Alan Buckett
In the previous article (July 27 1985 p 331) Alan Buckett explained the importance of the Tribunal decision in the case of Great Shelford Free Church v The Commissioners of Customs & Excise. The author indicated that he would report the eventual outcome of the appeal to the High Court: this article also considers the latest practical implications.
As explained in the previous article, following a change in the law in 1984, the Tribunal was asked to decide on a dispute between the Great Shelford Free Church and Customs & Excise as to whether a church hall was a new building, in which case the work would be zero rated, or an enlargement of an existing one, which meant that the work would be standard rated.
Upholding the appeal, the Tribunal had decided that the new hall, despite being tied into the church and having access through the church into the new hall, was not an enlargement of the existing building, but would be regarded as the construction of a new building eligible for zero rating. On July 10 1985, following the decision, Customs announced their intention to appeal to the High Court.
The case did not come before the High Court until April of this year, and notwithstanding Customs’ confidence that the Tribunal decision would be reversed, the High Court dismissed Customs’ appeal and also refused leave to appeal to the Court of Appeal.
The basis of Customs’ appeal was the assertion that the Tribunal had erred in law in taking insufficient notice of a previous case involving the do-it-yourself housebuilders scheme (Commissioners v Perry (1983) STC 383).
The Commissioners contended that in the present case there was more linkage between the two buildings than there was in Perry and the planning permission was for extensions.
The work having been completed there were common services, a common entrance and the whole was being used for a common purpose, so on the facts it was maintained that the arguments in favour of finding that the new hall was an enlargement of an existing building were stronger than in Perry.
Despite such argument, the judge found that the Tribunal had in fact asked itself the correct question: “Was this or was this not an enlargement of the existing building?”
In his decision, Mr Justice Kennedy observed: “Nothing said by Mr Justice Woolf in the Perry case made it necessary for the Tribunal to apply any special meaning to its own question, or to the individual words of which that question is composed, and so this appeal cannot succeed unless Counsel for the Crown can show on the facts that no reasonable Tribunal, properly directing itself, could have failed to find the new building was an enlargement of an existing building. That seems to me to be a hopeless task.”
The judge agreed that there were many facts that supported the view that the building was an enlargement but, on the other hand, there were also factors that pointed the other way.
He therefore concluded “Clearly a balance had to be struck. This is, as the Tribunal said earlier, a borderline case, and in the end the Tribunal came down, as it was entitled to, on the taxpayers side of the border. That does not surprise me. If in 1984 a bystander, seeing the work in progress next to the church, had said to a member of the building committee ‘I see you are enlarging’, the reply might well have been ‘no we are not, we are building a hall and some classrooms next to the church’. So, in my judgment, there was evidence to support the conclusion reached by the Tribunal, and this appeal must fail.”
On hearing the judge’s decision Customs — not noted for being good losers — immediately attempted to apply for leave to appeal to the Court of Appeal, but were refused.
An excellent result, readers might think — except that a church undertaking similar work now will have to pay VAT at the standard rate. How, in the light of the High Court ruling, can this be? Simple: Customs & Excise have moved the goalposts again and obtained a change in the law by persuading the Treasury to issue an Order under Sections 14(10), 16(4) and 48(6) of the VAT Act 1983.
Under the Order, Customs wanted to add a new note 1A to Group 8 (Construction of Buildings, etc) of Schedule 5 to the VAT Act 1983, which had previously excluded zero rating only for conversion, reconstruction, alteration or enlargement of an existing building.
In addition to this, the new note would also deny zero rating to “any extension or annexation to an existing building which provides for internal access to the existing building, or of which the separate use, letting or disposal is prevented by the terms of any covenant, statutory planning consent or similar permission”.
To justify this action, Customs stated in a press notice issued on May 5 1987: “The main amendment now to be made by this Order clarifies the borderline between zero-rated and standard-rated work following a recent High Court judgment. That appeal was taken in the hope of securing guidance from the court on what constitutes ‘an enlargement of an existing building’. The Court, however, took the view that the matter is largely one of impressions, with questions such as access to and integration with the existing building being largely discounted. The law is, therefore, being amended to provide a greater degree of certainty for builders and their customers. In future any extension or annexation to an existing building will be standard rated if it provides for internal access to the existing building.”
Giving such wording, one wonders why Customs bothered to go to the High Court if they knew they would change the law were they to lose. The continued use of Treasury Orders to make changes to VAT law, rather than via a legislative route which would encourage more debate in Parliament (eg a Finance Bill) must also be questioned once again.
As to the Order itself, a word or two of explanation is required. The Order first appeared on April 29, was laid before the House of Commons for positive approval on April 30 and was to come into force on May 21 1987. However, the not insignificant matter of the General Election and the dissolution of Parliament meant that the Order was not approved within the specified time. Although certain parties initially thought that zero rating was still possible until the Treasury could lay a new order, they were to be disappointed owing to the provisions which apply for such periods of dissolution. As explained in the note to The Value Added Tax (Construction of Buildings) (No 2) Order 1987, SI 1987 No 1072, which appeared on June 22 and came into force, following positive approval, on June 25 1987, the amendments described came into force on May 21 1987 and the No 2 Order continued these in force on the expiry of the unapproved first Order.
Readers may be forgiven for taking the view that this represents an element of retrospective legislation, but should be clear that the law has now been changed with effect from May 21 1987.
So what about the practicalities of the current legislation? First, projects similar to the Great Shelford case which were completed or paid for prior to May 21 were eligible for zero rating.
From May 21 in respect of the planning permission aspect of the changes, Customs advises that this provision was introduced mainly to deal with “granny annexes” in the domestic situation, where small-scale additional accommodation, typically for use by elderly relatives and having no internal access, is built on to an existing house. In most cases, planning consent is only granted on the condition that the addition remains part of the original house and therefore it is not appropriate for zero rating to be granted.
Although there may be an occasional application of covenant and planning conditions in the non-domestic field, Customs advise that they do not see the construction of new structures within the grounds of hospitals, schools, etc as being denied zero rating even if they are referred to as extensions or additions, if, in all other respects, what is being done amounts to the construction of an entirely new building.
In effect, Customs’ view is that if the work is the construction of a new building which is unaffected by access or disposal considerations, the work is eligible for zero rating. If the construction provides for internal access to an existing building, or if separate use, letting or disposal is prevented by planning permission, etc, the work will be subject to VAT at the standard rate.
Also safe, for the time being, are the phased construction projects where it is specified in the original planning consent that the construction of a building is to take place in several phases.
Readers will doubtless be aware, however, that the infraction proceedings against the UK Government’s continued zero rating in certain areas (one of which is the construction of new buildings) came before the European Court of Justice on September 15 1987, although the decision may not be forthcoming for some months. Depending on the outcome of those proceedings, the author may well be commissioned to explain the effects of possible further changes in the UK law in this area. The message must therefore be “watch this space”.