Taxpayer carrying out works to building – Office block constructed using concrete frame of old factory – Whether supplies zero-rated – Whether “conversion, reconstruction, alteration or enlargement of an existing building” – Customs finding supplies were standard-rated – VAT tribunal finding supplies were zero-rated – High Court dismissing Customs’ appeal – Court of Appeal dismissing appeal
A company acquired the lease of a property described as a light industrial building, at 44-52 Banner Street, London EC1. Planning permission was obtained for change of use to office use and extensive plans for its redevelopment were drawn up. Work commenced involving demolition which reduced the existing building to an incomplete skeleton consisting merely of reinforced concrete columns and beams, concrete floor slabs, party walls and foundations. The completed building, which was substantially different in appearance after the work was finished, consisted of a modern office block with an additional storey. The company claimed in its accounts that supplies made in the course of carrying out the works to the property fell within item 2, Group 8, Schedule 5 of the Value Added Tax Act 1983 and were accordingly zero-rated. Customs found that note (1A) which qualified item 2 of the 1983 applied because the works had been “conversion, reconstruction, alteration or enlargement of [an] existing building” and therefore the supplies were standard-rated.
The taxpayer appealed and the VAT tribunal found that the appropriate test to apply was whether the works were so extensive that the property was essentially a new building. The tribunal held that it was a new building and accordingly the works were not within the scope of note (1A). Customs appealed and contended that the sole question was whether there had been a conversion, reconstruction, alteration or enlargement of a building which had existed before any work had been done. It was argued that the answer was yes unless the building had been demolished to ground level. The High Court dismissed the appeal and held that note (1A) applied if a reasonable person would conclude that the building which existed before the works still retained its identity on completion. Applying that test, the tribunal’s decision could not be faulted either on the basis of its approach to the construction of note (1A) or as being unreasonable. Customs appealed.
Held The appeal was dismissed.
1. The words”‘existing building” in note (1A) supported the conclusion that supplies would only be within the scope of Note (1A) if the property after its conversion, reconstruction, alteration or enlargement, as a matter of commonsense, described as an existing building. That was a question of fact, degree and also of impression. At some stage it had to be possible to say first, that a new building had come into existence, and second, that the work being done could not sensibly be described as a conversion, reconstruction, alteration or enlargement. That was the approach taken by the tribunal and the correct approach in law.
2. Ward LJ dissenting: It had to be borne in mind that a supplier should be in a position to judge easily whether the supply was zero-rated or standard-rated. That would be achieved if the appropriate test to see whether note (1A) applied was whether there was any building in existence at the beginning of the process, not whether a new building would be the end product of the supply. The introduction of the concept of newness was not helpful unless used as the antithesis to conversion, alteration or enlargement of the existing building. Accordingly item 2 only applied without the qualifying note (1A) where there had been no building previously in existence.
3. The Finance Act 1989 abolished zero rating in relation to the construction of buildings other than those designed as dwellings. In relation to dwellings, the VAT Act 1994 provided that a building only ceased to be an existing building when demolished completely to ground level.
Nigel Pleming QC (instructed by the solicitor to Customs & Excise) appeared for the Crown; Roderick Cordara QC and Perdita Cargill-Thompson (instructed by HH Mainprice) appeared for the taxpayer.
