Chacombe Park Development Services Ltd v Revenue and Customs [2005] UKVAT V19414_2 (02 December 2005)

19414
VAT – ZERO RATING – construction of care home – annexe or extension? – no – appeal allowed.

LONDON TRIBUNAL CENTRE

	CHACOMBE PARK DEVELOPMENT SERVICES LIMITED	Appellant

-	and –

	HER MAJESTY’S REVENUE AND CUSTOMS 	Respondents

				Tribunal: Richard Barlow (Chairman)
					     John Brown CBE FCA

Sitting in public in London on 28 and 29 September 2005.

For the Appellant: Mrs Melanie Hall QC instructed by Chiltern PLC

For the Respondents: Richard Smith of counsel instructed by the acting general counsel and solicitor to the Commissioners of Revenue and Customs.

© CROWN COPYRIGHT 2005

DECISION

1.	The disputed decision which is under appeal is a decision notified by the Commissioners in a letter dated 25 January 2005 in which they stated that building services supplied by the appellant were excluded from zero rating.  It is not in dispute that the meaning of that letter was that the services would be standard rated.

2.	Those services are being supplied from time to time under the special rules relating to continuous supplies and strictly speaking this decision can only relate to supplies made, not to future supplies, but work has started and so both parties agreed that we have jurisdiction.

3.	Mrs Melanie Hall QC appeared for the appellant and Mr Richard Smith appeared for the respondents and we are grateful to both for the clarity and detail of their submissions.

4.	The basic facts are that Chacombe Park Developments Limited (Developments) is a subsidiary of Chacombe Park Limited (Chacombe).  Chacombe is in business as the owner and operator of a 45 bed care home which provides residential accommodation and nursing care for the elderly, including 6 beds for patients recently discharged from hospital and in need of rehabilitation as well as ordinary nursing care.  Many if not all of the residents have their fees paid for or contributed to from public funds.  Chacombe is also the owner of the freehold of a building which it either constructed or had constructed and which consists of 19 sheltered apartments which have been let on 125 year leases; though that building does not feature in this case.

5.	The new building with which this case is concerned will consist of 32 en suite bed sitting rooms with additional ancillary rooms including communal areas and catering facilities designed to provide permanent homes for elderly frail persons who are in need of personal care falling short of medical or nursing care.

6.	The 45 bed care home and the 19 apartments and the new building with which we are concerned are all situated within the same 15 acre parkland setting.

7.	The issue we have to decide is whether the building supplies made by Developments to Chacombe fall within item 2(a) of Group 5 of Schedule 8 to the Value Added Tax Act 1994 in which case they are zero rated.  That item reads:

       “2. The supply in the course of the construction of-

(a) a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose; 

 (b) …

of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.”

Mrs Hall QC did not contend that the building is designed as a dwelling or a number of dwellings or that it is intended for a relevant charitable purpose (Chacombe is not a charity).  She relies upon the contention that the building is intended solely for a “relevant residential purpose”.  That phrase is defined by Note (4) to Group 5 and the relevant parts of the Note are:

       “4 Use for a relevant residential purpose means use as –

…
(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, past or present dependence upon alcohol or drugs or past or present mental disorder;
…
(g) an institution which is the sole or main residence of at least 90 per cent of its residents,

except use as a hospital, prison or similar institution or an hotel, inn or similar establishment.”

Although there may have been a degree of ambiguity in the Statement of Case, Mr Smith confirmed in his skeleton argument that the respondents accept that the development will, in principle, fall within Note 4(b); though he was careful not to describe it as a building when making that concession.  For completeness we find and hold that the development will also fall within Note 4(g).  Mr Babak Lari, whose evidence we will refer to in more detail later, gave unchallenged evidence that the residents of the new accommodation would be likely to stay there indefinitely and that the staff would not live in. 
 
8.	The Commissioners case relies upon their contentions about the relationship between the new construction and the existing 45 bed care home.  Mr Smith contended that the construction is excluded from zero rating by Note (16).  

9.	Note (16) reads:

“(16) For the purposes 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 that 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.”

9.	The decision letter refers to the new work being an “extension” of the existing building but the Statement of Case contends for “extension”, “enlargement” or “annexe” to the existing building.  Mr Smith contended on behalf of the respondents that their primary case was that the new development is an “extension” to the existing building but alternatively that it is an “annexe”.

10.	By providing that “the construction of a building does not include” a conversion etc Note (16) does not purport to define what amounts to the construction of a building but it is logically necessary that there should be a building which has been constructed before the work can be excluded from zero rating. The respondents’ contentions did not go so far as to suggest that the development would not be of “a building” if it was not excluded from being such by Note (16) and there is no real doubt on the facts of this case that a building was constructed; and we find that to be the case.

11.	There are therefore two issues in this case.  Was the construction of that building an extension or an annexe to the existing 45 bed home?  If it was not it was zero rated.  If it was it was standard rated.

12.	Mrs Hall QC drew our attention to the cases of Cantrell –v- Customs and Excise Commissioners [2000] STC 100 and Cantrell –v- Customs and Excise Commissioners (no 2) [2003] STC 486 (and the corrigendum to the report of the earlier case which was issued by the publishers in 2003 and which is referred to at page 493h in the later case).

13.	Those cases give some guidance at least as to how the tribunal should approach the questions posed by Note (16).

14.	In the first case Lightman J said at page 103 d that the authorities establish a two stage test for deciding whether works constitute an enlargement, extension or annexe to an existing building.  The two stage test is to examine and compare the building (or buildings if more than one) before works are carried out and after they are completed and then to ask whether the completed works amount to an enlargement of or the extension or the construction of an annexe to the original building.   In particular he said this (at page 103 f-g):

“First the question is to be asked as at the date of supply.  It is necessary to examine the pre-existing building or buildings and the building or buildings in course of construction when the supply is made.  What is in the course of construction at the date of supply is in any ordinary case (save for example in case of a dramatic change in the plans) the building subsequently constructed.  Secondly the answer must be given after an objective examination of the physical characters of the building or buildings at the two points in time, having regard (inter alia) to similarities and differences in appearance, the layout the uses for which they are physically capable of being put and the functions which they are physically capable of performing.  The terms of planning permissions, the motives behind undertaking the works and the intended or subsequent actual use are irrelevant, save possibly to illuminate the potentials for use inherent in the building or buildings.”

15.	The judgement of Sir Andrew Morritt V-C in the later Cantrell case added to the above passage.  At paragraph 16 on page 403 he held that an annexe may be capable of functioning independently from the building to which it is annexed and may be physically separate from it.  This was clear from the fact that Note (17), which modifies the effect of Note 16(c) in the case of some buildings having charitable uses, proceeds on the basis that the annexe may be capable of functioning separately.

16.	Paragraph 17 of the Vice Chancellor’s judgement reads:

“17. An annexe is an adjunct or accessory to something else, such as a document.  When used in relation to a building it is referring to a supplementary structure, be it a room, a wing or a separate building.  The tribunal does not seem to have given consideration to this, in my view, crucial aspect of an annexe.  In that respect their decision is vitiated by a mistake of law and is liable to be set aside.” 

He added, at paragraph 20, that the Judgement of Lightman J in the first Cantrell case was directed mainly to the question of an extension and that where the issue was whether an annexe had been constructed, it may be necessary to enquire more widely than just considering the physical character of the buildings.

17.	We have to apply the legal principles laid down by the legislation as explained in the Cantrell cases but first it is necessary to make our findings of fact.  Mr Smith agreed that the facts are not much in dispute.  We heard evidence in the form of witness statements and supplementary questions put by Mrs Hall QC to her two witnesses and by cross-examination by Mr Smith which was for the purpose of elucidation rather than challenge.  The witnesses were Mr Babak Lari a director of both companies and Mrs Heather Clews, architect, whose firm, Acanthus Clews, were the architects for the construction in question.  We also read the bundle of documents and examined the plans submitted by the parties.

18.	Our findings are as follows.

19.	The 45 bed care home is an L shaped structure and the new building with which we are concerned is being built at a right angle to one of the ends of the L so as to form a third side of a rectangular complex, open at the fourth side, to make what might be described as a squared off U shape.  The new building is quite close to the existing building, the two being separated by a gap of about 6 feet 6 inches.  

20.	Part of that gap is filled by a linking structure that links the two buildings which is therefore 6 feet 6 inches wide and it is also about 6 feet 6 inches long.  The parts of the buildings which are close to each other are considerably more than 6 feet 6 inches in length and so the linking structure only occupies a part of the gap, approximately a fifth of the total length of the gap.       

21.	The existing building is two storeys high and the new construction is at least partly three storeys.  The linking structure links the two buildings at ground and first floor levels but it is only about half the height of the new building.  The construction of the linking structure led to minimal alterations to the existing building consisting only of the removal of a window at the first floor level in the existing building and its replacement by a door into the linking structure.  The construction of the new building itself, as opposed to the construction of the linking structure, did not affect the structure of the existing building at all.  Entrance to the linking structure from either the old or the new building will be by secure doors requiring the keying-in of a code that will be known to the staff but not the residents of the two buildings.

22.	The linking structure only serves the purpose of a back-up fire escape from either building to the other.  As both buildings have their own fire escapes it was not a requirement of planning, building or similar rules that there should be a link.

23.	The linking structure plays no part in supporting either the old or new buildings. 

24.	Both buildings are designed in the same general style as this was a requirement of planning permission.  Although the overall site, being 15 acres in extent, would have afforded ample opportunity to build the two buildings well apart from each other and Chacombe may have preferred that; it was not considered possible to obtain planning permission for that.

25.	The uses to which the two buildings will be put are different, as already mentioned in paragraphs 4 and 5.

26.	The different uses have strongly influenced the design of the buildings.  The new building is designed for people who are more independent than those living in the existing building and who are not ill or in need of nursing care.  As a consequence of those factors and also because they are financially better off than the residents of the existing building, the rooms are bigger than in the existing building.  The new building has different design requirements from the existing building in terms of there being no need for special bathrooms and other rehabilitation facilities (for those recently discharged from hospital) or nursing stations and the like.  On the other hand there is a greater need for communal areas because the residents are more mobile.

27.	Design of the buildings and the separation of them were also influenced by the desire to shelter the more able bodied residents of the new building from the unpleasant thought that they might be approaching a time when they might need the nursing and other care of their less fortunate neighbours in the existing building.  The separation of the buildings was therefore a deliberate aim.

28.	Both buildings have separate parking and access facilities and will be separately staffed even to the extent that different general practitioners will be appointed to attend to the residents.   

29.	Not all of the facts we have found are necessarily of relevance and certainly not all are of equal relevance to our decision.

30.	We first consider the question whether the new building will be an extension of the existing building.

31.	This should be judged by the objective examination suggested by Lightman J but allowing for the fact that the uses to which the buildings may physically be put may inform that process because the motives of the owners and intended uses may illustrate the potentials for use inherent in the buildings.  

32.	On one side of the balance or judgement that has to be made is that the buildings are physically close to each other, stylistically similar and physically linked.  On the other side of that balance we have in mind that the link is minimal and limited in its purpose even by the physical characteristics of the buildings (the security locking is an objective not a subjective characteristic).  The physical layout of the new building would not allow for nursing care and the physical layout of the old building would not be suitable for use as a residential home for persons in need only of personal care.  The potentials for use are therefore different.  The new building is three storeys; the old is two. 

33.	It is at least partly a question of impression and certainly of judgement but we are both of the firm conclusion that looking at all the facts we find to be relevant, the most significant of which we have highlighted in the previous paragraph, the new work will not amount to an extension of the existing building and we so hold.

34.	Turning then to the question of whether it will be an annexe we are also firmly of the view that the new building is not an annexe.  In paragraph 17 of the judgement in the second Cantrell case the Vice Chancellor refers to an annexe possibly being a wing.  Clearly the new building has the characteristics of a wing if the old and new structures are seen as one but that would be to answer the question we have to decide merely by presupposing the answer.  The vital point in that passage is that the Vice-Chancellor describes an annexe as a supplementary structure to the existing building and even basing the decision solely on the objective physical characteristics it would be impossible to see the new work as being supplementary to the existing building.  The two are designed for different purposes and that is an objective physical characteristic.  One does not supplement the other.  On that basis alone, we hold that the new building is not an annexe but if, as the Vice-Chancellor suggested, we can add to that the wider enquiry concerning the use to which the building will be put the case becomes even clearer.  

35.	The appeal will therefore be allowed.  The works in question are properly to be zero rated.

36.	There is no reason why the appellant should not be awarded its costs and we direct that if the parties cannot agree the amount of those costs or the basis on which they are to be assessed the appellant shall have leave to apply to the Tribunal for such issues to be determined by a chairman sitting alone. 

CHAIRMAN: RICHARD BARLOW

RELEASED: 2 December 2005

LON/2005/0110