued by
Sussex Building Control, it was always the Appellant’s intention that the two
rooms in the business part of the property were to be used in this way.
32.
We therefore find that the conversion had not been carried out in
accordance with the planning consent. We are supported in this finding by the
fact that the district valuer decided that the business use of the property was
immaterial, and therefore assessed the whole of the property to council tax.
33.
We therefore dismiss the appeal.
34.
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.
NICHOLAS ALEKSANDER
TRIBUNAL JUDGE
RELEASE DATE: 1 February 2013
