Flats — Former school — Residential conversion — Claim for VAT refund on construction works — Tribunal finding building as a whole non-residential albeit with residential elements — Whether tribunal adopting wrong approach in law — Section 35(1D) of Value Added Tax Act 1994 — Note (9) of schedule 8 to the 1994 Act — Appeal dismissed
The respondent had converted a former school into a new dwelling that included three flats for staff. On completion, he sought to claim back the VAT that had been incurred on the building works, on the ground that a residential conversion was zero-rated for VAT purposes. Section 35(1D) of the Value Added Tax Act 1994 defined a residential conversion as works consisting of “the conversion of a non-residential building, or a non-residential part of a building” into a building designed as a dwelling or dwellings, or intended to be used solely for a residential purpose. The school had previously contained bedsits for the school staff, a flat for the headmaster and dormitories for boarding pupils.
The appellant commissioners took the view that no tax was refundable, but the VAT and Duties Tribunal overturned that decision on appeal. The tribunal found that certain elements of the building had been residential but decided that the building, considered in its entirety, had been non-residential given that the residential accommodation had been ancillary to the building’s purpose as a school. The tribunal held that the respondent’s works were to be treated as a conversion of the whole building rather than of a part, so that note (9) in schedule 8 to the 1994 Act did not apply. Note (9) provides that the conversion of a “non-residential part of a building which already contains a residential part” would not be zero-rated unless “that conversion” resulted in the creation of additional dwellings. The High Court dismissed the commissioners’ appeal: Commissioners of Customs & Excise v Jacobs [2004] EWHC 2358 (Ch); [2004] PLSCS 239.
The commissioners appealed, contending that the words “that conversion…” should be construed as referring to the conversion of a non-residential part of the building, rather than the entire building, and that the additional dwelling had to be created entirely out of the non-residential part.
Held: The appeal was dismissed.
Note (9) had to be considered as if it were part of section 35 as a whole and should be construed so that the result of the conversion was to create an additional dwelling in the building. The number of dwellings in the building before conversion and again afterwards were counted and, if there were more on the recount, note (9) was satisfied and the respondent was entitled to his refund.
The word “additional” was crucial to that interpretation. It was impossible to have an “additional” dwelling by reference to the non-residential part because that part would not be non-residential if it already contained a dwelling. The existing dwelling therefore had to be found in the building as a whole.
Note (9) had limited application and was clearly aimed at the conversion of a building designed as a dwelling or a number of dwellings within section 35(1D)(a) since both were concerned with the conversion of a non-residential part into something that included dwellings.
Peter Mantle (instructed by the legal department of Revenue & Customs) appeared for the appellants; Richard Barlow (instructed by Cooper-Parry LLP, of Derby) appeared for the respondent.
Eileen O’Grady, barrister
