VAT – DIY housebuilders scheme – Planning conditions – Appellant appealing against decision of First-tier Tribunal upholding refusal of VAT refund for building works on log cabin in garden – Whether appellant satisfying conditions for refund – Appeal allowed
The appellant applied for planning permission to construct a log cabin (Rose Cottage) as holiday and short-term business letting accommodation in the garden of his home, known as Jalna, Goodmanham in Yorkshire. He was subsequently granted permission on condition that it should be occupied for tourism purposes only and not on a permanent basis or as a person’s sole, or main residence. Before construction of Rose Cottage started, the appellant sold Jalna. After it was completed, the appellant and his family occupied the cottage as their principal residence.
The appellant claimed a refund of VAT of £31,833.11 incurred by him on the construction of Rose Cottage under section 35 of the Value Added Tax Act 1994 (the DIY Builders’ Scheme). The respondent commissioners refused the application on the basis that the construction for use as a permanent residence was contrary to the planning permission and thus unlawful. In addition, if Rose Cottage had been used as required by the planning permission, the building would have constructed in the course or furtherance of a business. Accordingly, the claim was refused.
The appellant appealed to the First-tier Tribunal (‘FTT’) which held that he had not satisfied the conditions in Note 2(c) and (d) to Group 5 of Schedule 8 to the 1994 Act. The planning conditions prohibiting the use of Rose Cottage as a principal residence came within Note 2(c). Further, during construction, the appellant had decided he wanted to live permanently in Rose Cottage and such use was in breach of the planning permission within Note 2(d): see [2016] UKFTT 374 (TC). The appellant appealed to the Upper Tribunal.
Held: The appeal was allowed.
(1) For the appellant to be entitled to a refund under section 35, at the time that the works were carried out and when the claim was made, Rose Cottage had to be a building designed as a dwelling. Its construction must have been lawful and not in the course or furtherance of a business. The phrase “building designed as a dwelling” had a special meaning for VAT purposes. A building would only qualify as such if it met the four conditions set out in Note (2) to Group 5 of Schedule 8. The FTT concluded that Rose Cottage did not satisfy Note (2)(c) and (d). However, it did not interpret those conditions correctly or make relevant findings of fact and its conclusions on those conditions could not stand.
(2) The condition in Note 2(c) was that the separate use or disposal of the dwelling was not prohibited by the term of any covenant, statutory planning consent or similar provision. The restrictions on use imposed by the planning consent did not restrict the appellant’s ability to dispose of Rose Cottage. By the time of its construction, it was already separate from his former home, which had been sold. There was no finding to link the prohibition on the occupation of Rose Cottage on a permanent basis or as a sole or main place of residence, with the appellant’s use of Jalna, in the grounds of which Rose Cottage was built. Without such a link, the two conditions in the planning consent did not prohibit the separate use or disposal of Rose Cottage. Either the FTT’s interpretation of Note (2)(c) was faulty in that it gave no weight to the word “separate” or there was some finding of fact establishing the necessary link that was missing from the Decision: Revenue and Customs Commissioners v Shields [2014] UKUT 453 TCC, [2014] PLSCS 338 followed.
(3) In the context of Note (2)(d), the key focus was on when the works were carried out. An amendment to a planning permission, such as the removal of conditions, after the works had been carried out came too late to affect the liability of supplies already made, at least if that amendment was not retrospective. Where a planning consent included conditions relating to the future use of the property, the question whether the works were carried out in accordance with the consent could only be determined by reference to the intended use during the period of the works. The same approach applied to determining whether carrying out the works was lawful within section 35(1)(b). A breach of a planning condition as to use that occurred after the construction had been completed would not prevent a person making a claim under section 35 provided that, at the time of the construction works, there was no intention to breach the condition. The focus of Note (2)(d) was the construction of the building not its subsequent use. The Upper Tribunal was not able to make the necessary findings of fact to determine whether the condition in Note (2)(d) was satisfied.
(4) Section 35(1)(b) provided that a person would not be entitled to a refund of VAT where the construction was in the course or furtherance of a business. The term “business” had a wide meaning for those purposes, including any trade, profession or vocation. It also had the same meaning for VAT purposes as “economic activity” in article 9 of the Principal VAT Directive, which included the exploitation of intangible property for the purposes of obtaining income therefrom on a continuing basis, whatever the purpose or results of that activity. The construction of a building with the intention of letting it could be an economic activity and thus construction “in the course or furtherance of a business” for the purposes of section 35(1)(b): see Riverside Housing Association v Revenue and Customs Commissioners [2006] STC 2072. In the present case, the FTT had misunderstood the condition in section 35(1)(b). There was no finding of fact whether, at the time Rose Cottage was being constructed and the VAT was being incurred, the appellant was carrying on a business. The FTT’s decision had to be set aside and the case remitted to a differently constituted FTT for reconsideration.
The appellant appeared in person; Joshua Shields (instructed by the General Counsel and Solicitor to HM Revenue and Customs) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read transcript: Akester v Commissioners of HM Revenue and Customs
