J3 Building Solutions Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 May 2016 |
| Neutral Citation | [2016] UKFTT 318 (TC) |
| Date | 10 May 2016 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Richard Thomas, Ian Malcolm
Mr Graham Jamieson appeared for the appellant
Mr John Nicholson, presenting officer, appeared for the respondent
Value added tax – Zero-rating – Construction of dwelling – Value Added Tax Act 1994 (“VATA 1994”), Sch. 8, Grp. 5, item 2(a) – Whether building was within VATA 1994, Sch. 8, Grp. 5, Notes (16) and (18) – No, R & C Commrs v Astral Construction Ltd [2015] BVC 505 followed – Company's appeal allowed.
The First-tier Tribunal (FTT) allowed the appeal against HMRC's decision that building work was a standard-rated extension of an existing building.
The appellant company carried out construction work at “the site”, where beforehand there was a coach house with flat-roofed extensions. This building was a residential dwelling before the work began. The boundary wall was retained, including the north and west walls of the coach house. The coach house walls were stripped of their plaster. New walls were erected inside the old north wall with a membrane between them to stop the ingress of water. The membrane was attached to the inside of the existing wall, and lead flashing was carried from the exterior of the new wall over the top of the old wall. A fillet was inserted at the east end of the north wall between the old wall and the new. The new exterior wall at the east side of the coach house's footprint was joined to the existing exterior wall on the north side. A window in the west wall was blocked and a chimney breast built behind it.
The appellant argued that the construction was a new build, i.e. not the reconstruction of an existing building. If necessary, the appellant would argue that, if there was a reconstruction, it was not of an existing building. The two walls of the coach house were not facades, but became part of the boundary separate from the new north and west walls of the coach house. If they were facades, they were on a corner site and required as part of the planning permissions.
For the company to succeed, it must show that what it did (“the works”) as a matter of fact did not fall within the operations listed in Note (16), i.e. the reconstruction, etc. of an existing building. Neither the company nor HMRC suggested that the works were a conversion. Neither party argued that there was an enlargement of an existing building (para. 37 of the decision).
The FTT followed R & C Commrs v Astral Construction Ltd VAT[2015] BVC 505, which concerned Note (16)(b) (i.e. an enlargement or extension) and where HMRC argued that item 2 requires that, even if there is not an enlargement or an extension of an existing building, there must be a completely new building (which they argued there was not as the church building itself was retained). The UT held at para. 44:
We consider that, without the gloss provided by Note (16), the phrase construction of a building is not restricted to the construction of a wholly new structure.
The FTT noted that, in C & E Commrs v Marchday Holdings Ltd VAT[1997] BVC 165, Stuart-Smith LJ in the Court of Appeal said at p. 169 “… If what might otherwise be described as conversion, reconstruction, alteration or enlargement is so extensive that the building is essentially a new building …” and at p. 171 “… Somewhere along that line it is possible to say, the original building has ceased to exist, what is being done cannot be sensibly or realistically described as an alteration of it. …”
The FTT held, in favour of the company, on the basis of its findings as to what the old building consisted of and what was done after demolition, and the differences between them, that the works were the construction of a building designed as a dwelling, which was not the reconstruction of an existing building (para. 63 of the decision).
As the company's appeal succeeded, the FTT did not strictly need to consider Note (18) (a building only ceases to be an existing building when demolished completely to ground level), but did so.
The FTT held that what was intended by Note (18) was to give a developer the certainty that if, and only if, in the course of their work, they had demolished the existing building to ground level (ignoring the facades), then zero-rating applied, because it was not a reconstruction, etc. of an existing building where Note (16) would have denied zero-rating (para. 76 of the decision).
The FTT held that Note (18) did not apply, as the demolition was carried out in the course of the work (para. 78 of the decision).
The FTT noted that a building might be demolished and an exact replica built in its place, but that would still be a reconstruction despite Note (18) (para. 79 of the decision).
The FTT held that Note (18) does not say what is, or is not, a reconstruction, nor does it mean that all work done on a site that is not completely demolished to ground level (as the disputed site was not) must be regarded as a reconstruction, etc. and not a new build (para. 83 of the decision).
The FTT held that the reason why a planning authority wanted two facades, which join each other, to be retained is because they are what the public passing by the property see. The planning authority does not wish to upset the visual harmony of the neighbourhood, especially in a conservation area (para. 90 of the decision).
The FTT held that Note (18) was not satisfied, because the two facades were not all that was retained and the de minimis principle did not apply. On this basis, the FTT would hold that, if it were relevant, Note (18) did apply to the works to stop zero-rating (para. 96 of the decision).
Out of deference to the submissions made at the hearing, the FTT considered whether the walls were retained in accordance with planning consent, but the FTT made it clear that this was not a necessary part of the decision (para. 97 of the decision).
The FTT was not persuaded that there was a requirement to retain the two walls. Had the demolition of the two walls been an important factor in the initial refusal, then it would be surprising if their retention in a revised plan was not flagged up, instead of being left to be determined from the approved plans (para. 117 of the decision).
The social purpose of item 2(a) is to facilitate home ownership by zero-rating the supply of dwellings. The FTT took this into account in finding for the company.
[1] This was an appeal against a refusal by the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) to allow construction work carried on by the appellant at 82, Moor Lane North, Gosforth, Newcastle-upon-Tyne (“the site”) to be zero-rated. The VAT in issue was £40,069.00.
[2] We had two bundles of documents, one from each party, containing among other things photographs and plans of the building and construction work carried on by the appellant at the site. We had some oral evidence from Mr. Bryan Watson, the owner of the appellant and we were supplied by the appellant with a number of documents relating to the appellant's applications for planning permission etc to carry out the works at the site, though not the planning consent itself.
[3] In view of this rather strange omission we informed the appellant that we might have taken the view that the appeal failed for lack of evidence on what might turn out to be a crucial point: however as neither the appellant's owner nor Mr Jamieson was apparently a tax specialist we decided to issue directions after the hearing (“post-hearing directions”) with a strict time limit to enable the appellant to provide the planning permission and building plans which were discussed at the hearing and to enable any comments to be made on these documents that either party wished to make.
[4] We add that, from reading the papers again after the hearing, we noted that the appellant had in fact supplied a copy of the planning consent to HMRC because they referred to having seen it when making their decision. It is possible then that the appellant expected HMRC to include the consent in the bundle it prepared and it seems then somewhat odd to us that HMRC did not include it, especially as in their Statement of Case they refer to it in support of their case.
[5] In the event, in accordance with the directions, the appellant supplied the planning consent, a number of plans and its comments on the documents. HMRC did not comment on them.
[6] From the bundles, the evidence and the documents provided in accordance with the post-hearing directions and from oral evidence from Mr Watson we make the following findings of fact.
[7] The site consisted, before the works, of a coach house of, we assume, at least pre-war origin together with modern flat roofed extensions. There was no suggestion that this building had not been a residential dwelling in the period before the works with which we are concerned were begun (and we find that it had been).
[8] The boundary of the site is roughly square, with the entrance to the road on the west side. The site is bounded by a stone wall about a metre high, except on the centre of the west side where there was an entrance from the road. But in the northwest corner of the site a side gable wall and rear wall of the coach house form the boundary so that the north and west boundary walls abut without a gap and are “knitted” into the two walls of the coach house, which are one storey high and so substantially higher than the main boundary wall. The entrance to the coach house is on the south side.
[9] The boundary wall was not a party wall at any point as it went “hard up” against the boundary line of the site.
[10] The appellant sought permission from Newcastle City Council on 19 December 2012 to demolish part of the original coach house and all the extensions on the site and to...
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