19131
Value Added Tax – zero-rating – construction of buildings for a relevant residential purpose – whether an “annexe” or separate building – VATA 1994, Schedule 8, Group 5, Item 2 and Note (16) – Appeal allowed.
EDINBURGH TRIBUNAL CENTRE
ALLAN WATER DEVELOPMENTS LTDAppellant
- and -
HER MAJESTY’S REVENUE & CUSTOMS Respondents
Tribunal: (Chairman): Mr Kenneth Mure, QC
(Member): James D Crerar, WS., NP
Sitting in Edinburgh on Wednesday 25 May 2005
for the AppellantMr Colin Tyre, QC
for the RespondentsMs Gillian Carty, Shepherd & Wedderburn, WS
© CROWN COPYRIGHT 2005.
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DECISION
Introduction
In this appeal Mr Tyre, QC appeared for the Appellant. MsCarty, Solicitor, appeared for the Respondents.
The Appellant constructed a care home, known as Calder Care Home, for an associated company. That company already owned a nearby care home, Orbiston Care Home. Both are linked physically by a corridor. “Calder” uses excess kitchen capacity of “Orbiston”. Although each home has its own staff and manager, there is a general manager having overall administrative responsibility for both.
The Appellant treated the supply, being the construction of Calder, as zero-rated in its Return for the period to 31 July 2003. The Respondents, however, issued a Notice of Assessment subsequently on the basis that Calder represented an “annexe” of Orbiston and as such did not qualify for zero-rating by reason of Note (16) to Group 5 of Schedule 8, VATA 1994. (See Documents 2 and 3).
The Law
The appeal proceeds in terms of Section 83(p) VATA 1994.
Section 30 provides for the zero-rating of supplies within Schedule 8. Group 5 thereof includes the construction of buildings for relevant residential purposes and relevant charitable purposes. However, Note (16) excludes certain constructions. It provides –
“(16) for the purpose of this Group, the construction of a building does not include –
(a)the conversion, reconstruction or alteration of an existing building; or
(b)any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or
(c)subject to Note (17) below, the construction of an annexe to an existing building.”
It is agreed that Note (17) does not apply in the present case. Further, it is accepted that the relevant exclusion arising in this Appeal is that in paragraph (c) viz an annexe to an existing building. The Respondents accepted that the other exclusions, which indicate a greater degree of integration with the principal building, were not apt in the present case.
We were referred by both Mr Tyre and Ms Carty to the decisions of Lightman J and Sir Andrew Morritt V- C in Cantrell and Another v C&E [2000] STC 100 and [2003] STC 486. Reference was also made to –
Torfaen Voluntary Alliance (LON/03/756)
Archdiocese of Southwark Commission for Schools and Colleges (LON/2004/0013)
Yeshurun Hebrew Congregation (MAN/99/161)
Bryan Thomas MacNamara (LON/97/1584)
Associated Nursing Services Plc (LON/93/1173)
The Facts
Mr Tyre led evidence from Mr Ian Stirling, a Director of the Appellant. He spoke to the terms of a signed statement, which is produced, and amplified this with references to the Bundle of Documents and plans of the development. Mr Stirling was the only witness. Ms Carty indicated at the end of his evidence that, given its terms, she did not wish to lead further evidence.
Mr Tyre outlined suggested Findings in Fact in relation to which Ms Carty made only limited observations. We find as follows:
- The Appellant provides construction services to an associated company, Allan Water Plc. It owns 4 care-homes in the Stirling area in addition to Calder and Orbiston which are situated in Motherwell.
- Orbiston cares for the “frail elderly”. It is a single storey building with 4 wings, 3 for accommodation and one for services, and has room for about 81 residents.
- Calder caters for elderly patients suffering from dementia and mental illness. It is an L-shaped building on 2 storeys. Each of its 4 wings contains 12bedrooms. It has its own dedicated day-rooms and dining-rooms. It has areas dedicated to the provision of medical services, chiropody and hairdressing and its own laundry facilities and staff offices.
- The connecting corridor between Calder and Orbiston was built at the suggestion of the Fire Officer. No structural alterations were required to Orbiston when it was constructed. It provides shelter in the event of one building having to be evacuated and its residents taken to the other. While it is used to transport meals from Orbiston to Calder, it is not a means of access for the residents of either home. Such use is precluded by an alarm system.
- Following on the Fire Officer’s suggestion of erecting the corridor the original intention of having full kitchen facilities in Calder was abandoned. It was operationally desirable for Calder to use the spare kitchen capacity of Orbiston. The Appellant’s other homes share kitchen facilities. Outsourcing of catering is common in care establishments.
- The “serveries” in Calder could be fitted out as fully functioning commercial kitchens, there being sufficient room for installing the necessary equipment. At present besides keeping food warm pending distribution, snack meals can be prepared in the serveries.
- Calder and Orbiston have independent services, including water, power and sewerage. They have independent addresses, means of access and separate parking areas.
- Calder and Orbiston could be sold separately. Each is capable of independent operation as a care home.
- There is a similarity in the colours of the brickwork in both homes. While each home has a separate staff and manager there is a “general manager” overseeing both.
- Various brochures relating to both Calder and Orbiston are produced (Document 31).
- The ultimate choice in selecting care in either home is a matter for the prospective resident and his/her family.
The Respondents’ Submissions
Ms Carty moved us to refuse the Appeal.
She acknowledged that if the supply was in the course of construction of a building it fell to be zero-rated. However, the Respondents argued in the present case that Calder was an annexe to Orbiston and not a separate building. She referred us to the zero-rated categories in Schedule 8 Group 5 and Item 2(a) – “a building designed as a dwelling … for use solely for a relevant residential purpose …”. Note (4) thereto defined such use as extending to – “(b) a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, … or past or present mental disorder;”. However Note (16) made certain exclusions, including the construction of an annexe to an existing building. (The other exclusions in the Note which all denoted a greater degree of physical integration with the existing premises were not appropriate to the present case). She referred us to the decisions in Cantrell. Regard should be paid to the building before construction and comparison made after the works were completed. Ordinarily that would show the nature of the works at the time of supply. Appearance, layout, equipment and function fell to be considered. Motives behind the building work and the intended or subsequent actual use are not generally relevant except insofar as they might throw light on the potential use and functioning. That decision was applied in The Archdiocese of Southwark Commission for Schools and Colleges at para 25 et seq. The sense of an “annexe” as an adjunct or accessory is noted. Ms Carty referred also to the decision in Torfaen Voluntary Alliance where the colour of brickwork and the sharing of a common wall were noted. She mentioned also Yeshurin Hebrew Congregation at para 23 in relation to the various exemptions in Note (16) and, also, MacNamara at para 13 et seq.
Ms Carty submitted that the principles which emerged were that an annexe is supplementary and subordinate to a main building. While there must be a connection or association between the original building and annexe that need not be physical. An annexe was distinct from an enlargement or extension in as much as the degree of physical integration must be minimal. In reaching its conclusion the Tribunal must consider all relevant factors, particularly appearance, layout and equipment to function. However, planning permission and intended or subsequent actual use might not be directly relevant.
In the present case there was a degree of physical attachment by way of the corridor. This was a substantial structure although no structural alterations were required to Orbiston. Also Calder fulfilled a subordinate role. It could not function independently in that it had to utilise and rely on the excess kitchen capacity at Orbiston. The decision in Cantrell directs the Tribunal to consider this question at the date of supply. Then it was clear that Calder was designed to use the kitchen facilities and services at Orbiston. Thirdly in appearance there was similarly coloured brickwork and tiled roofs. Finally, there was a shared management structure with the appointment of a General Manager overseeing both homes. In short, Ms Carty argued, there was both a physical connection and a functional connection sufficient to render Calder an “annexe” of Orbiston for the purposes of the applicable statutory provisions.
Appellant’s Submissions
Mr Tyre invited us to allow the appeal and hold that Calder did not represent an “annexe” for the purposes of Note (16)(c). Primarily, he argued, this was a question of factual inference. He agreed with the legal test based on the Cantrell decisions founded on by MsCarty. The key concept was whether Calder represented something “new”, in which case zero-rating applied, or whether it was supplementary. He distinguished the other authorities referred to by Ms Carty and noted very briefly a Tribunal decision which preceded CantrellvizAssociated Nursing Services Plc. There a block of residential flats erected contiguous to a nursing home, with a common party wall and internal access, was held to be neither an extension nor annexation.
Mr Tyre referred to the OED definition of an annexe as being an “adjunct” or “accessory”. Here, he argued, there were 2 distinct homes, each capable of separate ownership and operation. Neither was dependent on the other nor supplementary to the other. This was not affected by the use of kitchen facilities. While there was some aesthetic similarity externally the layout and appearance of each building was distinct. All the public services and other domestic provisions were separate for each home. The corridor should be viewed as a neutral element. It was suggested by the Fire Officer. In the event of either building being evacuated it had the value of sheltering the residents. Ordinarily it would not be used by residents. Orbiston did not have to be altered structurally when the corridor was installed. The corridor did not lead to the buildings’ integration together.
Mr Tyre submitted that physically and functionally Calder and Orbiston were 2 independent buildings and accordingly the construction of Calder should be zero-rated. As noted supra he made various submissions in relation to appropriate findings-in-fact. MsCarty made only limited criticism of these, and substantially we have adopted Mr Tyre’s suggestions with some amplification as we considered appropriate.
Decision
We consider that “Calder” is not an annexe to “Orbiston” but a separate building. Accordingly we allow the Appeal.
Following the decisions in Cantrell and noting particularly the observations of the Vice Chancellor the Tribunal has to consider the dictionary sense of annexe as an “adjunct or accessory” to a main building (Mr Tyre referred us to the OED definition.) Also, we have to make an objective examination of the physical characters of both structures at the time of supply having regard to appearance, layout, uses and functions. In the absence of any change in the building plans, regard should be paid to the completed structure. On the other hand planning permission, motives, intended and actual use tend to be irrelevant except in so far as possibly showing the potential use inherent in the building. We refer to paragraph [15] et seq of the Opinion of the Vice Chancellor in which also reference is made to Lightman J’s Opinion in the earlier decision.
While Mr Tyre did not discuss in any detail the decision in Associated Nursing Services Plc (LON/93/1173), we note that the definition of “annexe” was not satisfied there where a block of sheltered flats for the elderly was built as contiguous to a pre-existing nursing home, even although there was a means of internal access at each level.
In the present case it is significant in our view that the form of care and categories of resident are different in each home. (That resembles Cantrell.) There is a greater level of care provided in Calder. While there is a physical link by means of the corridor, it is of note that this provision was suggested by the Fire Officer. While it is used as a route for delivering meals to Calder and could, of course, be used to evacuate either building in an emergency, it is otherwise not available as an access and this is secured by an alarm system. No structural alteration to Orbiston was required to complete the corridor.
During the Hearing we noted from the plans that Calder has separate facilities with its own plant room allowing for its independent operation, viz water and power supplies, telephones, entry, access and parking. There is independent provision in Calder for staff accommodation, administrative offices and laundry. Its residents have the exclusive use of their own dining rooms, bathing facilities, medical treatment room and accommodation for hairdressing and chiropody.
We accept that Calder benefits from the kitchen facilities in Orbiston and that its own kitchen provision amounts to a “servery”, which would keep warm and distribute delivered meals but prepare only snack meals. However, it appears that the serveries on each floor in Calder could be converted readily to independent kitchens. There is sufficient available space for this and the necessary extra equipment could be installed readily. We noted Mr Stirling’s undisputed evidence that meals were delivered to other homes within the group and that in the industry outside caterers were used commonly.
While according to the photographs there is a similarity in the colour of the brickwork in both buildings, the structures in no way seem to resemble each other. Calder has an extra storey. Its shape and layout are different. Each building had a different designer, and apart from aesthetic questions of external colour the design and layout of Calder does not seem to have been influenced by Orbiston.
The staffing of each home is independent with its own manager although there is a General Manager overseeing both. That seems to have been an administrative decision.
As the Appeal is allowed the matter of a Penalty does not arise. We would observe in any event that since the issue before us is purely a question of interpretation and application of a legal concept and that the factual background was largely uncontroversial, a Penalty seems inappropriate.
Expenses
Mr Tyre indicated that the Appellant sought expenses in the event of success. Accordingly we award expenses which, failing agreement, will require to be taxed in terms of Rule 29(3).
Finally, we wish to record our appreciation of the helpful and detailed manner in which Ms Carty and Mr Tyre presented their arguments.
MR KENNETH MURE, QC
CHAIRMAN
RELEASE: 20 JUNE 2005
EDN/04/160
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