Richmond Hill Developments (Jersey) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 August 2021 |
| Neutral Citation | [2021] UKFTT 290 (TC) |
| Court | First-tier Tribunal (Tax Chamber) |
[2021] UKFTT 290 (TC)
Judge Charles Hellier, Julian Stafford
Nicola Shaw QC instructed by Stewarts Law LL,P appeared for the appellant
Howard Watkinson instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Substantial reconstruction of a residential listed building – VATA 1994, Grp. 6, Sch. 8 – Whether note 4 to be read as permitting the retention of internal elements necessary for structural integrity – Whether retained items de minimis – Whether Grp. 6 breached the principles of fiscal neutrality and proportionality.
The FTT found that a protected building had not been substantially reconstructed by the appellant, its sale was therefore exempt and not zero rated.
The appellant undertook a project to extensively remodel a listed building. The building's previous owners used the building as a nursing home and the appellant converted it into residential apartments with the intention of granting major interests.
The appellant argued that it had substantially reconstructed the building and that therefore the major interests were zero rated under VATA Sch. 8, Group 6, item 1. Note 4 of the group states that a substantial reconstruction has taken place if the reconstructed building “incorporates no more of the original building (that is to say, the building as it was before the reconstruction began) than the external walls, together with other external features of architectural or historic interest”.
The appellant retained various internal parts of the building, the most material of which were:
- Some floor slabs, being concrete floors which were cast into the walls (para. 18–20)
- A steel frame which enabled large rooms to be created in the interior because the load of the roof and upper floors was transferred to the external walls (para. 21–23);
- Masonry stacks which extended into the foundations and supported the chimney stacks rising out of the roof. The chimney stacks were retained as a condition of the planning consent (para. 24–25).
Some of the retained elements of the building could not be removed without damaging the structural integrity of the building. The appellant argued that, despite not removing all of the internal elements, it was still undertaking a substantial reconstruction which fell within Note 4 because:
- Purposively construed Note 4 permitted the retention of internal structures which were either part of the external walls or were structurally necessary to retain them or the external features;
- The retained internal items were de minimis because they formed a small fraction of the building; or
- If the works were not a substantial reconstruction within Note 4, this represented a breach of the EU principles of fiscal neutrality and proportionality.
The FTT rejected the appellant's arguments. It concluded that the internal structures which were integrated into the walls in some way were not part of the walls because they served a different function, e.g. the floor slabs “were more than mere adjuncts to the wall. In ordinary language they were not part of the walls” the FTT distinguished the floor slabs from, for example, the foundations on which the walls stood which, it determined, were part of the walls (para. 60). The FTT further found that this interpretation of Note 4 was not contrary to the purpose of the legislation.
The de minimis principle is the principle that that the law does not concern itself with trifling matters. The FTT agreed with the UT in Boxmoor Construction Ltd v R & C Commrs [2016] BVC 508 that there was nothing in the statutory language which displaced the de minimis principle (para. 63). However, it also concluded that, looking at the development as a whole, the retained elements were too great to be considered de minimis (para. 68). It rejected the appellant's approach of considering the retained elements item by item (para. 65).
In relation to the question of whether Note 4 breached the EU principle of fiscal neutrality (i.e. that supplies which are similar or identical from the point of view of the typical consumer should have the same VAT treatment). The FTT concluded that fiscal neutrality had not been infringed (para. 85). The appellant compared the zero rating which would be achieved if all the internal elements were removed, with the exemption applying if some elements are retained. However, the FTT was not satisfied that, in relation to residential flats, it was possible to identify a typical consumer or to determine their reasons for seeking or rejecting a particular type of flat. The purchase of a flat is, it concluded, a “highly idiosyncratic activity” (para. 79).
Finally, the appellant attempted to argue that Note 4 breached the EU principle of proportionality, i.e. that it exceeded what is appropriate and necessary to achieve its aim (para. 92). However, the FTT found that this principle did not help the appellant because the proportionality principle relates to legislation which is too broad and it was arguing that the legislation was too narrow (para. 104).
A building is substantially reconstructed if the “new building” retains no more than the external walls and external features of architectural or historic interest of the “old building”. The appellant unsuccessfully argued that various internal components of the building which had been retained were de minimis and should be disregarded when determining whether a substantial reconstruction had occurred. The decision will be of interest to other businesses which are redeveloping protected buildings.
[1] The Royal Star and Garter Home (the “RSGH”) was built in the early 1920s to provide nursing facilities for servicemen returning from service in the first world war. It stands at the top of Richmond Hill in Surrey overlooking Petersham Common and the Thames beyond Richmond. It is opposite one of the gates into Richmond Park. It is a large and impressive building, listed1 grade 2.
[2] Sited on the brow of the hill, at the front (facing we shall say East), it presents as five storeys (from street level, levels D to H together with level I in the roof) facing towards the entrance to Richmond Park, and nine storeys (levels A to H plus I) facing West over Petersham Common. There was space on most floors for some 60 rooms for those being looked after there.
[3] At the rear there was a formal garden flanked by two colonnades stretching like arms from the main building. Also facing West at the rear on Level B, were two large rooms known as the King's Room and the Queen's Room, between them spanning the width of the rear elevation, one on each side of a passageway leading to the formal garden. These rooms were two storeys high, having their floors on Level B and their ceilings at the level of Level C ceilings.
[4] Changes in medical practice and need led the charity which owned the building to move its operations elsewhere and in 2013 the last resident moved out. The building was then sold to the Appellant (“RHD”).
[5] In an operation which lasted some 2½ years RHD converted the building into 86 residential units (we shall call them “flats” even though some had more than one level) which it sold. The King's Room was converted into a swimming pool and gymnasium and the Queen's Room was to be converted into a communal sitting room, or for use for large receptions or dining.
[6] The issue in this appeal is whether the sales of the flats were zero rated or exempt for VAT purposes. If zero rated RHD would be able to recover all2 the input tax on the conversion works; if exempt it could not.
[7] As a result of sections 8, 30, 31 and Sch 9 VAT Act 1994 (“VATA”) the transfer of a flat is exempt from VAT unless zero rated. Groups 5 and 6 Sch 8 VATA provide for the zero rating by a developer of the supply of certain new dwellings.
[8] Group 5 zero rates the supply of: (i) a new dwelling constructed from a bare site, (ii) a dwelling in a building converted from a building previously used for non-residential purposes and (iii) on certain conditions, a dwelling constructed on the site of a previous residential dwelling which has been demolished apart from up to two walls.
[9] Group 6 Item 1 zero rates the supply of dwellings which are the result of a “substantial conversion” of a listed building. Note 4 to Group 6, which is the battleground in this appeal, provides that for the purposes of Item 1:
a [listed] building is not to be regarded as substantially reconstructed unless when the reconstruction is completed, the reconstructed building incorporates no more of the original building (that is to say, the building as it was before the reconstruction began) than the external walls together with other external features of architectural or historical interest.
There is no doubt that in ordinary language the work undertaken on the RSGH was a substantial reconstruction. The issue which arises is whether the restriction in Note 4 – “unless …” – deprives it of that appellation.
[10] The reconstruction of the RSGH left the walls and the roof substantially intact but also retained, in compliance with the planning application and consents, certain internal features, including the chapel, a marble staircase, the substantial majority of the reinforced concrete floor slabs and the chimney stacks.
[11] HMRC say that these retentions deprived RHD of the benefit of zero rating under Item 1 because of Note 4. RHD says (i) features, such as the concrete floor slabs and the chimneys which were retained in order to maintain the structural integrity of the exterior are properly to be considered as part of the external walls and features for the purposes of Note 4, (ii) other retained features were de minimis, (iii) the EU principle of Fiscal Neutrality requires that a reconstruction of a listed building in which some...
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