20541
VAT— DIY Builders and Converters Refund Scheme s35 VATA — conversion of barn to include residential accommodation offices and workshop — condition in planning permission that residential accommodation should only be occupied in conjunction with commercial use — Note(2) (c) Group 5 Schedule 8 VATA (that  the separate use, or disposal not to be prohibited) examined — live/work unit provisions considered — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
					PAUL CUSSINS	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: Elsie Gilliland (Chairman)
						 Roland Presho
					
Sitting in public in York on 19 July 2007 and 6 November 2007

Michael Flint, VAT Specialist for the Appellant 
 
Lisa Linklater, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2008

DECISION

1.	The appeal before the tribunal was that of Paul Cussins (“the Appellant”) against a decision of Customs set out in a letter from them dated 7 September 2006 to disallow his claim for a refund of VAT within s35 of the Value Added Tax Act 1994 (“the Act”) under the DIY Builders and Converters Refund Scheme.  The amount of the claim was £14217.75.  However it was agreed by both parties that in view of an error in the claim the tribunal was to consider the issue of liability only not quantum.  
2.	The Appellant had obtained planning permission on 18 February 2003 for the change of use of redundant farm buildings at Primrose Hill Farm Buildings Mowthorpe Lane, Terrington, York YO60 6QF to form residential accommodation, offices and workshop.  The Appellant claimed the refund the subject of the appeal as a private individual in respect of work done on he stated the residential part of the barn conversion.  A separate claim for a refund we understand was successfully made in respect of the commercial part by Cussins & Light (1994) Ltd (“the company”) a VAT-registered company of which the Appellant is a director and company secretary and which uses those premises.  
3. 	One of a number of conditions in the planning permission was Condition 8 which stated  that:
“The residential accommodation hereby permitted shall only be occupied in conjunction with the commercial use hereby approved.  Reason:- The site lies in an area where new residential development is restricted.”
4.	No representative from the Local Planning Authority attended as a witness before the tribunal but in the bundle of documents before us was a copy of a letter dated 18 August 2006 addressed to the Appellant but of which a copy had been sent by the Authority to the customs officer dealing with the matter Kate Sherrard.  In this the Authority referred to its planning policy on the re-use of rural buildings and confirmed that the reason for the occupancy condition was the need for the business and residential uses to be tied together to accord with local planning policies. The Development Control Assistant who wrote the letter added in a separate paragraph:
“Whilst I can appreciate why you are pursuing the matter, I can advise that from a local planning authority perspective the only way to separate the two uses is to submit a planning permission application to remove Condition 8. However, I would at this stage have to clarify that the separation would seek to create a new residential dwelling in the open countryside (even though constructed), and in principle would be contrary to Policy H9 - Residential development in the countryside”.
We were informed that the Appellant had sought the removal of the condition. The view taken by Customs was that this condition constituted a bar to repayment.
4. 	The importance of the condition is seen when taken in the context of s35 of the Act which allows a refund of Vat to “persons constructing certain buildings” which include “a residential conversion” (s35(1A(c)). The notes to Group 5 of Schedule 8 are applied in construing the section and the four conditions set out in Note 2 must be satisfied to obtain the refund. Both parties accepted that only one was relevant in the instant case and accordingly submissions from the representatives were directed to Note 2(c) namely that:
“… (c) the separate use, or disposal is not prohibited by the term of any covenant, statutory planning consent or similar provision; …” 
5.	In his grounds of appeal of 11 November 2006 the Appellant contended that “separate use” meant “separate from any other dwelling” and in an attached addendum his representative Michael Flint stated that there was no restriction on disposal.  He submitted also that the whole comprised a “dwelling”; that the domestic accommodation fell within Council Tax band G and the non-domestic, which he described as comprising workshop garage office kitchen and storage space was subject to business rates.
6.	We have had in the papers before us photographs drawings and written descriptions of the building. The Appellant’s representative described it to us as mainly single-storey in a square with a gap.  A plan shows a central quadrangle accessed from the exterior. The residential premises are single-storied on three sides with part on the fourth side and the non-domestic premises are on the fourth side in part on the ground floor (workshop storeroom and disabled WC) and also on a first floor (conference waiting office and storage areas).  The first floor premises are in part positioned over the residential accommodation essentially the master bedroom and bathroom.  It is clear to us from the evidence that the planners had required the majority of the property to be non-domestic and it is for this reason that the garage does not form part of the domestic premises but is within the non-domestic which thus comprise 51% of the building.    
7.	We saw also copies of the registered title with the Appellant and his wife the registered proprietors with absolute freehold title. They showed also a lease of 99 years from 24 October 2003 of “office and workshop (Ground and First floor)” confirmed to us as the lease to the company.  The nature of the company’s business is property management.  The Appellant stated that the business premises provided more space than was needed.
8.	It was submitted also by the Appellant’s representative that that the building could be regarded as a live-work unit within apportionment provisions set out in Customs Notice 708 Buildings and Construction a notice to be read by contractors developers and those needing to issue certain certificates.  Some extracts from the June 2007 version were produced to us. 
9.	We look first at the meaning and effect of Note (2)(c).  The Appellant’s submission has been that there is no prohibition against disposal in condition 8 of the planning permission merely a requirement that there has to be a connection between the dwelling and the workshop.  Customs considered that there had a prohibition of both separate use and separate disposal though one only would be sufficient to disallow a refund.  The wording of Condition 8 to our mind establishes a close nexus between the residential and the commercial premises and taken in the context of the published planning policies of Ryedale District Council and the reason for the decision as clearly stated this defines the domestic enjoyment as conjoined together with the commercial.  Nor do we find the language imprecise, as Mr Flint seemed to suggest.
10.	To our mind the occupation of the residential accommodation may not be separated from the commercial use of the business premises.  In the circumstances the domestic could not in practice be disposed of to a third party who did not also use the commercial premises.  A disposal of the residential premises by way of sale or lease would in fact entitle the acquirer to the exclusive possession of and thus also the right to occupy the premises.  Accordingly we do not accept the contention of Mr Flint that this was merely an occupancy provision and nothing to do with the disposal of the property.  The Appellant with his family can and do use the residence as does the company the commercial premises under its lease but this is still subject to the terms and conditions of the planning permission which are enforceable legally by the local planning authority.  The Appellant in his evidence acknowledged that he would not have obtained the planning permission without the 51% commercial provision.  The refund has been claimed in respect of the residential accommodation.  We find that the planning permission in its wording restricts its separate use or disposal and the provisions of Note (2)(c) are not satisfied.
11. 	Disposal and occupancy are in our view closely connected and it will be a question of fact whether a particular disposal does lead to the use of the residential part becoming separate or distinct from the use of the commercial premises.  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 condition 8. 
12.	We were referred to a recent tribunal decision that of Giblin v The Commissioners for Her Majesty’s Revenue and Customs (LON 20352) in which the tribunal in accepting that Note 2 (c) required that there be no prohibition on either the use or disposal of the relevant dwelling (following here the decision in Cartagena (Vat decision 19454) nevertheless held that a requirement that premises should not be used for any purposes other than as ancillary to existing residential accommodation did not constitute a prohibition on the separate disposal of the premises thus disagreeing with the decision in Cartagena on this point.  The tribunal in Giblin said:
	“… The fact that a subsequent owner would be affected by the planning condition as to its use may mean that the granny annexe would have a small market value, but that would not prevent its disposal either by sale or by gift or by testamentary disposition. The statutory condition is that there should be no prohibition on separate disposal not that there should be no prospect of realising any substantial amount on its sale or no likelihood that the number of potential purchasers would be large. “Disposal” is a word of wide meaning. A gift is a disposal; a lease may be a disposal and in our view would not breach the planning condition …”. 
We do not agree with this approach to the construction of the condition.  It is our opinion that a condition which in practice prevents the free disposal of the residential part of the premises from the remainder amounts to a prohibition of the separate disposal of the premises . The issue is not a question of the realisation of the full value of the premises (though this may be a side effect) but whether the separate disposal in substance is prohibited. The language of the Note does not require that there should be an absolute prohibition on the disposal merely that the separate disposal is prohibited,. However it is not necessary in the instant case to rely on this part of Note 2 namely disposal (though we would if it had been necessary) since it is clear that the separate use of the residential premises from the commercial part is prohibited by the condition in the planning condition.   
13.	Mr Flint requested us also to look at the property in the context of a live-work unit as described in Customs Notice 708 Buildings and construction. Section 15 of the notice deals with apportionment rules which can apply when only part of a building qualifies for zero-rating or reduced rating. 
“A live-work unit is a property, that combines, within a single unit, a dwelling and commercial or industrial working space as a requirement or condition of planning permission”.  
The section continues:
“Zero-rating or reduced-rating is only available to the extent that the unit comprises the dwelling, provided that the dwelling meets the normal conditions outlined in paragraphs 14.2 to 14.5.”   
Section 14.2 defines a building and sets out the four conditions of Note 2 except that here they are set out as five conditions the separate use and the separate disposal being dealt with as different conditions.  Kate Sherrard the officer of Customs who made the decision and who was a witness at the hearing said that these provisions did not occur often re DIY. She acknowledged that the whole could be sold together to someone in a similar position to the Appellant but that the residence could not be sold separately.
14.	We do not see that as described to us the commercial premises are treated other than as not "part of the dwelling" in which case the commercial area could not obtain any Vat benefit in respect of conversion services. As we have been informed that the company has received a refund the route already taken would appear to have been more productive. In any event it is a different legal entity with a distinct legal estate in its own premises. As to the residential premises even within the apportionment rules they are subject to the prohibition on “separate use, or disposal” which we have already dealt with above.
15.	Mr Flint in his submissions gave us some background as a guide to interpretation of changes in legislation to reach the current position and referred also to the parliamentary debate on the subject. He suggested that the intention was to encourage home ownership with “all houses to be effectively free of VAT” and to assist the construction industry. He submitted that the legislation was designed not to allow relief to “granny annexes” but that it did not say that there could not be relief for a new dwelling with a workshop.  That however is not the position in the instant case. Mr Flint said that we should look at the reality of the situation and not rely on the informal view of a planning officer.  We are satisfied that the effect of the planning condition 8 with Rule (2)(c) is to withhold relief from the Appellant.
16. 	We dismiss the appeal.
17. 	Customs have not sought costs and we make no direction as to costs.

ELSIE GILLILAND
CHAIRMAN
Release Date: 24 January 2008
MAN/06/0807