Anomalous Decision

'Yes, but a lot of public house accommodation is not self-contained because the access is internal and there is only one kitchen. However, there was no internal access in this case. You had to use a separate door from the street.

'This tribunal decided that the rules in Group 5 of Schedule 8, concerning the zero rating of the sale of a converted dwelling, could not be interpreted in the same way in relation to section 35. Since this is designed to put a private individual, who constructs a dwelling or converts a non-residential building into a dwelling, in the same position as if he bought the finished result zero rated, the decision produces an anomaly. A developer has to create two dwellings; a private individual needs only one.'

'But I thought that section 35(4) says that the notes to Group 5 shall apply to section 35, subject to a variation in the meaning of non-residential.'

'Yes, but the tribunal refused to apply to section 35, note (9) of Group 5. Note (9) says that, when a building already contains a dwelling, the conversion is not within item 1(b) or item 3 of Group 5 unless an additional one is created. The tribunal saw those rules as having nothing to do with a repayment claim under section 35.

'Section 35(1D)(a) provides for the repayment of VAT on works which constitute a residential conversion to the extent that they consist in the conversion of a non-residential building, or a non-residential part of the building, into a building designed as a dwelling or a number of dwellings. Although paragraph (c) extends repayment to anything which would fall within paragraph (a) above if different parts of the building were treated as separate buildings, the tribunal said paragraph (a) should still be given its plain meaning. If the conversion of a non-residential part of a building was to be covered by paragraph (a), the result must be that the whole building became designed as a dwelling or a number of dwellings. That meant it included the creation of a new dwelling out of a residential part as well as a non-residential one.'

'So did Lady Blom-Cooper get a repayment of VAT?'

'Only on the work which converted a non-residential part of the public house. This is an unusual case because the tribunal disagreed with three previous decisions. Calam Vale Ltd (16869) concerned the onward sale of a part converted into two houses so this tribunal's comments are merely obiter. However, in Robert and Annabel Tilley (15097) and Graham Tobell (16646), tribunals disallowed section 35 claims on the basis that note (9) did apply, and in the absence of an extra dwelling.

'Customs have appealed, but with Sir Louis Blom-Cooper QC representing his wife, she must have some chance of success. Meanwhile, as usual, Customs have said nothing and local offices are likely to continue to refuse claims. The decision was only released in December, so we have a long wait in prospect, just as we have with Yarburgh Children's Trust [2001] STC 2007.

'Here, too, there could be VAT savings for people not in business, this time charities. The Yarburgh Children's Trust constructed a building, which it then let to another charity, a playgroup. The Divisional Court has confirmed that the letting was not a business activity and nor was that of the playgroup, when it made charges to the parents. Since the work was therefore the construction of a building for non-business use by a charity, it was zero rated.

'Michael Hitchen and Judith D'Aguilar wrote about the case in Taxation, 24 January at pages 373 to 374. They correctly warned of the need for any charity affected to ask for an immediate review because of the problem of a three-year cap on retrospective claims. However, unless Customs offer special treatment in this case, they will not repay the VAT themselves. They will tell people to get it back from the builder, who originally charged it and who is the person entitled to a reclaim.'

'That could be tricky, could it not?'

'Yes, especially as Customs may refuse to reconsider cases pending their appeal to the Court of Appeal. However, I think the judge and the tribunal have been over-influenced by the particular facts of this case. The rent to the playgroup may be non-business, just, but I fail to see how running a playgroup can be, merely because the management is voluntary and the charges are set just to cover costs. Such reasoning introduces a distortion of competition. It would not surprise me if this case went to the House of Lords.'