An Englishman's Home is his Kingscastle

DAVE JORDAN looks at the meaning of 'non-residential' in the light of recent case law.

FOR VAT PURPOSES, the meaning of the phrase 'non-residential' is of considerable importance in obtaining zero rating when converting buildings into residential use under item 1(b) of Group 5 of Schedule 8 to the VAT Act 1994. In particular, the treatment of public house conversions has been the subject of a number of VAT tribunal cases over the past couple of years. One might consider that it should be fairly easy to distinguish a non-residential property from a residential one, but then we are looking at VAT where such matters are rarely easy. The legislation at Note 7 to Group 5 of Schedule 8 sets out the VAT meaning of non-residential as follows:

'For the purposes of item 1(b), and for the purposes of these Notes so far as having effect for the purposes of item 1(b), a building or part of a building is 'non-residential' if -

Prior to 1 August 2001, instead of ten years at point (b) the building was required not to have been used as a dwelling since 1 April 1973. The zero rating for conversions actually came into force in United Kingdom legislation from 1 March 1995, although it had been available by concession since the previous July, so the legislation is still relatively new.

What is a dwelling?

Case law on the subject has reached a stage where it is generally considered that the meaning of 'dwelling' conferred by Note 2 to the legislation (having self-contained accommodation, etc.) has no bearing on the definition of the building prior to works being carried out, but that the completed works must comply with Note 2 in order for zero rating to apply to them, and that Note 7 stands alone determining the type of property prior to the works being carried out which will qualify, upon conversion to a 'Note 2 type dwelling', for zero rating. The words 'neither designed, nor adapted, … for use as a dwelling' therefore have their ordinary English meaning.

In Calam Vale (16869), the tribunal followed this reasoning even though it felt that it had been forced by an absurd law into an absurd decision which flew in the face of common sense, equity and the social purpose which underlies zero rating.

A place to live

In one of the more recent decisions, Amicus Group Ltd (17693), Customs relied on a Housing Act case decided last year by the House of Lords, Uratemp Ventures Ltd [2001] UKHL 43, which decided that a dwelling is simply 'a place where one lives'. In determining that the bed-sits, which were the subject of the conversion into flats, constituted dwellings, the tribunal interpreted 'neither designed nor adapted for use as a dwelling or number of dwellings' as meaning 'neither designed for use as a dwelling or number of dwellings, nor adapted for use as a dwelling or number of dwellings' (emphasis added). As the bed-sits had been 'a place where one lives', they were designed for use or adapted for use as dwellings, and the tribunal ruled against the taxpayer. Customs see this case, and the use of the Uratemp Ventures Ltd interpretation of dwelling, as something of a landmark, and we will undoubtedly see this used in future cases also.

Kingscastle Ltd

This decision was released on 19 June 2002, a mere seven days prior to the hearing date in the Kingscastle Ltd case, which concerned the conversion of the upper two floors of a 400-year old coaching inn, the ground floor and basement retaining commercial use as a bar, etc., and Customs relied on the Amicus decision at the hearing. To be fair to them, Customs were stipulating that only one of the three flats which resulted from the project failed the test for zero rating. In looking at the meaning of 'neither designed nor adapted for use as a dwelling or number of dwellings', the appellant argued that previous interpretations by the tribunals (including Amicus) had been in error. The correct interpretation of this phrase was 'neither designed as a dwelling, nor adapted for use as a dwelling' (note the lack of the words 'for use' in the phrase 'designed as a dwelling'). If this was correct, then the Note 2 definition of 'designed as a dwelling' did come into play, so that if the building had been designed as a dwelling under the Note 2 definition, or 'adapted for use as a dwelling', then it would fail the Note 7(a) test. Comfort for this interpretation was drawn from Note 10(b)(i) of the legislation which uses similar wording: 'neither so designed nor intended for such use', words which refer back to Note 10(a): 'designed as a dwelling … or is intended for use solely for a relevant residential purpose …'. This refers to the Note 2 definition, the 'for use' part of the phrase applying only to the 'intended' and not to the 'designed as' part of the phrase, unlike the interpretation given by the tribunal in Amicus Group Ltd and prior decisions.

Furthermore, Note 7(b) allows the zero rating to apply even in cases where the building has been 'designed as or adapted for use as a dwelling', provided that it has not been used as a dwelling for the past ten years. The legislator could have simply dispensed with 7(a) if the Calam Vale definition of 'non-residential' is correct, and allowed zero rating for any building which had not been used as a dwelling for the last ten years, whereas with the Kingscastle Ltd definition above, the legislation makes perfect sense.

Was the building adapted?

Once the 'designed as dwelling' matter is passed, it is then necessary to look at whether the building was 'adapted for use as a dwelling', and in Kingscastle Ltd the appellant relied on the definition in Derby YMCA (16914), which interpreted this as requiring a physical adaptation to be made to the building. Although there had been some works carried out to the building, none of these could be said to be adapting the building for use as a dwelling.

It was accepted in Kingscastle Ltd that the Note 7(b) test was not passed, as landlords and staff had lived on the premises, but there was no requirement for this part to be met, as having been originally designed as a coaching inn with rooms to let, it was neither designed as a dwelling when it was originally constructed, nor had it been physically adapted for use as a dwelling since.

Once the Note 7 issues are dealt with, there is the further condition in Note 9 to overcome. Note 9 states that if there is a conversion of a 'non-residential' building which already contains a 'residential' part, then it does not qualify for zero rating unless the result of the works is to create an additional dwelling or dwellings. Again we are left with looking at the ordinary English meaning of the words used.

It should be noted that the legislator does not say that it will not be zero rated to the extent that a dwelling formed by the conversion works, contains part of any pre-existing residential accommodation (as decided in previous tribunal decisions). It effectively states that provided that an additional dwelling is formed, the works qualify for zero rating. There is no restriction of the zero rating to those parts which do not contain a previously 'residential' element.

'Residential' does not mean the same as 'designed or adapted for use as a dwelling', and neither should it be construed to do so, because otherwise the whole of Note 7 would be a nonsense. The legislator construed that one can have a building which contains a residential part, but has not been designed or adapted for use as a dwelling or for a relevant residential purpose (such as a coaching inn which contains staff accommodation) in the same way that one can have a building which is 'designed as a dwelling' which contains parts which are not for 'residential' use.

Wide implications

The tribunal's decision in Kingscastle Ltd was released on 30 July 2002, and went against the appellant. The tax involved is probably insufficient to warrant taking the matter to the High Court, so as far as Kingscastle Ltd is concerned matters will probably rest there. However, the decision opens up a whole host of other opportunities, assuming that the tribunal's decision is correct. For example, the Uratemp Ventures case decided that accommodation in an hotel used as a person's residence was a 'dwelling' and, if this is correct, then long term hotel accommodation where the person has no other residence, should not be at a reduced value, but exempt from VAT. Also, as the legislation disapplies the option to tax for 'buildings intended for use as a dwelling', do squatters living in a non-residential building turn the building into a dwelling and disapply the option to tax?

Dave Jordan is an independent VAT specialist trading as Jordans VAT Consultancy, Lilac Cottage, Fakenham Magna, Suffolk, IP4 2QY, and can be contacted on 01359 268889. His new book 'Understanding VAT on Property', published by Law Society publishing, is available from the Society's Business Centre on 020 7242 1222.

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