VAT — Zero rating — Residential conversion — Value Added Tax Act 1994 — Construction of further flats in roof spaces of blocks of flats — Application to register for VAT for zero-rated taxable supplies — Item 1(b) in Group 5 of Schedule 8 to 1994 Act — Revenue commissioners refusing registration on ground that works exempt supplies not zero-rated — Whether roof space a non-residential part of building such that conversion into dwellings qualifying for zero rating
The appellant owned the freehold of five blocks of flats with pitched roofs. The roof space was unused save that cables passed through to connect to roof-mounted television aerials. The appellant planned to construct new flats in the roof spaces and applied to register for VAT on the basis that it was intending to make zero-rated taxable supplies by “converting a… non-residential part of a building into a building designed as a… number of dwellings” within item 1(b) of Group 5 in Schedule 8 to the Value Added Tax Act 1994. Refusing the application, the respondent commissioners found that the works would not fall within item 1(b) since the roof space was integral to the residential part of the building and was not therefore a “non-residential part of the building”. They concluded that the appellant’s supplies were entirely exempt rather than zero-rated. They considered that the appellant was therefore making entirely exempt supplies, not zero-rated supplies. The appellant appealed. It argued that the roof space was non-residential because it was not designed or adapted for living in and none of the lessees of the flats had rights of access to it.
Decision: The appeal was allowed. The roof spaces were not residential since they had never been habitable and no one apart from the appellant could access them; they were not designed or adapted for use as dwellings and had never been intended or used for residential occupation. They were not dwellings or parts of dwellings. It was not part of the statutory test to ask whether the roof spaces were integral to the residential part of the building. In any event, the roof spaces were not integral because they did not contain utilities that were necessary for the residents to be able to live in the flats below and the residents had no access to them for storage or any other purpose. The roof space of each building was a “non-residential part of a building” and the result of the conversion would be to create additional dwellings. The intended supplies of the appellant fell within item 1(b) and would be zero-rated taxable supplies for which the appellant should be registered for VAT.
The following cases are referred to in this report.
Amicus Group Ltd v Customs & Excise Commissioners [2003] STI 186, VAT Trib
Hicking v Customs & Excise Commissioners [2001] STI 1003, VAT Trib
Jacobs v Customs & Excise Commissioners; sub nom Customs & Excise Commissioners v Jacobs; Revenue & Customs Commissioners v Jacobs [2005] EWCA Civ 930; [2005] STC 1518
Lightspace Partnership Ltd v Customs & Revenue Commissioners MAN/01/185 unreported 2001, VAT Trib
This was an appeal by the appellant, Merlewood Estates Ltd, from a decision of the respondents, the Commissioners for Revenue & Customs, refusing to register the appellant for VAT in respect of a residential conversion of roof space.
Timothy Brown (instructed by Constable VAT Consultancy LLP) appeared for the appellant; Alexander Ruck Keene (instructed by the legal department of HM Revenue & Customs) represented the respondents.
Giving the tribunal’s decision, Dr Nuala Rice said:
Appeal
[1] Merlewood Estates Ltd (the appellant) appeals against a decision of the Commissioners for HM Revenue & Customs (HMRC) dated 8 November 2007. The decision was to refuse the appellant’s application to register for value added tax (VAT). HMRC made that decision because they took the view that the appellant was making and intending to make entirely exempt supplies. The appellant appealed because it considered that it was intending to make taxable (zero-rated) supplies.
[2] It was not disputed that the appellant intended to construct new flats in the roof spaces of five blocks of flats and then to grant a major interest of each new flat. The appellant argued that it was “converting… a non-residential part of a building into a building designed as… a number of dwellings” within the meaning of item 1(b) of Group 5 of Schedule 8 to the Value Added Tax Act 1994 (the 1994 Act) and so the supplies that it intended to make were not exempt but taxable at the zero rate.
Legislation
[3] Section 30(2) of the 1994 Act provides that a supply of goods or services is zero-rated if the goods or services are of a description specified in Schedule 8. Group 5 of Schedule 8 specifies certain supplies relating to the construction of buildings and item 1 specifies:
1. The first grant by a person …
(b) converting a… non-residential part of a building into a building designed as a dwelling or number of dwellings…
of a major interest in, or in any part of, the building, dwelling or its site.
[4] Notes (7), (8) and (9) to Group 5 clarify the extent of item 1(b) and the relevant parts provide:
(7) For the purposes of item 1(b)… a… part of a building is “non-residential” if
(a) it is neither designed, nor adapted, for use
(i) as a dwelling or number of dwellings, or….
(b) it is designed, or adapted, for such use but
(i) it was constructed more than 10 years before the grant of the major interest; |page:100|
and
(ii) no part of it has, in the period of 10 years immediately preceding the grant, been used as a dwelling… .
…
(8) References to… a non-residential part of a building do not include a reference to a garage occupied together with a dwelling.
(9) The conversion, … of a non-residential part of a building which already contains a residential part is not included within item 1(b)… unless the result of that conversion is to create an additional dwelling or dwellings.
Issue
[5] The appellant accepted that if it made wholly exempt supplies, HMRC’s decision to refuse to register it for VAT was correct having regard to the provisions of Schedule 1 to the 1994 Act. However, the appellant argued that it intended to make supplies that were not exempt but taxable (zero-rated) within the meaning of item 1(b) of Group 5 of Schedule 8 because the roof space was a non-residential part of each building that was to be converted into a number of new dwellings. HMRC argued that the supplies made by the appellant did not come within the meaning of item 1(b) because the roof space of an existing building was integral to the residential part of the building and was therefore not “a non-residential part of a building”.
[6] Thus, the issue for determination in the appeal was whether the roof space of each of the blocks of flats owned by the appellant was “a non-residential part of the building” (as argued by the appellant) or was not a non-residential part of the building because it was integral to the residential part of the building (as argued by HMRC).
Facts
[7] A bundle of documents was produced from which we find the following facts.
[8] The appellant trades as a property developer.
[9] In 2006, the appellant owned the freehold of five buildings known as Beechwood Court, West Street Lane, Carshalton, Surrey. Each of the five buildings was a block of flats. The occupants of the flats owned long leases and paid service charges to the appellant. The supplies made by the appellant for which it was paid the service charges were exempt.
Blocks 1 to 4
[10] Blocks 1 to 4 were built in the 1930s as blocks of flats with flat concrete roofs. In the 1970s, alterations were carried out to these four blocks and each roof was altered to become a pitched roof for aesthetic rather than structural reasons. Each block is a three-storey building, with two separate staircases serving six flats each. There are 12 flats in each block.
[11] In 2006, the roof space of each of these four blocks contained no water tanks, electricity or insulation and the only contents of the space were cables that were passed through for connection to roof-mounted television aerials.
Block 5
[12] Block 5 was built in the 1950s and was constructed with a pitched roof. It is a three-storey building, with three separate staircases each serving six flats. There are 18 flats in the block.
[13] In 2006, the roof space of block 5 contained cables for connecting to television aerials. It also contained water tanks that had in the past been used to provide water to the flats. However, these tanks had ceased to be used at some undetermined time in the past. They had not been removed because there was no advantage in removing them.
Existing roof space
[14] Access to the roof space in each block was obtained by means of the communal staircases. The appellant, as freeholder, owned the roof space and none of the long leaseholders of the flats had any rights of access to, or occupation or use of, the roof space. The appellant was responsible for the maintenance of the roof space.
New flats
[15] The appellant proposed to construct new flats in the existing roof space of the five blocks. The proposal was to convert the existing roof space of each of blocks 1, 2, 3 and 4 into two flats and the existing roof space of block 5 into four flats, making a total of 12 new flats in the five blocks. After the conversion, the appellant intended to grant a major interest (a lease in excess of 21 years) of each new flat.
[16] In April 2006, planning permission was obtained for “the provision of dormer windows within the existing roof space of five buildings to provide twelve new self-contained flats”.
Arguments
[17] Mr Timothy Brown, for the appellant, argued that the roof spaces were non-residential parts of the buildings because none of the leaseholders had the right of access to them. He mainly relied upon note (7)(a) and argued that the roof space had not been designed or adapted for use as a dwelling and had not been lived in or regarded as home by any of the long leaseholders. Alternatively, he relied upon the provisions of note (7)(b) and argued that the roof space had been constructed more than 10 years before the commencement of the works of conversion and no part of it had been used in those 10 years as a dwelling. Finally, he argued that the purpose of the legislation was to zero-rate the construction of new dwellings and his interpretation was consistent with that purpose. He also referred to note (8), and argued that the legislation had made specific provision for garages to be treated as residential and that the lack of a similar provision concerning roof space pointed to the conclusion that roof space was non-residential.
[18] Mr Brown cited Amicus Group Ltd v Customs & Excise Commissioners VAT (2002) decision no 17693*, in [2], [5] and [13], for the principles that the purpose of the legislation is to zero-rate the creation of new homes where none existed before; that note (7) looks at how the building had been used in the past; and that “dwelling” is not a term of art but a familiar word that means the place in which one lives, regarding and treating it as home. He cited Lightspace Partnership Ltd v Customs & Excise Commissioners (2001) VAT decision no 17393, in [27] and [40], for the principle that, when considering note (7)(a), the question was whether the non-residential part had been lived in before the conversion. He cited Customs & Excise Commissioners v Jacobs [2005] EWCA Civ 930†, in [40] and [41], for the principle that zero-rating was authorised so long as it was for clearly defined social reasons and for the benefit of the final consumer, and the creation of an additional dwelling or dwellings met the purpose of note (9) of Schedule 8.
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* Editor’s note: Reported at [2003] STI 186
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† Editor’s note: Reported at [2005] STC 1518
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[19] For HMRC, Mr Alexander Ruck Keene argued that the supplies made by the appellant did not come within the meaning of item 1(b) because the roof space of an existing building was integral to the residential part of the building and was therefore not “a non-residential part of a building”. Normal buildings had roofs and, if the roofs were pitched, there was a void. It was artificial to separate that void from the rest of the building and he argued that the void was residential although it was not lived in. He accepted that he was introducing a new test, but argued that this point had never before been litigated. He went on to argue that note (8) supported his case because it made it clear that a garage occupied together with a dwelling was residential, and there was no reason why the same principle should not apply to a roof space.
[20] Mr Ruck Keene accepted the principle in Jacobs that the purpose of the legislation was to encourage the construction of new homes where none had previously existed. However, he argued that Jacobs concerned the interpretation of note (9), which was not relevant in this appeal. In his view, it would be arbitrary to allow the appellant’s appeal and the integral test that he proposed would give a fairer result for taxpayers overall. He distinguished the decisions in Amicus and Lightspace, where the questions were whether bedrooms and bed-sitting rooms were residential. He cited Hicking v Customs & Excise Commissioners (2001) VAT decision no 17117‡, in [9], [10], [14], [15] and [16] for the principles that a dwelling-house was capable of including a house that was constructed or adapted for dwelling in |page:101| although it may at the relevant time be vacant, or even not fit and ready for occupation, and that it was incorrect to regard a building as being something other than a dwelling just because there was some limitation as to the occupation of the building. Mr Ruck Keene argued that, by analogy, a part of a building could be a dwelling even if it was not lived in.
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‡ Editor’s note: Reported at [2001] STI 1003
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Reasons for decision
[21] In considering the arguments of the parties, we begin with the relevant facts that are that new dwellings were intended to be constructed in the existing roof space of buildings that were occupied as blocks of flats. Each block had three stories and contained either 12 or 18 existing flats. Before the conversion, the roof spaces were not owned or occupied by the residents of the flats, who had no access to them. The roof spaces were effectively empty. This is not a case in which the roof space of a building used as by single household and occupied with the rest of the house was converted.
[22] We then have to ask whether the roof space in each of the buildings the subject of this appeal was “a non-residential part of a building” within the meaning of item 1(b). Before referring to any of the notes to item 1(b), our preliminary view is that they were. They were empty; nobody lived or had ever lived in them; nobody regarded them or treated them as home; they were not and never had been habitable; the only person with access to them was the appellant; and so, in our view, they could not be regarded as residential. Mr Ruck Keene argued that they were integral to the residential part of the building, but that is not part of the statutory test. However, even if it were, we are of the view that, on the facts of this appeal, the roof spaces were not integral to the residential parts of the buildings. The roof spaces contained no utilities necessary for the residents to be able to dwell in the flats below; the residents could not use the spaces for storage or for any other reason; and the residents did not have access to the roof spaces. Item 1(b) refers to “a non-residential part of a building”, which assumes that a part of a residential building could be non-residential. Some meaning has to be given to the words “non-residential part”.
[23] With those views in mind, we turn to consider the notes to group 5, and we begin with note (7)(a). This provides that a part of a building is “non-residential” if it is neither designed nor adapted for use as a dwelling or number of dwellings. The roof spaces meet this test because, before conversion, they were neither designed nor adapted for use as a dwelling.
[24] Note (7)(b) provides that a part of a building is non-residential if it is designed or adapted for use as a dwelling but was constructed more than 10 years before the grant of the major interest and no part of it has, in the period of 10 years immediately preceding the grant, been used as a dwelling. In our view, note 7(b) is not relevant to the facts of this appeal because the roof spaces were not designed or adapted for use as a dwelling. However, even if they were, the roof spaces meet the requirements of note 7(b) because they were constructed more than 10 years ago and have never been used as dwellings.
[25] We have not relied upon note (8) because it applies only to a garage occupied together with a dwelling, and not to a roof space. The lack of any reference to a roof space is not conclusive. It could support the view that a roof space has to be treated differently from a garage (that is, that whereas a garage is to be treated as residential, the roof space should be treated as non-residential). On the other hand, it could support the view that the legislation assumes the roof space to be residential. We prefer to limit ourselves to applying the words of the legislation to the facts of this appeal where it is relevant that the roof spaces were not owned or occupied by any of the residents of the flats and were not occupied as part of any dwelling. From that, we conclude that they were non-residential parts of the buildings.
[26] Note (9) provides that the conversion of a non-residential part of a building that already contains a residential part is not included within item 1(b) unless the result of that conversion is to create an additional dwelling or dwellings. Note (9) was considered in Jacobs, which concerned a residential school that contained non-residential areas as well as accommodation for the boys and a maisonette for the headmaster. The Court of Appeal held that note (9) applied to the school and that the additional dwellings did not have to be created from the wholly non-residential parts of the building. Note (9) confirms our view that, in this appeal, the conversion of the roof spaces is included within item 1(b) because the result of the conversion will be to create additional dwellings. It is also relevant that note (9) assumes that there can be residential buildings with non-residential parts.
[27] We have considered the tribunal decision in Hicking, which was cited by Mr Ruck Keene. We accept that a dwelling-house is capable of including a house that was constructed or adapted for dwelling in even though it may, at the relevant time, be vacant or even not fit and ready for occupation. We also accept that it may be incorrect to regard a building as being something other than a dwelling just because there is some limitation as to the occupation of the building. However, those principles do not persuade us that the roof spaces were residential parts of the blocks of flats. They were not constructed or adapted for dwelling in and had never been intended or used for residential occupation. Before conversion, they were not dwellings or parts of dwellings.
Decision
[28] Our decision on the issue for determination in the appeal is that the roof space of each of the blocks of flats owned by the appellant was “a non-residential part of the building” within the meaning of item 1(b) of group 5. That means that the intended supplies of the appellant will be zero-rated taxable supplies and that the appellant should be registered for VAT.
Costs
[29] We direct that the respondents shall pay the reasonable costs of the appellant of and incidental to and consequent upon this appeal, the amount of such costs to be agreed between the parties. Failing agreement, either party may apply to the tribunal for a direction under either r 29(1)(a) or (b) no later than three months after the date of the release of this decision.
Appeal allowed.