Cusdin v Revenue & Customs [2006] UKVAT V19739 (24 August 2006)

19739
	VAT – BUILDERS  -  Do-it-yourself Builders and Converters Scheme  -  refund of VAT  -  Aga cooker  -  whether “designed to heat space”  -  no  -  refund not due  -  whether refund of difference due from HMRC when VAT erroneously paid at 17.5 per cent instead of 5 per cent  -  no  -  difference not constituting tax  -  owner should look to suppliers for refund of difference  -  appeal dismissed

MANCHESTER TRIBUNAL CENTRE

RICHARD CUSDIN	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	Michael Johnson (Chairman)
Roland Presho

Sitting in public in York on 19 July 2006

The Appellant appeared in person

Nigel Poole, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2006
DECISION

1.	This appeal concerns a building conversion carried out by the Appellant to a property belonging to him in Sykes Lane, Oxenhope, West Yorkshire, in respect of which he claimed a refund of value added tax from H M Customs and Excise (“Customs”) pursuant to section 35 of the Value Added Tax Act 1994 (“the Act”), under the “Do-it-Yourself Builders and Converters Scheme” described in VAT Notice 719 (“the Scheme”).

2.	Customs allowed the Appellant’s claim for a refund of VAT in part, but they rejected the claim to the extent of £6,302.68.   The Appellant states that he has received refunds, not from Customs but from the suppliers with whom he dealt, in respect of part of the £6,302.68 originally in issue.  Consequently the following amounts of VAT remain in issue:

1)	£805.76 of tax paid to Cheshire Cookers Ltd in respect of the purchase and installation of an “AGA” cooker, which we will call “the Aga”;

2)	£3,885.14 of tax paid to Crown Domestic Contractors Ltd in respect of building works; and

3)	£543.01 and £225.63 of tax paid to the associated concerns Alert Installation and Bantech Ltd in respect of supplying and installing security systems and alarms.

3.	The issues to be determined by the tribunal are agreed to be:

a.	Is the VAT paid by the Appellant in respect of the Aga recoverable by him under the Scheme at all; otherwise

b.	Is the Appellant entitled to recover under the Scheme VAT at the rate of 17.5 per cent in respect of the supplies mentioned in paragraph 2      above, or is his claim limited to VAT at the rate of 5 per cent? 

4.	We record that the tribunal has received little by way of evidence.   The Appellant described the background to the conversion carried out by him, and explained to us in straightforward and helpful terms the essence of his position in relation to the dispute, but he did not tender himself formally as a witness, nor did he call any other witness.  He put no documents before the tribunal.

5.	Her Majesty’s Revenue and Customs (“HMRC”) were represented by Nigel Poole of counsel.  He presented us with a lever-arch file containing copies of the Notice of Appeal, HMRC’s Statement of Case, and of some correspondence between the parties, plus 304 pages of other documents said to be relevant to the appeal, including copies of further relevant correspondence, copy invoices, and a copy of Notice 719.  However, only limited reference was made by either party to the contents of this file during the course of the hearing.  Mr Poole was content to call no witness.

6.	The following appears to us to be the factual position in relation to the Aga.

7.	As one might expect, the Aga was purchased by the Appellant to go in the kitchen of the converted property.  It was to be used for cooking food, but for the Appellant it had an important separate function, which was to be that of space heating.  The kitchen would need no separate heating, because – as information obtained by the Appellant from the internet and contained in the tribunal file appears to indicate – the Aga whilst operating would contribute some 1 KW/Hr of heat to the room in which it stands.  The Aga, which is gas-fired, was designed for continuous operation.

8.	The Aga has a flue projecting through the ceiling of the kitchen and via the bathroom above, which serves to provide some incidental heat to the bathroom as well as the kitchen.

9.	The conversion was designed by the Appellant, who we understand to be an experienced designer in such matters, to include a central heating system that did not heat the kitchen.  The kitchen would receive its heat solely from the Aga.  

10.	In these circumstances, can it be said that the Aga is an “ … appliance which is … designed to heat space or water (or both)” within the meaning of Schedule 8, group 5, Note (22) of the Act?  That is the first issue that the tribunal has to decide.   

11.	Note (22) is applied to the refund provisions of section 35 of the Act by section 35(4).  By section 35(1B), goods are treated as used for the purposes of works to which that section applies “ … in so far only as they are building materials which, in the course of the works, are incorporated in the building in question or its site.”   “Building materials” is defined by Note (22), in relation to any description of building, as “ … goods of a description ordinarily incorporated by builders in a building of that description, … but does not include … (c) electrical or gas appliances, unless the appliance is an appliance which is … (i) designed to heat space or water (or both) …”.  

12.	So, assuming that the Aga constitutes goods of a description ordinarily incorporated in a conversion of the description effected by the Appellant, it is nevertheless a gas appliance, so it can only qualify for a refund of VAT if it is designed to heat space or water, or both – designed is the key word.

13.	The following appears to us to be the factual position in relation to the VAT paid by the Appellant in respect of his conversion project.

14.	The Appellant is not an expert in VAT.  We are prepared to assume that his various suppliers were not experts in VAT either.  Consequently the Appellant was invoiced for VAT on supplies made to him at the rate of 17.5% when, as is not in dispute, VAT should have been charged in respect of those supplies at the rate of 5 per cent.  The Appellant paid those invoices in good faith, assuming that VAT at the higher rate was due from him.

15.	It is further not in dispute that the suppliers accounted to Customs for VAT at the rate of 17.5 per cent.  The suppliers, also acting in good faith, believed that tax at that rate had been payable by the Appellant and that they should account for it in the ordinary way.

16.	The result was that Customs received, alternatively the suppliers were credited with, “VAT” that should never have been charged in the first place and was not in fact tax at all.  The amounts overpaid by the Appellant, and treated by all concerned as “tax” when they were not tax, represented the difference between 5 per cent and 17.5 per cent of the invoiced value of the supplies.

17.	We are satisfied that the amounts overpaid by the Appellant on account of “tax” that was never due were paid under a mistake of law.  We have not been referred to any authorities in respect of money paid under a mistake of law, such as Deutsche Morgan Grenfell Group plc v IRC [2005] EWCA Civ 78, but Mr Poole on behalf of HMRC accepted, in our view correctly, that in principle the money is repayable, subject to any lawful statutory limitation upon the right to receive repayment.  Mr Poole reserved his clients’ position as to any such limitation. 

18.	Certain of the suppliers to the Appellant in respect of the conversion have been prepared to repay to the Appellant the so-called tax wrongly paid to them by him, so that in respect of those amounts, the Appellant is not out-of-pocket and no issue arises.  However other suppliers, namely those mentioned in paragraph 2 above, have indicated that they would prefer to await the decision of this tribunal before contemplating any refund.

19.	For HMRC, Mr Poole submitted in respect of the first issue that the Aga was not “designed” to heat space or water, which suffices for the supply of that appliance to fall outside the scope of the Scheme.  In respect of the second issue, he submitted that there can be no requirement for a refund to be made under the Scheme in respect of “VAT” that was never properly tax in the first place.  VAT at the rate of 5 per cent can properly be the subject of a refund, where the Scheme applies, but the balance of the sums paid by the Appellant on account of “tax” fall outside the Scheme, because they should never have been charged, nor should they have been paid.  In respect of those amounts, Mr Poole says, the Appellant should look to his suppliers for a credit.  The Appellant seemingly accepts this in respect of suppliers who have been prepared to repay, but continues to dispute this in relation to suppliers who have not been prepared to repay.

20.	Mr Poole cited three tribunal decisions in each of which the tribunal appears to have been of the corresponding view, namely Elizabeth Banks v Customs and Excise Commissioners (1994) VAT Decision 12004, Dennis Charles Fisher v Customs and Excise Commissioners (1994) VAT Decision 12356 and Christopher John Allen v Customs and Excise Commissioners (2001) VAT Decision 17342.  Two of those decisions date from 1994 and the most recent from 2001.  None of those decisions was considering the law as it has applied in respect of supplies made after 31 July 2001 (all the relevant supplies in the instant case were after that date).  Nevertheless we accept that these decisions support Mr Poole’s submission in a general way.

21.	The Appellant submitted that, as the designer of the conversion, he has designed the Aga to heat space as well as to be the cooker for the property as converted by him.  He says that he has not designed the conversion to have any form of heating in the kitchen other than the Aga, precisely because it pushes out enough heat to heat the kitchen.  He has also taken account of the heat from the flue in heating the bathroom above.  The Aga therefore has, he says, the dual function of cooking and heating, and is such an appliance as qualified under the Scheme for a refund of VAT.

22.	Moreover, the Appellant submitted, paragraph 8.9 of Notice 719 (May 2002) gives the impression that a refund will be forthcoming if the appliance is so designed.  The Appellant simply relied upon that assurance in formulating his claim for a refund of the VAT paid in respect of the Aga.  So, in respect of the first issue, the Appellant says that he should receive a refund in respect of that VAT. 

23.	With regard to the second issue, the Appellant submitted that he had no reason to believe that VAT was not payable at the rate of 17.5 per cent.  He accepted that, as mentioned in paragraph 9.1 of Notice 719, a builder can “sometimes” charge VAT at the reduced rate of 5 per cent for conversions, and that he was aware of that paragraph, but he says that neither he nor the suppliers with whom he dealt believed that the reduced rate applied in respect of the particular supplies in issue.  As he has paid the suppliers at the full rate, and they have accounted for that VAT to Customs, and Customs have received the amounts involved, all parties acting in complete good faith, he submitted that the correct course now was for restitution to be made to him of the amounts found to have been overpaid.

24.	With regard to the first issue, we are of the view that Schedule 8, group 5, Note (22) of the Act falls to be construed in the sense argued by Mr Poole.  The Appellant’s argument is attractive, because we accept that he designed the conversion to have the Aga heat the kitchen.  That was the reason, we accept, that the central heating also installed in the conversion did not extend to the kitchen.  But does the word “designed” in sub-paragraph (c)(i) of Note (22) refer to the design of the conversion or to the design of the appliance?

25.	It is clear, in our view, that the sub-paragraph relates to the design of the appliance.  The Note provides that “building materials” does not include electrical or gas appliances, unless the appliance is an appliance which is designed to heat space or water, or both.  This throws the emphasis onto the design of the appliance, rather than that of the conversion.

26.	Whilst the Appellant was the designer of the conversion, he was not the designer of the appliance.  The only information we have had as to the design of the appliance is that contained in the tribunal bundle – the information downloaded from the internet, and annexed to the Appellant’s letter to Customs dated 30 September 2005.  This information appears to be from the AGA-Rayburn website.  In our view, the information makes it clear that the Aga was not designed as a space heater.  Rather, its only function is that of a cooker.  

27.	In the “General Questions” section of the website, under the headings “Heating – Heat to room”, the following is stated:

“The Aga releases a gentle warmth into the kitchen, which is not likely to give rise to any problems, unless the room is exceptionally small or poorly ventilated.  The actual output varies slightly from model to model in accordance with the type of flue system chosen.  An average contribution to the room of 1 KW/hr should be allowed.

“An Aga does not supply central heating output.”

28.	There is no doubt that the Aga supplies heat to the kitchen.  Designers of conversions would, entirely understandably, make allowance for that fact, as the Appellant did.  There would commonly be no need for a central heating radiator, or other form of heating, in a room containing an operating Aga.  But AGA-Rayburn do not offer their product as a space heater.  Their website shows that they offer it solely as a cooker.  They describe the heat that it pushes out as “unlikely to give rise to any problems”.  That somewhat apologetic language shows, in our opinion, that the heating effect of the Aga is regarded by them as an incidental consequence of the product, not as a function of it.  The Aga is not offered to purchasers as a space heater, even as ancillary to its function as a cooker. 

29.	We therefore reject the submission of the Appellant that the installation has a dual function.  Everything that we have seen goes to show that the appliance in question, the Aga, has one function only, namely that of cooking.

30.	We have considered the wording of paragraph 8.9 of Notice 719, which the Appellant has submitted to be misleading.  That paragraph is headed, “Electrical and gas appliances,” and it begins:

“You cannot normally claim for electric and gas appliances, even if they are required to be incorporated in a building as a requirement of Building Regulations.  You can, however, claim for them when the conditions at paragraph 8.4 are met and they are … designed to heat space or water (this includes cookers designed to have a dual purpose to heat the room or the building’s water) …”

The Appellant has told us that he regarded the Aga as having such a dual purpose.  

31.	In our view, paragraph 8.9 does not misstate the effect of the legislation.  We consider that the paragraph is directed to the design of appliances, not conversions, and that in speaking of “cookers designed to have a dual purpose”, it is referring to the design of appliances, not the conversions in which they are incorporated.  Clearly there are appliances that have been designed to have such a dual purpose, but we are satisfied that the Aga in this case is not one of them.

32.	We therefore decide the first issue in favour of HMRC.

33.	With regard to the second issue, money cannot be regarded as a payment of tax if it was never required to be paid as such.  If the purpose of the payment was to meet an assumed tax liability – which was the position here – and that liability was non-existent, then it falls outside the tax regime completely.  By rights the money should be returned to the payer, because the recipients have no ground on which to keep the payment.

34.	Paragraph 9.1 of Notice 719, on which the Appellant says that he relied, states:

“You should be careful to ensure that you are charged the correct amount of VAT, as you can only reclaim VAT that has been correctly charged.”

In our view, that operates as a warning that the owner should take pains to check the rate of VAT charged by suppliers, as sometimes the correct rate of tax will be 5 per cent, and sometimes it will not be.

35.	The position is complicated in this case because the recipients accounted to Customs on the basis that the money was tax, and it was accepted by Customs on that basis.  The money may well have been applied by Customs towards genuine tax liabilities of the recipients.  As, in effect, Customs have been invited to treat the sums received as in discharge of tax liabilities, straightforward repayment of the amounts overpaid may not always be possible.          

36.	Nevertheless, the Appellant was, as we see matters, correct to seek repayment from those to whom he has made the overpayments.  We think that it was entirely right for him to have approached the suppliers with whom he dealt, claiming refunds in the amount of the overpayments.  Some of the suppliers have given him refunds.  Others are awaiting the outcome of this hearing to see if they should do so.  We decide that, on the basis that the suppliers had no right to the money, refunds should be made to the Appellant in all cases.  In our view, the supposed VAT collected at the rate of 17.5 per cent, when the true rate payable was 5 per cent, was incorrectly collected and neither the invoicing suppliers nor the Crown had any entitlement to it.

37.	In summary, in respect of the second issue –

•	We decide that the Appellant should be repaid by all his suppliers the supposed VAT incorrectly overpaid by him, as money that was never due to them, by contract or otherwise;

•	As to whether the suppliers can seek onwards reimbursement from the Crown of amounts refundable to the Appellant for which they may have accounted as VAT, that depends upon the details of their individual accounts with HMRC. HMRC may or may not be prepared to acknowledge that reimbursement should be made. We have already indicated that, in principle, we think that reimbursement should be forthcoming.

38.	The Appellant has informed us that some of the suppliers with whom he dealt have since gone into liquidation.  We are not equipped to express a view as to the status of the Appellant’s right to refunds vis-à-vis creditors of the suppliers, which is a matter as to which we would respectfully suggest that the Appellant should consider taking legal advice.  It is, however, clear to us that the Appellant’s claim with regard to the overpayments is distinct from, and arguably better than, that of a creditor.

39.	It follows that we reject the submission of the Appellant that he should be refunded by HMRC the amount of VAT at 17.5 per cent in respect of expenditure covered by the Scheme.  As tax was never due at that rate in the first place, and should not have been paid, and is properly refundable to the Appellant by his payees as indicated above, there is no call upon HMRC to make such a refund directly to him.  The difference between the tax due at 5 per cent and tax supposedly due at 17.5 per cent is outside the scope of the Scheme, and it would be improper for a refund in respect thereof to be made to the Appellant by HMRC.

40.	We therefore decide the second issue in favour of HMRC also.

41.	This appeal is accordingly dismissed.  

42.	The appeal may be restored at the request of either party for the purpose of argument as to costs.  Having said this, and seeing that the Appellant has lost his appeal, yet brought his appeal in good faith and presented attractive arguments to the tribunal, we provisionally feel that justice might best be served by there being no order as to costs in this instance.

MICHAEL JOHNSON
CHAIRMAN
Release Date: 24 August 2006
MAN/05/758