Appeal Number: TC/2009/10367

[2010] UKFTT 102 (TC)

TC00413

Appeal number: TC/2009/10367

VAT – DIY Builders Scheme – Invoices charged at 17.5% - HMRC only able to repay VAT “chargeable” – Three Year Rule – Section 80(4) VAT Act 1994. Appeal dismissed.

FIRST-TIER TRIBUNAL

TAX

IAN ROBERTSONAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT)Respondents

TRIBUNAL JUDGE: W Ruthven Gemmell, WS

MEMBER:Ian M P Condie, CA

Sitting in public in Edinburgh on Wednesday 20 January 2010

Mr Robertson for the Appellant

Mrs Kim Tilling - instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

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DECISION

The Appeal

1. This is an Appeal by Ian Robertson (“the Appellant”) against a decision to refuse a claim for a VAT refund for an amount, agreed by the parties, totalling £9,994.29 representing VAT paid in respect of the conversion of a building known as Park Cottage, Newlands, Gifford, Haddington, EH41 4PG (“Park Cottage”) issued by the Commissioners of HM Revenue and Customs (“the Respondents”) on 16 April 2009. The refusal relates to a claim for a refund of VAT under the DIY Builders and Converters VAT Refund Scheme. A number of contractors involved charged the Appellant VAT at the standard rate on works and material which they should have charged at the reduced rate of 5%. The three year rule makes it impossible for VAT of 12.5% referable to invoices beyond the three year period to be reclaimed by the contractors and therefore repaid to the Appellant.

Legislation

Section 35 VAT Act 1994

Refund of VAT to persons constructing certain buildings

(1C)Where—

(a)a person (“the relevant person”) carries out a residential conversion by arranging for any of the work of the conversion to be done by another (“a contractor”),

(b)the relevant person’s carrying out of the conversion is lawful and otherwise than in the course or furtherance of any business,

(c)the contractor is not acting as an architect, surveyor or consultant or in a supervisory capacity, and

(d)VAT is chargeable on services consisting in the work done by the contractor,

the Commissioners shall, on a claim made in that behalf, refund to the relevant person the amount of VAT so chargeable.

(1D)For the purposes of this section works constitute a residential conversion to the extent that they consist in the conversion of a non-residential building, or a non-residential part of a building, into—

(a)a building designed as a dwelling or a number of dwellings;

(b)a building intended for use solely for a relevant residential purpose; or

(c)anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings.

(2)The Commissioners shall not be required to entertain a claim for a refund of VAT under this section unless the claim—

(a)is made within such time and in such form and manner, and

(b)contains such information, and

(c)is accompanied by such documents, whether by way of evidence or otherwise, as the Commissioners may by regulations prescribe or, in the case of documents, as the Commissioners may determine in accordance with the regulations.

Section 29A VAT Act 1994

Reduced rate

(1)VAT charged on—

(a)any supply that is of a description for the time being specified in Schedule 7A, or

(b)any equivalent acquisition or importation,

shall be charged at the rate of 5 per cent.

SCHEDULE 7A OF VAT ACT 1994

CHARGE AT REDUCED RATE

PART 1 INDEX TO REDUCED-RATE SUPPLIES OF GOODS AND SERVICES

Renovation and alteration of dwellings …………….. / Group7

Group 7 —RESIDENTIAL RENOVATIONS AND ALTERATIONS

ITEM NO.

1The supply, in the course of the renovation or alteration of qualifying residential premises, of qualifying services related to the renovation or alteration.

2The supply of building materials if—

(a)the materials are supplied by a person who, in the course of the renovation or alteration of qualifying residential premises , is supplying qualifying services related to the renovation or alteration, and

(bthose services include the incorporation of the materials in the premises concerned or their immediate site.

Meaning of “supply of qualifying services”

5(1)“Supply of qualifying services” means a supply of services that consists in—

(a)the carrying out of works to the fabric of the premises, or

(b)the carrying out of works within the immediate site of the premises that are in connection with—

(i)the means of providing water, power, heat or access to the premises,

(ii)the means of providing drainage or security for the premises, or

(iii)the provision of means of waste disposal for the premises.

(2)In sub-paragraph (1)(a), the reference to the carrying out of works to the fabric of the premises does not include the incorporation, or installation as fittings, in the premises of any goods that are not building materials.

Section 80 VAT ACT 1994

Recovery of overpaid VAT

(1)Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.

(2)The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose.

(4)The Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim.

1. The Appellant is a DIY builder and is not registered for VAT. He and his wife purchased a property being a derelict 18th century farmhouse now known as Park Cottage. The property is in an isolated rural location with no road, track or even defined path to the property and is located approximately half a mile from the nearest public road.
2. Initial work was carried out in September 1999 with the aim of moving in to the property on the Appellant’s retirement in 2003. The design was only sufficiently detailed by 2003. A period of design and cost checking was undertaken, a budget agreed and work commenced on a separate trades basis controlled by the Appellant. In addition, it was necessary to comply with a number of planning and other associated conditions so that the project took from initial conception in July 1998 until December 2008 until a final completion certificate was issued by the local Council. Advice was obtained from Benjamin Tindall, an architect, who gave evidence and by Allan Angus, a chartered surveyor, who was unable to give evidence due to his absence abroad but whose explanatory letter was submitted to the Tribunal.
3. The project took a particularly long time because of specialist works such as the creation of a thatched roof as it was necessary to find specialist work contractors. An access road had to be constructed and photographs of this and work to the site were submitted to the Tribunal. The access road was not straightforward as a result of the position of the building site and it was also necessary to ensure that power and telecommunication services were available. The road was installed in January 2002 and electricity to the site in January 2004. A borehole had also to be drilled to provide water.
4. In addition to the conversion of the former derelict house, a former barn was also converted to comprise a garage, store and workshop. Work on this was completed at the end of 2003. Actual work on the house started in May 2004. In addition to obtaining planning permission and building warrants much time was taken up with agreeing accounts with contractors including dealing with disagreements.
5. Prior to the work being carried out the cottage had been unoccupied for approximately fifty years.
6. The Appellant first applied for a ‘claim pack’ from the Respondents in approximately 2001 but did not obtain an update when the works were about to start in 2003.
7. An update to the guidance was issued in January 2005. The Appellant confirmed that he had read the guidance but did not pass it to his professionals and acknowledged that the provisions relating to conversions were applicable to his project. Although having read the warnings and reminders in the HMRC Reference Notice 719 (VAT Refunds for “DIY Builders and Converters”) specifically at paragraphs 2.2 and 3.2 and a reference to there being VAT at a reduced rate of 5% at paragraph 9.1, the Appellant did not, at that time, fully understand their significance to the work he was carrying out.
8. In addition, none of the seven contractors or two professionals involved appear to have been aware of a 5% rate of tax being applicable in certain circumstances. At no time, until March 2009, was any challenge made to the decision to charge VAT at 17.5% as opposed to 5%.
9. There was no dispute between the parties that the works carried out by the Appellant were in respect of a residential renovation in terms of Schedule 7A of the VAT Act 1994, that the works supplied and invoiced were qualifying services under Group 7 of Schedule 7A of the VAT Act 1994 and that where appropriate VAT calculated should be at the rate of 5%.
10. The Appellant accepted that he had made an error in accepting invoices from the contractors for an amount of VAT at 17.5% when it should have been 5%, and was pursuing this matter with them to obtain repayment outwith the appeal; and that the VAT would be refunded to the contractors in the event of the appeal being successful and the three year cap not applying and that in turn the contractors would repay the Appellant. The Appellant also accepted that when completing and signing the VAT Refund for DIY Builders and Converters Claim Form (VAT Form 431) on 7 March 2009 he confirmed that he had read Notice 719 and that he was “only reclaiming VAT which was correctly charged” to him and was “paid on goods imported or bought from a VAT registered supplier”.
11. The Appellant gave evidence and was cross examined and his wife, MrsRosamund Robertson, and their architect, Benjamin Tindall, also gave evidence but were not cross examined. All the witnesses were credible. The Tribunal had a witness statement from Elizabeth Christine Taylor of the Respondents who was present and was not called to give evidence and was not required to be cross examined on her statement.
12. In evidence, Mr Tindall confirmed that this particular project was of a very long term nature as it had to contend with so many different and difficult factors. This was contrasted with a more modern building of, say, a new house but in Mr Tindall’s opinion, even the time limit from the beginning of construction on the new property to obtaining a completion certificate could take in excess of three years.
13. The VAT Form 431, dated 7 March 2009, was submitted together with the relevant invoices and was responded to by letter of 10 March advising that some of the VAT claim would not be eligible for refund.
14. A decision letter was issued on 16 April and was not referred to the Appeals and Review Unit of the Respondents but instead an Appeal was made to the Tribunal.
15. The Respondents made adjustments to the repayment claim “to reduce the VAT repaid in respect of those invoices over three years old evidencing VAT incorrectly paid at the standard rate because under the three year capping rules the supplier could not make an adjustment for the invoice on their VAT account and VAT charged in error could not be reclaimed by the Appellant (Update 1 to Notice 719 paragraph 9.1 dated January 2005)”.
16. The Appellant’s claim was that this refusal was unfair because the Respondents had received the money and claimed that the 12.5% covering the period not included in the three year period should either be refunded to him or refunded to the contractors to enable them to refund him.

Authorities

Christopher John Allen v The Commissioners for Revenue & Customs [2001] VAT Decision 17342

Jeffrey Williams v The Commissioners for Revenue & Customs [2009] UKFTT 96 (TC)

Susan Frances Nike v The Commissioners for Revenue & Customs [2009]UKFTT 349 (TC)

Reasons for the Decision

1. The arguments of the parties raised the following questions for the Tribunal -

(1)Should the three year cap be rescinded or discretion applied so that the contractors are entitled to recover the additional 12.5% tax that need not have been paid so that the Appellant may recover it from them?

(2)Given the impossibility of completing a project such as this and, indeed, many other building projects within a three year period and given that HMRC has received tax at a higher rate than need have been paid, can the Respondents refund the 12.5% tax in respect of supplies beyond the three year limit to the Appellant?

1. The Appellants submitted that the retention of the funds and the imposition of a three year cap was unfair given that errors such as this were unlikely to be discovered until well after the three year limit which would consequently serve to exclude a repayment claim. The Respondents submitted that they had no discretion in relation to the three year cap as set out at Section 80 subsection 4 of the VAT Act 1994.
2. In terms of Section 29A of the Act the correct liability for the rate of VAT charged on supplies of services made in respect of works carried out in residential conversions is 5%. Where the supply of goods is made with the supply of services commonly known as “Supply and Fit”, the entire supply is known as a supply of services.
3. The Respondents submitted that they are only liable to refund to a claimant the amount of VAT properly chargeable on such a supply (in this case at 5%) rather than the amount actually charged at 17.5%.
4. The Respondents argued that the VAT 431 Form signed by the Appellant on 7March 2009 contained a declaration that the Respondent had read Public Notice 719 before making the claim and confirmed that he had read the contents of the Notice including a declaration that the claimant is only reclaiming VAT which was correctly charged. This was accepted by the Appellant.
5. The Respondents also submitted that they have no power to refund VAT charged in error to anyone other than the person who incorrectly accounted for the tax and could not therefore make any repayments directly to the Respondent.
6. The Respondents submitted that the factors in relation to making a claim for a refund of VAT were known to the Appellant at the outset of the claim and referred to the Public Notice 719 “Will I be charged VAT on services?” which states as follows –

“for conversion, a builder can sometimes charge VAT at the reduced rate of 5% or, if you are a housing association, at the zero rate. You should be careful to ensure that you are charged the correct amount of VAT, as you can only reclaim VAT that has been correctly charged”.

1. Reference was made to Jeffrey Williams v HMRC Decision TC00064 at paragraph 25 when it was stated that –

“whether the Appellant can recover the remaining excess VAT (that is to say the VAT charged at the standard rate but which should have been charged at the reduced rate) charged to him by his contractors? The short answer is ‘no’ because HMRC are only obliged to refund the VAT chargeable on the supplies. The decision goes on to say that there is no obligation on HMRC to refund the difference”.

1. In support of the Respondents’ contention that they could only submit a refund claim to the person who actually accounted to Customs and Excise, reference was made to Christopher John Allen v HMRC, Decision 17342, paragraph 2, which states –

“there is no mechanism that allows the recipient of a supply to submit refund claims”. The decision goes on to state “there may be a private law relationship between the suppliers… on the one hand and the Appellant on the other where a three year limit for claiming may not be applicable. However, the main point is that Mr Allen cannot stand in the shoes of the suppliers in asking for a refund of VAT erroneously paid on the invoices”.

1. The Respondents made reference to Susan Frances Nike v HMRC, Decision MAN/090407, paragraph 36. The Tribunal states –

“we have no discretion….neither she or her contractors are experts in VAT law and neither of them realised that the invoices should only have been charged at 5%...this mistake over the VAT in combination with the DIY Scheme under which such claims can only be made when the building certificate is issued, meant that by the time the mistake was spotted it was too late to put it right…we have no discretion to do other than apply the law which means that we do not order HMRC to refund the overcharged VAT”.

1. The Tribunal recognises the predicament of the Appellant that at the date of his claim most of the disputed invoices were more than three years old which means that his suppliers were too late in respect of most of the invoices to reclaim the excess VAT from the Respondents as a three year cap does apply to them under Section 80(4) VATA 1994.
2. As in the Nike case, the Appellant did not realise he had been overcharged VAT, he paid it, his contractors have accounted for it to HMRC and he believes HMRC ought to refund it. He asked us to exercise our discretion in his favour.
3. It was accepted by the Tribunal that the invoices which are the subject of this Appeal should have been charged at 5% VAT and the conversion is a qualifying conversion.
4. The Tribunal as in the Nike case has no discretion. The then three year cap that applies is clear in law. We understand and sympathise with the Appellant’s position and his contention that where buildings works take more than three years and errors do arise then they are unlikely to be discovered and matters put right because of the three year cap. In both the Allen VTD 17342 andWilliams TC 00064 the Tribunal held that the Respondents, HMRC, were only liable to refund VAT under the DIY scheme insofar as it was “chargeable” and that VAT charged at higher than the proper VAT rate is not refundable.
5. Neither the Appellant nor his contractors, or professional advisers realised that the invoices should only have been charged at 5% but the DIY Scheme which provides that claims can only be made when a building certificate is issued, means that any mistake may be spotted too late to put it right. The Appellant does not understandably consider this fair and whereas we have sympathy with his position, we have no discretion to do other than apply the law which means we cannot order HMRC to refund the overcharged VAT to him or his contractors.
6. The Appeal is therefore dismissed.

W RUTHVEN GEMMELL, WS

TRIBUNAL JUDGE

RELEASE DATE: 3 MARCH 2010

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