Conversion Inconsistencies

DAVE BROWN surveys the recent history of the application of VAT to the conversion of outbuildings.

VAT AND THE conversion of outbuildings has been the subject of a number of tribunal cases in recent years, with Customs and taxpayers winning and losing in equal measure. While the High Court found for the taxpayer in Commissioners of Customs and Excise v Arbib [1995] STC 490, subsequent decisions have not followed any pattern, making it difficult to extract any winning formula. In the last year or two, several cases have been to the tribunal, one of which, i.e. Commissioners of Customs and Excise v Zielinski Baker & Partners Ltd, has now been heard by the Court of Appeal, and the decision has just been released.

The law

The relevant legislation was put in place in 1984; until that time all manner of new building work was zero rated. The then Government decided that most work on existing buildings would thenceforth be liable to VAT. However, it recognised that those who live in listed buildings are constrained by the fact that they cannot change the building at will, and must abide by often onerous conditions (inside and out) when they carry out building works to the property. It decreed that some assistance was appropriate, and therefore zero rating remained for alterations to listed properties. In 1989, this relief was curtailed for commercial property owners, but it remained for domestic and other qualifying residential and certain charitable buildings.

Much time could be spent considering what constitutes an alteration (zero rated), and what constitutes a repair (standard rated). However, the focus of this article is to look at the conversion of an outbuilding where most of the work is without question alteration, and to consider whether the work is done to an outbuilding, or to the house alongside which it sits. In simple terms, is the outbuilding part of the house? It is important to remember that no relief exists unless the alteration work requires and obtains listed building consent.

The legal basis for the VAT relief on alterations to listed buildings is found in Item 2 of Group 6 of Schedule 8 to the VAT Act 1994 as follows:

'The supply, in the course of an approved alteration of a protected building, of any services other than the services of an architect, surveyor or any person acting as consultant or in a supervisory capacity.'

Note (1) to Group 6 further defines a protected building as:

' … a building which is designed to remain as or become a dwelling or number of dwellings... and which … is -

The Planning Act at (a)(i) above states, inter alia:

'(5) In this Act, "listed building" means a building which is for the time being included in a list compiled or approved by the Secretary of State under this section; and for the purposes of this Act -

Thus, zero rating would appear to apply to alterations to 'any structure' within the curtilage, as if it were part of the building. What could be simpler?

Chequered history

Customs, however, seem to take a blinkered view, namely that a house must only comprise one building, with the exception of a garage, and only then in certain carefully defined circumstances. They have, as a result, resisted numerous attempts to obtain zero rating, with the following results.

Barn used for leisure activities

In Nick Hopewell-Smith (16725), the taxpayer converted a barn into what was designed to be additional space for the family. It had all the attributes of a dwelling, but the focus was clearly on the leisure activities of the family play area, containing as it did, a small gymnasium. The planning permission dictated that it should be used 'in a manner ancillary to or incidental to' the residential use of the house. It did not, however, forbid separate disposal of the property and this gave the tribunal one good reason to allow zero rating. If that were not enough, the tribunal went into some detail about the definitions in the legislation and suggested that either:

• the outbuilding must be shown to be an integral part of the main house; or
• together, the two buildings must be shown to be integrated parts of a single dwelling.

The tribunal decided that the barn 'could fairly be described as a building designed to be a part of a dwelling consisting of self-contained living accommodation'.

Administration unit

In Hill Ash Developments (16747), a partnership carried out some work on redundant farm buildings, converting them into sheltered accommodation and an administration block, used in connection with the main house which was a nursing home. The statutory conditions were fulfilled, and the taxpayer zero rated the work. Customs were adamant that the work should not be zero rated, saying that the administration block could not reasonably be described as any type of qualifying residential accommodation.

At the tribunal, the taxpayer asserted that the buildings constituted a single block by virtue of their historic association and their current use. Interestingly, it referred the tribunal to Customs' internal guidance on the characteristics of a complex, as commonly applied by them in determining the scope of a waiver of exemption. The tribunal was also referred to the earlier case of N Forman Hardy (12776) where work to an outbuilding some 18 feet away from the main house was found to be zero rated; '... the school room was within the curtilage of and appurtenant to the hall so as to be part of the entity which together with the hall constituted a building designed to remain as a dwelling'. Customs' case was quite simple: the building was physically distinct from the main house, and could not be regarded as part of it. Furthermore, they suggested that one should focus on the individual building (shown on the plans as office space and reception), and the question had to be asked whether it was designed or used solely for residential purposes. In this case, it was not.

The tribunal was not persuaded by Customs' narrow view of the situation, nor by the taxpayer's assertion that the work could be zero rated under Group 5. However, it did find that the administration block was used so intimately with the barn and main house that the definition of 'use solely for a relevant residential purpose' was fulfilled. The chairman made the point that residential accommodation of this nature naturally has a number of ancillary matters without which the building or the institution could not properly function. In finding for the taxpayer, his decision was further fortified by the authority of Lewis v Lady Rook [1992] STC 171, which again confirmed that a dwelling could comprise more than one building.

An unsuccessful case

In D and L Clamp (16422), the appellants owned a house dating from the fifteenth century, with a barn. Works were carried out to create extra living accommodation, but Customs ruled that the work was standard rated. The appellants argued that the buildings, taken as a whole, comprised self-contained living accommodation and that as the outbuilding was treated as part of the listed building, the works should qualify for zero rating. The tribunal dismissed the case, holding that the fact that the main building was a domestic building did not mean that all the buildings within its curtilage were domestic buildings, even if covered by the listing.

The latest case

The Court of Appeal decision in Commissioners of Customs and Excise v Zielinski Baker & Partners Ltd was handed down in May 2002. It concerned an outbuilding which had been converted and extended by adding a swimming pool at one end, and creating a number of rooms for the use of the family within the existing part, including a study, snooker room, changing rooms, and lavatory. The contractor obtained the necessary permissions (including listed building consent) and zero rated the work. Customs disagreed with this decision, and issued an assessment, which was central to the appeal.

Tribunal

The appellant's case before the tribunal was, principally, that the outbuilding was brought within the definition of a protected building by Item 2 of Group 6 and Note 1(a), which includes the definition within the Planning (Listed Buildings and Conservation Areas) Act 1990. Furthermore, the past and current usage meant that the outbuilding was integral to the main house. Counsel for the appellant also argued that section 6(c), Interpretation Act 1978 should apply, that 'In any Act, unless contrary intention appears... words in the singular include the plural and words in the plural include the singular'. This was relevant in that Item 2 of Group 6 mentions '... alteration of a protected building...' in the singular.

In addition, certain cases relating to capital gains tax were also quoted, notably Batey v Wakefield [1981] STC 521 and Lewis v Lady Rook. In these, for the most part, the resulting decisions held that buildings even within 200 yards would qualify as being part of the main house.

Customs adopted a novel argument and suggested a staged approach to interpreting Group 6. Effectively, this meant that the first part of Note 1 would be regarded in isolation, i.e., is it a dwelling?, and if the answer was negative, there was no need to go further into the Planning Act definition. Their counsel was dismissive of the Interpretation Act comments and refuted strongly the notion that decisions involving other taxes could be used. Customs also depended on Whiteley (11292); that case rested heavily on whether a building could consist of more than one structure.

The Chairman dismissed Customs' staged approach, concentrating rather on the definition of a listed building within the Planning Act, and found that the two structures together formed 'a protected building'. She went on, however, to distinguish the Whiteley case, taking greater comfort from R G Morfee (13816). Furthermore, she made the point that it was acceptable, indeed obligatory, to cross-refer to the planning legislation because a protected building is defined by reference to the listing.

Round one went to the taxpayer.

High Court

In the High Court, the European background to the United Kingdom law was given some prominence, but it is not abundantly clear how this added anything to the decision, except to indicate that 'exceptions' in the legislation, such as zero rating, must be construed strictly. Counsel for Customs also traced the history of the United Kingdom legislation, in a bid to give further credence to his arguments. Counsel for the taxpayer repeated the arguments put forward at the tribunal, but to no avail. In summary, Mr Justice Etherton concluded that '… a protected building must be a single building which comprises one or more dwellings, each of which consists of self-contained living accommodation'.

Round two went to the Commissioners.

Appeal Court

In the Court of Appeal, matters appeared to be much simpler, and were condensed into one simple point: did Zielinski Baker alter the outbuilding or the main house? In simple terms, the outbuilding was altered, and Customs argued that this building would have to be a dwelling for zero rating to apply. However, in a decision of two to one in favour of the taxpayer, a holistic approach was taken, and it was found that the taxpayer was indeed altering the main house, in whose curtilage the outbuilding stood. Under the terms of The Planning (Listed Buildings and Conservation Areas) Act 1990, the outbuilding is deemed to be part of the house. So the alterations were carried out to a listed dwelling, and zero rating was appropriate.

Comment

The Court of Appeal's holistic approach is a victory for common sense as well as being the correct decision in law. For example, when buying a house, the purchaser buys it in its entirety. To suggest otherwise is totally absurd. In other parts of their guidance, and indeed the legislation, Customs suggest or, to be more precise, demand that separate buildings be treated 'as one', for instance, when establishing the scope of a waiver of exemption. Amazingly, Customs have petitioned the House of Lords for leave to appeal against the decision.

Those of us who keep a watchful eye on what Customs argue at tribunal will be aware that they have been known to use one argument one week and the opposite argument the week after, to get the answer that suits their particular purpose at the time. A little more consistency would be appreciated.

Dave Brown is director of VAT services for Bishop Fleming, Torquay.

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