Cheltenham College Enterprises Ltd v Revenue & Customs [2010] UKFTT 118 (TC)

FTT-Tax
Cheltenham College Enterprises Ltd v Revenue & Customs
[2010] UKFTT 118 (TC) · 2010-03-12
[1]Cheltenham College (“the College”), an educational charity which runs a public school, owns a number of buildings in Cheltenham including a number of boarding houses where boarding children attending the school are lodged in term time. The College decided to carry out works to some of these boarding houses. This appeal is concerned with the works undertaken in respect of Hazelwell House (“Hazelwell”). Hazelwell is a listed building. The College believed that the works were such that, had another person been in a position to carry out the works to Hazelwell and then sell it to the College after the works were completed, the sale would qualify for zero rating under Item 1 of Group 6 of Schedule 8 of the Value Added Tax Act 1984 (“VATA”).[2]The College therefore decided to engineer such a sale by granting on 13 July 2005 a long lease of Hazelwell to a wholly owned (non-charitable) subsidiary, Cheltenham College Enterprises Limited. That company is the Appellant in this appeal. It employed third-party contractors to carry out the works to Hazelwell between 13 July 2005 and 18 March 2006, incurring the VAT which it is seeking to recover. The Appellant granted on 3 March 2006 a long sub-lease back to the College. Apart from during the nine months of the project, the College has continued to use Hazelwell as boarding accommodation for its pupils.[3]A supply within Item 1 of Group 6 of Schedule 8 to the Value Added Tax Act 1984 (“VATA”) is zero rated. Item 1 reads as follows:
“The first grant by a person substantially reconstructing a protected building, of a major interest in, or in any part of, the building or its site”
[4]Note 4 of this group then adds a qualification as follows:
“For the purposes of item 1, a protected building shall not be regarded as substantially reconstructed unless the reconstruction is such that at least one of the following conditions is fulfilled when the reconstruction is completed – (a) that, of the works carried out to effect the reconstructing, at least three-fifths, measured by reference to cost, are of such a nature that the supply of services (other than excluded services), materials and other items to carry out the works, would, if supplied by a taxable person, be within either item 2 or item 3 of this Group; and (b) that the reconstructed building incorporates no more of the original building (that is to say, the building as it was before the reconstruction began) than the external walls, together with other external features of architectural or historic interest and in paragraph (a) above “excluded services” means the services of an architect, surveyor or other person acting as consultant or in a supervisory capacity.”
[5]HMRC accept that the lease granted by the Appellant to the College was a first grant of a major interest in Hazelwell and that Hazelwell was a protected building. They also accept that the works had planning and listed building consents. They do not agree that Hazelwell was substantially reconstructed. Applications[6]This appeal was originally listed for two days on 15 & 16 July 2009 but due to illness was adjourned after half a day and resumed on 14 & 15 December. At the start of the hearing on 15 July there was an application by the Appellant to admit an expert witness statement made by a quantity surveyor. HMRC objected as they had only had the statement for 48 hours and the appendices to it on the day of the hearing. We refused to admit the witness statement. Evidence should normally be allowed in unless there is a compelling reason to the contrary: we considered in this case that there was such a compelling reason as there would be unjust prejudice to the Respondents if we admitted new evidence produced so late in the day. It would have given HMRC no time to consider or respond to the evidence. Further, there seemed to be no good reason why the witness was not instructed earlier by the Appellant. The Tribunal also doubted the relevance as the evidence seemed to go to what was “substantially reconstructing” which is a legal question for the Tribunal to decide.[7]There was also an application by HMRC for two documents to be included in the core bundle. The Appellant objected, not to the documents being admitted as evidence, but to their inclusion in the core bundle. In particular the Appellant by its counsel considered that the documents should have been exhibited to the statement of HMRC’s witness and not merely inserted into the core bundle. The two documents, an electric service specification and a tender for the work, were included in HMRC’s List of Documents served on the Appellant on 30 April 2007. We directed that the two documents were part of the evidence in front of the Tribunal and (in effect) could be treated as if in the core bundle.[8]The Appellant made an application for the old costs regime to apply to the appeal and HMRC did not object and we so directed. The Appellant also applied for costs in the event that they were successful in their appeal. Is this a preliminary hearing?[9]The hearing then commenced with an application by the Appellant that the Tribunal determine the nature of the appeal and in particular decide that this was a final hearing. HMRC refused to zero rate the Appellant’s grant of the sub-lease and the Appellant contended that if we decided in favour of the Appellant on this point the result is that the grant is zero rated.[10]HMRC on the contrary considered that this hearing was a preliminary one to decide whether or not Hazelwell was substantially reconstructed. Mr Singh’s point was that HMRC had not yet made any decision on whether the works qualify under Note (4) and had not come to the Tribunal prepared to argue this point.[11]Although considering that they do meet the 60% test of Note 4(a), the Appellant similarly to HMRC was not prepared to argue in front of us the issue of whether its grant qualified under Note (4): Mr Gordon’s view was that HMRC must be taken to have conceded this point as they had not chosen to raise it before and there was no indication that this was to be merely a preliminary hearing. He considered that HMRC were unfairly stringing out litigation by taking it point by point and that it would be much more expensive for a taxpayer to keep returning to Tribunal to argue each individual test before a Tribunal could rule that the supply was zero rated. Mr Gordon said it was “procedurally dishonest” of HMRC and inefficient for the Tribunal.[12]The Appellant also considered that their appeal was under s83(c) VATA and was about the amount of input tax which might be credited to any person. Therefore, Mr Gordon considered, if the Appellant won the appeal it would be entitled to zero rate its supply and recover the attributable input tax.[13]The history of the dispute is that HMRC in the person of Mr Nunn issued a decision letter on 3 August 2006 which said in summary that: HMRC did not consider Hazelwell to have been substantially reconstructed; The sub-lease by the Appellant to the College was therefore not zero rated; It was not necessary to consider the 60% test as HMRC had already decided for other reasons that the grant was not zero rated; HMRC were reserving their position on whether Halifax applied.[14]HMRC were asked to review this decision by the Appellant which they did and on 20 December 2006 Mrs Kay issued a review letter which said in summary that: The building was not reconstructed; She upheld Mr Nunn’s decision.[15]The Appellant’s Notice of Appeal was filed on 18 January 2007. The last section of their grounds of appeal reads “the Appellant hereby contends that HMRC have incorrectly interpreted the definition “substantial reconstruction” and that Cheltenham Enterprises Limited has in fact undertaken substantial reconstructive works in respect of the Hazelwood (sic) Boarding House and that HMRC are therefore required to regard these works as a zero rated supply”. The Appellant clearly indicated that it was appealing the decision of Mrs Kay of 20 December 2006. No sum of money was stated as being in dispute.[16]HMRC duly issued their Statement of Case on 30 April 2007. It says in its first paragraph “the disputed decisions of [HMRC] is the decision contained in a letter of 3 August 2006 that the works carried out on Hazelwell Boarding House (“the Boarding House) do not amount to a substantial reconstruction and therefore, do not qualify for zero-rating”. The Statement of Case goes on to cite Item 1 and note 4 of Group 6 (but no other provisions). However, that is the only reference to Note (4) : under the heading “the Commissioners’ Contentions” it deals only with the question of substantial reconstruction. In fact HMRC’s conclusion at paragraph 16 is that “The Commissioners contend that as a reconstruction didn’t take place, it is not necessary to progress to the second limb of the test to address the question of whether there has been a ‘substantial’ reconstruction”.[17]The Appellant’s skeleton argument delivered on 30 June 2009 (only two weeks before the hearing commenced) deals almost exclusively with the issue of substantial reconstruction. However, the last paragraph contains the line, almost an afterthought:
“Further more it will be shown that the quantitative test in Note 4 is also satisfied”
. But as stated above the Appellant is not in fact intending to show that Note (4) is satisfied: they consider that HMRC has conceded this.[18]It is clear to us from HMRC’s decision letters and Statement of Case that they were reserving their position on Note (4) and have made no actual decision in respect of it which the Appellant could appeal. We do not think that HMRC should be deemed to have made a decision against the Appellant simply because they have failed to make any decision. They clearly reserved their position and the Appellant never reverted to them to request that an actual decision be made on Note (4). In any event even if we were to consider that HMRC should be deemed to have made a decision against the Appellant on this point, it would not convert this hearing into the final hearing because, as Mr Gordon says, he is not prepared today to present a case to us that that deemed decision was wrong.[19]Rather it is the Appellant’s case that HMRC should be deemed to have conceded the point. Although the Appellant’s Notice of Appeal does refer to the Appellant’s belief that their supply is zero rated, they do not make the matter clear as at the same time(a) they state they are appealing the decision letter (which in fact is about substantial reconstruction and not Note (4)) and(b) do not state that a sum of money is in dispute (which it would be if this was not a preliminary matter). In our view the Appellant should have done a great deal more to make it clear to HMRC if they wished to put compliance with Note (4) at issue in this hearing. They could have made it clear in the Notice of Appeal that they were also appealing HMRC’s failure to issue a decision on the Note (4) point: they could have written to HMRC asking for a decision on the Note (4) point. They did none of these things with the result that (in our view not surprisingly) HMRC are not prepared to argue the point at this hearing. We do not consider that HMRC have conceded the point.[20]Mr Gordon referred to the Tribunal’s jurisdiction under s83(c)(the amount of input tax which may be credited). We do not think the fact that it can only be a preliminary hearing, for the reasons given in the above paragraph, prevent our jurisdiction. If we decide in favour of HMRC, we will be making a final decision that the supply is exempt and the input tax can not be credited to the Appellant. If we decide in favour of the Appellant, it is a preliminary finding that Hazelwell was substantially reconstructed, which is a step on the way to a possible later finding that the input tax can be credited. If the Appellant is successful in this hearing, they must ask HMRC to make a decision on the Note (4) point, which they can then appeal if they do not agree with it.[21]We note that, although in their decision letter HMRC kept open two challenges to zero rating, the Note (4) point and the Halifax point, at the hearing Mr Singh said that HMRC had in fact decided that the arrangements would not be challenged on Halifax grounds. Therefore it seems to us that if the Appellant is successful in this hearing, it is only the Note (4) point that remains in contention. Main issue – meaning of substantially reconstructing[22]We have approached this question of statutory construction by considering, as the parties are agreed we should, the normal everyday meaning of the words. We have also looked at the statutory context in which they are used.[23]As counsel for the Appellant said, ‘substantially reconstructing’ clearly means less than total rebuilding. There are a number of reasons for this. Firstly, if to qualify for Group 6 Item 1 relief, the building had to be demolished and rebuilt, Group 6 Item 1 would be wholly redundant as zero rating would be achieved under Group 5 Item 1 as new construction. Secondly, this is also clear from the interaction of Item 1 and Note (4). These two provisions are clearly intended to be read together: the latter qualifies the former. A building substantially reconstructed for the purpose of item 1 nevertheless does not qualify for relief unless it meets one of the two tests set out in Note (4). Neither of the two tests in Note (4) require the demolition and total reconstruction of the building at issue. For instance, Note (4)(b) envisages that all the external walls remain standing. Thirdly, we would say, the normal everyday meaning of the word “reconstruction” is not the same as “construction” and in particular does not necessarily connote a total rebuilding.[24]HMRC did not make a case that “substantially reconstructing” required a total rebuild. The issue between the parties was just how much work was required to be done to a building before it was substantially reconstructed. Respondent’s submissions[25]HMRC believed that “substantially reconstructing” should be seen as a two part test. The first was that the building must be “reconstructed” using that word in its everyday meaning, and secondly the reconstruction must be “substantial” as defined by Note (4). Mr Singh cited as authority for this proposition the case of Donald Barraclough [1987] VTD 2529 where the Chairman said as follows:
“In our judgment, the sale by Mr Barraclough…was a taxable supply if, but only if, he had ‘substantially reconstructed’ that building…..In this regard ...., to establish the required proposition, Mr Barraclough must show both that the building was ‘reconstructed’ in common parlance and that the reconstruction was ‘substantial’ under the provisions of the Notes to Group 8A [now Group 6]…..”
[26]In HMRC’s view the VATA impliedly contrasts “reconstructing” in item 1 with “approved alteration” in item 2. Reconstructions are not (necessarily) alterations. Work to a building can be substantial and yet not be reconstruction of the building. Barraclough shows that works of enlargement and modernisation do not necessarily amount to reconstruction in its ordinary meaning.[27]HMRC’s view is that the Barraclough test is the right test and that it has been applied by subsequent Tribunals: they cite ADJ Lee [1991] VTD 5887, Vivodean [1991] VTD 6538, Nigel Brodie Church t/a Milton Antique restoration [1994] VTD 12427 and Southlong East Midlands Ltd [2004] VTD 18943.[28]In Vivodean [1991] the Tribunal expressly adopted the reasoning in Barraclough. In Southlong East Midlands Ltd even if the chairman did not refer explicitly to Barraclough he applied the same test:
“for the Appellant to succeed, it must be shewn, first that [the building] was reconstructed, and secondly, that the reconstruction was substantial….It is not in dispute that more than 60% of the cost was incurred on permitted alteration. The only remaining issue, therefore, is whether the work that was done was reconstruction, or something else.”
[29]He says in the next paragraph:
“Once it is established that reconstruction took place, then one goes on to consider whether than reconstruction was substantial. In the present case, it is clear that if the work was reconstruction it was substantial according to the statutory test in Note 4.”
[30]In the case of Church , the test in Barraclough was not repeated although the conclusion of the Tribunal was that the works “did not constitute the reconstruction of a building”. (Although cited by HMRC, the case of Lee does not seem relevant to the issue as the Tribunal in that case seems simply to have decided zero rating was not available as neither test in Note (4) was met.) Appellant’s submissions[31]The Appellant agrees with HMRC that there is a two stage test but disagrees with HMRC what it is. The Appellant considers that the test for zero rating under Item 1 is(1) is the building substantially reconstructed? And if so,(2) is one of the two tests in Note (4) met?[32]Unlike what he referred to as the Barraclough heresy, Mr Gordon considers that the phrase “substantially reconstructing” (and not “reconstructing”) should be given its ordinary everyday meaning. In particular, Mr Gordon considers that the word “substantially” does and is intended by Parliament to qualify the word “reconstructing”.[33]Mr Gordon considers that HMRC’s interpretation of Item 1 involves giving no meaning to the word “substantially” because it simply asks the question is there “reconstruction” and then looks to Note 4 to decide if that reconstruction is sufficiently substantial. If this were the correct interpretation, argues the Appellant, Parliament would simply have omitted the word “substantially” from Item 1. Instead, Mr Gordon points out, the word ‘substantially’ is used to qualify “construction” throughout Group 6 (except the last references in Note (4) where he says it is clear that the word “reconstruction” is a short-hand referring back to “substantially reconstructed” mentioned at the start of Note (4).)[34]Mr Gordon said it would be wrong for this Tribunal to separate a phrase into its component parts. He cited a dictum of Megarry J in Fleming v London Produce Co Ltd 44 TC 582 at page 596 where the Judge was considering the meaning of “general commission agent”. The Judge said: “I feel little temptation in the process of defining each of the words separately and then adding the bits together; for such an operation is notoriously unreliable, as indeed the Holy Roman Empire and the Lord Privy Seal have long testified” (The latter we presume to be a reference to the old joke that the Holy Roman Empire was neither holy nor Roman, and the Lord Privy Seal is neither a lord, a privy nor a seal.)[35]Mr Gordon also criticised HMRC’s interpretation as it exchanges the word used by Parliament (substantially) for a different word (substantial). He does not consider that they necessarily have the same meaning. “Substantial” may mean large. “Substantially” in taxing statutes he says is used to mean less than 100%. He suggests it might mean “significantly” or “to a great extent”.[36]Mr Gordon considered that the test applied in Barraclough and the cases which applied the same test was the wrong test: he does not conclude that they were necessarily wrongly decided. He much preferred the test applied in the case of Lordsregal as follows:
“…it seems to us that the question posed by item 1 is straightforward (even if it may not always be easy to answer) and, in this respect, we would construe the words “substantially reconstructing” together according to their ordinary everyday meaning. The question posed by item 1 is whether the person in question is substantially reconstructing the building and while that necessitates a view as to what amounts to reconstruction (contrasting that as necessary with ‘in the course of approved alteration within item 2), it does not involve ignoring the word ‘substantially’ in arriving at a conclusion as to whether what was done in the particular case amounted in ordinary parlance to substantial reconstruction.”
[37]HMRC criticised the Appellant’s reliance on the Lordsregal case. Mr Singh did not consider that it rejected the Barraclough approach. He pointed out that the Appellant in that case accepted Barraclough as a correct statement of the law and says that the Tribunal found no practical difference between “substantially reconstructing” and “reconstructing” and decided that every case was “one of impression based on the evidence” (paragraph 47).[38]As to what “substantially” means, Mr Gordon cited the Australian case of Secretary, Department of Social Security v Wetter (1993) FCR 22 which was a decision of Mr Justice Hill of the Australian Federal Court. Part of this case was about whether the claimant was entitled to a pension and on that point the case turned on whether the claimant “wholly or substantially maintained” a child. After commenting that the meaning of “substantially” depends greatly upon the context in which it appears, the Judge rejected the Tribunal’s interpretation that “substantially” where it appears in context with “wholly” could mean “something more than merely incidental”. He said: “It is the word ‘wholly’ that gives context here to the word ‘substantially’. In the context, in my view, the word means something less then ‘wholly’ but more than merely ‘insubstantial’ or ‘insignificant’ and is appropriately paraphrased by the words ‘in the main’ or ‘as to the greater part’.[39]Mr Justice Hill’s views are not of course binding on this Tribunal, coming as they do from another jurisdiction but Australia is of course a common law jurisdiction that shares our language and some of the history of its legal system with the legal system of this country.[40]Based on Mr Justice Hill’s dictum, Mr Gordon puts the view that where the word “substantially” is qualified by “wholly” it means ‘more then 50%’ or “as to the greater part’. However, where ‘substantially’ is not qualified by ‘wholly’, as in this case, he thinks ‘something more than merely incidental’ is the correct meaning as this could be taken to be implied by what Mr Justice Hill said. In his Skeleton Argument he suggests that “substantially” might mean “to a significant extent”. He also suggests the use of the word is to ensure that the works are not merely restorations, maintenance, alterations or repairs.[41]Another point that Mr Gordon made was that he thought Item 1 should not be interpreted in such a way that it effectively encouraged the demolition of listed buildings, as in his view this would be contrary to the scheme of the legislation. Mr Singh for HMRC did not consider that a purpose of preserving listed buildings could be read into the legislation as Item 2 of the same group (not to mention Note 4(b)) gives relief for alterations to and not repairs of listed buildings. Decision on test to apply[42]We agree with the Appellant that there has been some divergence of views between different Tribunals on how “substantially reconstructing” should be interpreted.[43]The tests used in Lordsregal and the Barraclough line of case appear to differ on two grounds. The first stage of the Barraclough test is whether the building was reconstructed: at this stage the test does not see the word “reconstructing” as qualified by the word “substantially”. This is because it requires the Appellant to show that there was a reconstruction and only if there was would the Tribunal consider stage 2 of the test (which is whether the works were substantial). On the other hand, Lordsregal sees the first stage of the test as whether the building was “substantially reconstructed”.[44]Secondly, the Barraclough line of cases read Note (4) as defining “substantially”. This is no doubt because Note (4) reads “For the purposes of item 1, a protected building shall not be regarded as substantially reconstructed unless the reconstruction is such that at least one of the following conditions is fulfilled…..” Mr Gordon says the second reference to reconstruction unqualified by the word “substantially” in the above phrase is just a kind of short-hand for substantially reconstructed, but it seems to me that the Barraclough line of cases see the omission of the “substantially” from the second use of the word “reconstruction” as indicating that the two tests in Note (4) in fact define “substantially”. It is contrasting “substantially reconstructed” with “reconstructed”. The second stage of the Lordsregal test is also to apply Note (4) but it does not see it as defining the word “substantially”.[45]On the first stage of the test, to the extent that there is a real difference, we agree with the Appellant and the Chairman in Lordsregal. The legislation in Item 1 uses the phrase “substantially reconstructing”. It does not say “reconstructing”. The only logical inference is that the adverb “substantially” was meant to qualify the verb “constructing”. We agree with the Chairman in Lordsregal that this Tribunal must consider what the word “reconstruction” means, but that the Appellant only has to show that it substantially reconstructed the building.[46]However, this divergence in formulation of the test may be more apparent than real because although the Barraclough line of cases require “reconstructing” rather than “substantially reconstructing” to be shown by the Appellants at the first stage, in practice the Tribunals have required we think rather less than total reconstruction. (It is difficult to be entirely sure of this because the Tribunals dismissed all the appeals except the one in Lordsregal. ) It is clear that the Appellant must show that the works are works of reconstruction and that the works amounted to substantially reconstructing the building. Meaning of “reconstructing”[47]We have made the point above, which we do not consider to be controversial, that it is clear from the fact Group 6 is distinct form Group 5 and from the tests in Note(4) that “substantially reconstructing” clearly does not envisage total re-building of the listed property in question. But what does the word “reconstructing” by itself mean?[48]In our view, as stated above, “reconstructing” does not necessarily mean the same as “constructing”. To us the word can indicate the re-building of something that was there before: we think it might well in such a context also carry the connotation (even without the qualification of “substantially”) that whatever was reconstructed had not necessarily entirely ceased to exist before the reconstruction. Indeed, if what is “reconstructed” had entirely ceased to exist the re-building is of a replica (or if not a replica one would speak of “construction” rather than “reconstruction”). It is therefore perhaps more natural to talk of reconstruction where at least something of the original building remained.[49]“Reconstruction” may well also carry the implication that the re-built property is the same or very similar to the one that existed before, although no doubt this depends on context. It is certainly not inimical to “reconstruction” that the reconstructed building looks the same inside and as the original one even though replication may not be essential for a building to be re constructed.[50]We considered the Oxford English Dictionary and the meaning its ascribes to “reconstruct” which is (ignoring inapplicable definitions) “ To construct or put together again, esp. following damage or destruction, or by way of renovation”[51]We draw the following conclusions about “reconstruction”: · A reconstruction may not necessarily involve a construction from nothing – something may very well remain of the original building; · It is as much (if not more so) a reconstruction where the original building materials are re-used. The Tribunal in Lordsregal appeared to share this view (see paragraphs 45 and 47); · The reconstructed building could be a complete replica: it is not necessary for there to be alterations (although obviously if the Appellant relies on Note 4(a) rather than (b), the 60% test must be passed as well so although a replica may be a substantially reconstructed building it might not achieve zero rating as it could fail the 60% approved alterations test). We note that our views on this are similar to the Tribunal in Lordsregal who said:
“it is true that the external walls and internal layout were the same and that there were no significant additional to the building. But we do not think that it is a requirement for there to be ‘reconstruction’ that there should be such changes”
We note in passing that HMRC’s reconsideration letter to the Appellant specifically made the point that there had only been minimal changes to the layout of the building and that alterations were kept to the minimum. The Tribunal does not see this as relevant to the question of “substantially reconstructing” although it may of course be relevant to the question of alterations. · Construction of new extensions as part of the project are not works of reconstruction (as this is not re-building something that was there before); · Works can be works included in a reconstruction even if they are not “structural”. We did not in fact understand HMRC to contend that only works to the structure of the building could be part of a reconstruction, although in cross examination of the Appellant’s witness they made an issue of which works were and were not structural. It must be right that reconstruction can include non-structural changes: a “construction” of a building would normally include the erection of all parts of a building including its non-structural elements such as non-load bearing partition walls, or more pertinently in this case to plastering walls, and it follows that “reconstruction” could also include the reconstruction of such non-structural elements. HMRC’s point seemed to be that they did not consider the project to include sufficient structural works to constitute a reconstruction of the building. We will return to this point; · We consider that installing new services or re-installing services (such as gas, electricity, drainage etc) are also works of reconstruction, and we did not really understand HMRC to contend otherwise. The Appellant drew our attention to HM Customs & Excise’s Business Brief 7/2000 in which they state that they consider works to the wiring in or on structure of building are works to the fabric of the building for the purpose of the approved alterations test. Our view is that such works during the construction of a building would be seen as part of the construction of a building and therefore such works on a protected building are works of re-construction. Undertaking such works and no other, though, would not amount to substantially reconstructing a building; · ordinarily repairs and maintenance are not “reconstruction”. In so far as HMRC suggested to us that repairs could never amount to reconstruction we cannot agree. In our view, repairs could be so extensive that they amount to reconstruction. One could say that the building at issue in Lordsregal was repaired: it was in a parlous state and at risk of collapse and the effect of the work was to repair years of neglect yet nevertheless the Tribunal found that the house was substantially reconstructed. Indeed, unless the works are necessary to repair the building, it seems unlikely any protected building would be given listed building consent to (in effect) be reconstructed. The question for the Tribunal, it seems to us, is when does a series of repairs cease to be mere repairs and become reconstruction? The Tribunal in Lordsregal said:
“it may always be possible to describe particular items of work comprised within a larger project as works of repair when looked at individually but if one stands back and looks at the property as a whole and what was done to it, we find it impossible to describe it as amounting to no more than a work of repair or restoration.”
We agree that extensive repairs can amount to reconstruction if, viewed as a whole, the building was reconstructed.[52]It is relevant at this point to note that HMRC suggested in the Lordsregal case that because the application for planning & listed building consent used the word “repair” the Appellant was being inconsistent in the hearing in calling the work “reconstruction” for zero rating purposes. In the case before this tribunal HMRC suggests there is inconsistency in describing the work as refurbishment in the tender documents yet reconstruction for VAT purposes. Firstly, of course, the description of the works that one of the parties chooses to ascribe to them is not determinative of the issue. Secondly, in any event, inconsistency would only arise if the terms were incompatible. Yet repairs can amount to reconstruction, and reconstruction to repair. Similarly extensive refurbishment might involve reconstruction, and reconstruction almost inevitably must involve refurbishment. Meaning of “substantially”[53]Deciding as we have that the test is “substantially reconstructing” requires us also to decide what “substantially” means. HMRC, as they follow the Barraclough line of cases thinks that it means that either one or other of the Note (4) tests must be met by the Appellant. This would be a favourable test for the Appellant as they have to satisfy one or other of the conditions in Note (4) to qualify in any event. However, HMRC only held this view on the basis that the Appellant had first to show reconstruction of the building.[54]We agree with the Appellant and Lordsregal that “substantially” is meant to qualify “reconstructing” and that the word must have a meaning apart from the tests in Note (4). What is that meaning?[55]We started by looking at the decided cases although we recognise that they are of limited assistance as being Tribunal cases they are not binding on us and we have already decided that we are applying the test of “substantially reconstructing” and it is not clear that those cases necessarily applied the same test. Nevertheless, both parties in this case agreed that (with the exception of the Southlong East Midlands decision as far as the Appellant is concerned) these earlier cases were correctly decided on the facts.[56]Lordsregal was the only case cited to us where the Appellant was found to be entitled to zero rate under Item 1. The facts in the case were described by the Tribunal in Southlong East Midlands Ltd and by the Appellant in this case as “extreme”. We would agree: in that case before the restoration the building was a ruin unfit for human habitation (albeit inhabited) and at risk of collapse. Although done bit by bit, the work involved: Roof coverings removed and replaced; Many roof and ceiling/floor joists replaced, floorboards replaced An area of flat roof replaced with pitched roof Timber frame left standing but rotten bits cut out and replaced; Foundations enlarged; Brickwork removed and replaced/renewed Stud walls and ceilings replaced; Windows replaced and some new windows created; New heating and power supply installed. Some minor alterations in floor plan involving removing/creating walls.[57]In summary the building in that case was more than gutted. Very little of the original building remained. The only part of the building that remained in situ was its timber frame (and even sections of that were replaced) and some of the roof timbers. The rest of the building was reconstructed partly out of original materials and party out of new. HMRC in that case (rather surprisingly we think) did not consider that this amounted to a reconstruction of the building, but Mr Singh in front of us did not take the view that it was wrongly decided. In our view had the Appellant gone any further by replacing the frame it would have been a case of construction of a replica rather than reconstruction of an existing building.[58]Both Mr Singh and Mr Gordon considered Barraclough to be correctly decided and we agree. The works undertaken cost £20,000 (the building in its ruined state cost approximately £48,000 and was sold for approximately £81,000 after the works were completed) and came no where near satisfying the 60% test of Note 4(b). The works comprised: Installation of central heating; New bathroom; New kitchen Re-wiring One room enlarged Two windows replaced Felt on porch changed to lead Other repairs New doors[59]In the case of A D J Lee (VTD 5887) again the 60% test was failed. The Chairman did not seem to make a decision on whether the building was substantially reconstructed per se but he did comment that “putting on a new roof may be a substantial undertaking, but by itself I would not regard it as the reconstruction of a building…nor indeed did Mr Lee suggest it might be.” The works were much more extensive that the new roof but the Appellant’s failure to obtain listed building consent meant that the works were not approved alterations (required for the 60% test) and the Tribunal did not need to consider the matter further.[60]In Vivodean Limited (VTD 6538) the specification for the work was mostly “checking and repairing as required” and the case failed in part as there were too few alterations which required listed building consent. There were few internal works and no structural works to main building. The work in summary comprised: demolition of extension 2 underpinning extension 1 replaced upper floor and wall linings of extension 1 overhauled roof new wiring and some new plumbing new kitchens and bathrooms[61]The Chairman ruled that there was no material reconstruction. Both parties before me considered that it was the right decision on the facts and we agree.[62]In Nigel Brodie Church t/a Milton Antique Restoration (VTD 12,427) outbuildings were demolished and an extension and new outbuildings rebuilt. There were some improvements and renovations to the main building itself but the details are not specified. As noted above the finding was that the works came “nowhere near” a “reconstruction”. Both parties before me considered that it was the right decision on the facts and we agree. This was a case where the cost of the works appeared to be about the value of the property but the costs seemed to relate mostly to extensions and new out buildings rather than reconstruction of the listed building.[63]In Southlong East Midlands Limited (VTD 18,943) it was agreed that the Appellant passed the 60% test of Note (4)(a) but the finding was that the works were not within Item 1. The works comprised: demolition and rebuilding of one internal wall demolition of one outbuilding, with construction of larger extension over its site; partition walls removed; new staircase; main entrance of house moved re-configuration of rooms on first floor new bathrooms created where none existed before; most windows replaced roof covering (but not timbers) replaced some foundations rebuilt complete re-wiring new drainage system[64]Mr Gordon suggested that this case was not correctly decided. Indeed at paragraph 48 the Chairman says that had they found the building was reconstructed, they would have held it to have been substantial, which Mr Gordon said suggested that had the “substantially reconstructing” test been applied the Tribunal might have found for the Appellant. HMRC consider the case correctly decided and on the correct test. As can be seen from our view of the legal test, the approach of the Tribunal in this case was quite different to the one which we have adopted. Our view[65]If substantial reconstruction required the total reconstruction of the building Note 4 would be without point as a total reconstruction is clearly more extensive than the work required either by Note 4(a) or (b). The point of Note 4 is to limit the relief to only certain substantially reconstructed buildings: it anticipates that a building might be substantially reconstructed but not within Note 4(a) or (b). A sale of such a building is not zero rated.[66]We don’t find it helpful to do as the Appellant suggests and interpret the legislation in the light of Parliament’s supposed intent to protect listed buildings. Zero rating for listed buildings is rather odd, and at odds with planning law part of the purpose of which is we presume to preserve listed buildings. Only certain buildings (those for domestic and charitable uses) have beneficial VAT treatment and then in the main this is for alterations rather than repairs. The reason for this may well lie in history and the derogations the UK negotiated on its entry to the EU and later on the changes to construction zero rating in 1989, rather than any desire by the British Government to alter rather than preserve listed buildings, but nevertheless the scheme of the legislation is not so clearly aimed at the preservation of listed buildings as the Appellant suggests.[67]It is clear on the face of the legislation that Item 1 is qualified by Note (4) and Note (4) therefore gives guidance to what Parliament had in mind when using the words “substantially reconstructed”. Note 4(b) indicates that it is possible that a building can be substantially reconstructed when it retains all its external walls and other architectural features.[68]Note 4(a) applies to buildings which do not qualify under Note 4(b) or otherwise Note 4(a) is quite otiose. Substantial reconstructions which qualify under Note 4(a), therefore, by implication include those which retain more than the external walls and architectural features, and comprise a series of approved alterations.[69]Just how much of the original building can be retained for it to be substantially reconstructed? The Appellant argues that “substantially” can mean as little as ‘more than incidental’. In a wholly different context and jurisdiction Mr Justice Hill in Wetter where the phrase was “wholly or substantially” thought it meant more than 50%.[70]We are of the view that “substantially” means – even without being juxtaposed with “wholly” – of the most part or least more than 50%. If Parliament had intended to include reconstructions which were only more than incidental but not in the most part, why would it have used the word “substantially”? The Oxford English Dictionary gives a number of shades of meaning to substantially (ignoring an obsolete one): 1. In substance; in one's or its substantial nature or existence; as a substantial thing or being ; Essentially, intrinsically; Actually, really. 2. In a sound or solid manner; on a firm or solid basis; effectively, thoroughly, properly, soundly; 3. Of the construction of buildings, manufacture of fabrics, etc.: Solidly, strongly; 4. In all essential characters or features; in regard to everything material; in essentials; to all intents and purposes; in the main.[71]Although these are dictionary definitions and by no means conclusive, what is clear from this is that the dictionary definition of “substantially” does not mean merely more than incidentally. In our view “substantially” must mean at the very least “in the main”, or, if percentages must be used, at least over 50%. The facts The evidence[72]Having decided on the legal test which we must apply we turn to consider the evidence. We had witness statements and oral evidence from: · Mr Friling, Director of the Appellant and Director of Finance and Deputy Bursar of the College for approximately 10 years. He was the person in charge of the financial side of the project at issue in this case and also part of the team that selected the suppliers and contractors. The Appellant employed an independent project manager to oversee the day to day running of the project but Mr Friling was nevertheless on site every day, as he put it, as a casual observer. We found that he was in a good position to give the Tribunal an insight into the works undertaken; · Mr Nunn, an Officer of HMRC since 1975. His current position is as a Higher Officer in VAT Audit working in the Tax Avoidance and Partial Exemption team within Local Compliance. He carried out an VAT inspection on 12 July 2004, before the works commenced, and met Mr Friling. At this meeting the planned work to Hazelwell was mentioned and Mr Friling asked for advance clearance. Mr Nunn walked past Hazelwell after the meeting. He wrote shortly after this meeting to say HMRC was not in a position to make a decision. Agreement was reached that the Appellant would submit protective claims for the VAT at issue separately to its VAT returns and which HMRC would not pay pending making its decision. In June/July 2006 the Appellant provided HMRC with the details of the Hazelwell project which was by then complete. Mr Nunn met with Mr Friling again and had a tour of Hazelwell. He also had a meeting with the project manager employed by the Appellant. On 3 August Mr Nunn took the decision notified to the Appellant to deny its claim to the zero rating the subject of this appeal. The Appellant point of view is that HMRC’s view of what happened at Hazelwell is coloured by the fact that Mr Nunn only saw it internally after all the works were completed. To Mr Nunn, they say, it looked like the building had been redecorated and new furniture purchased. They consider that HMRC has failed to take into account all the work that was undertaken before the redecoration was carried out. From Mr Nunn’s point of view, of course, he was not in a position to inspect the works while they were being carried out. Overview[73]HMRC’s view was that the works were never intended to be a reconstruction. The architects’ tender documentation was headed “Refurbishment of Hazelwell Boarding House”. Mr Singh says it is clear from other references within this document that only refurbishment was intended. The mechanical and electrical engineers produced an Electrical Services specification which also referred to the intended refurbishment of the Building. As stated above we consider the Tribunal must look at what works were actually done and not at how documents produced for other purposes described them.[74]Mr Singh also said that the Hazelwell was a listed building and only necessary changes were approved by the Council. This is inconsistent with a reconstruction. He says consideration of the works themselves show that there was no reconstruction. He points out that the building was inhabited and in a useable condition before the works took place.[75]Mr Friling agreed that the building was inhabited before the works. He said, however, it was in “rag order” and held together with “bedsprings and gaffer tape”. Mr Nunn’s evidence on the other hand was that it did not show obvious signs of disrepair. On this difference between the parties we would say firstly, that it does not matter what state the building was in before works commenced: the test is whether it was substantially reconstructed, not whether it was in need of repair. Secondly we accept Mr Friling’s evidence that it was in need of repair (as it had, for example, a rotten roof) but that this would not necessarily have been evident to Mr Nunn when walking past.[76]The building was emptied of the children (who were decanted into a hotel for the two terms the building was out of action) and reduced, in Mr Friling’s view, to an uninhabitable ruin by virtue of the works carried out. It was then “reconstructed” in his view to be habitable once more and the children allowed back in.[77]The project took nine months. Mr Friling pointed out that HMRC’s view of the project relied on the specifications, such as the tender documentation and electrical services specification, all of which documents were produced before the work took place. His evidence, which we accept, was that in practice the project went about 10% over budget due to more extensive works being required. An example given by Mr Friling was in relation to the ceilings where the specification was to make good the existing plaster ceilings but they were in such a condition that in the event nearly all were removed and replaced by double layers of plaster board. Another example was in relation to the Architects’ Schedule of Internal Work where the only instruction for many rooms in relation to the plaster was “Strip all Tasso from the walls and make good to plaster where Tasso removed.” Mr Friling’s evidence, which we accept, was that removing the Tasso inevitably involved removing all the plaster behind it and so that in practice the re-plastering was rather more major than the specification indicated (Tasso was explained to the Tribunal as being a kind of child proof wall covering).[78]Apart from the differences between the parties caused, as noted from the specifications not quite anticipating the full extent of the work done, another main difference between the parties, it seemed, was a difference in terminology (and of course whether the works were sufficient for a substantial reconstruction). In particular, Mr Friling referred to the building being gutted. Mr Singh described this as a gross exaggeration. In particular, HMRC considered that “gutting” implied most internal walls were demolished, which in Hazelwell they were not. This seems a difference in terminology: Mr Friling agreed that most walls remained in situ. Mr Friling also referred to the roof being lifted. It seems by this he meant that where the roof bearers had to be replaced the roof joists were lifted to allow this work to be done. The roof was then replaced in the same position as before. HMRC, however, had understood the word to mean that the roof’s pitch or position had been altered – which it had not been. Other than as stated above, the parties did not seem to disagree greatly on what works had in fact been carried out, and we set out the detail of them as we have found them to be as follows: Internal walls[79]Ignoring the reconstructed extensions, HMRC considered that only 16 out of existing 131 rooms in the building had walls which were demolished, or demolished and rebuilt, or new walls. Mr Friling agreed save to say his count was 20 rooms. Virtually all of the walls in the basement and ground floor and most of walls on the first and second floors were stripped down to bare masonry (removing twil & lath and limestone plaster), replastered (with plasterboard and skim coat) and given new skirting boards.[80]Mr Singh and Mr Nunn pointed out that there were few changes to the buildings floor plan (apart from the construction of the extensions):
“looking at the before and after plans that essentially the internal structure of the existing building (apart from the new extension) remained very much as it was before…”
Mr Friling agreed, as we do. But as stated above in paragraph 51 we take the view (as did the Tribunal in Lordsregal) that this is irrelevant to the question of “substantially reconstructing” (although not to the question of alterations). The ceiling[81]As mentioned above virtually all ceiling coverings were removed and replaced with double plasterboard. This was not in the specification but proved easier than trying to repair the old ceilings. The roof[82]The roof was removed down to the roof joists. Rotten joists were replaced. Some joists were lifted to allow the roof bedding stones to be replaced where necessary. Extra joists were inserted. New battens were replaced. New insulation and a breather membrane inserted. It was re-tiled using the old tiles where possible. New rainwater goods and flashings were installed.[83]HMRC made the point, with which Mr Friling agreed, that the roof was replaced because it was rotten. The Tribunal cannot see the relevance of HMRC’s point: the question is whether the building was substantially reconstructed: the reason for the alleged reconstruction does not seem relevant. We would suggest that HMRC’s point is that the roof was not altered but, as we have said, we do not consider that relevant to the question of substantially reconstructing (and we note that in fact there were alterations to the roof in that new insulation, membranes and some new joists were inserted).[84]Again HMRC emphasised that old roof tiles were re-used where possible. Again we make the point that we do not consider this relevant to the question of substantially reconstructing. As we have said in paragraph 51 “reconstruction” could apply to using old or new materials.[85]Another area of dispute was Mr Friling’s evidence that one long but narrow section of roof over a corridor was converted from slanting to a flat roof. By the time Mr Friling had taken the Tribunal through the documents and in particular the photographs evidencing this, we did not understand HMRC to continue to dispute the matter. We find as a fact that the section of the roof covering the long corridor was removed and replaced with a new flat roof. The important point for this Tribunal is that that section of the roof was entirely rebuilt: that it was also altered goes to Note (4) rather than Item 1. Chimneys[86]The chimney stacks were re-worked: layers of brick were removed till they got to good bricks. The stacks were then re-built. The remaining old brickwork was repointed. Works to external walls[87]Some areas of defective brick work replaced. Some dressed stone removed and replaced. The two external fire escapes were removed and the building made good. The Tribunal finds that the works to the external walls were not extensive (Mr Friling described them as modest) and by themselves would not amount to substantially reconstructing the building. Housemaster’s flat[88]The building which before the works had over 130 rooms (it seems this may have increased to nearer 160 by the end) had some 11 rooms over two floors (ground and first) at the end of one wing which was a self contained flat occupied by the housemaster and his family. No works at all were carried out to this flat during the project save that the fire alarm system was upgraded. Green house and new extension[89]Hazelwell as it existed immediately before the works in question had two single storey extensions to the original building. Item 1 applies to a protected building and we take this to mean the whole of the protected building and not the building in its state as originally constructed. Certainly no one suggested the contrary to us. Therefore we find these two extensions formed part of Hazelwell.[90]One extension was the main entrance foyer and the other was an ablutions block (comprising toilets and showers). As part of the project the extensions were demolished and replaced: once rebuilt they accounted for approximately 20% of the footprint of the whole building, which was larger than the old extensions. The new foyer (called the Greenhouse) occupied the space of the old entrance foyer and part of the old ablutions block and is about 50% larger than before. The other extension, although occupying a similar footprint to the old single storey ablutions block, now rose three storeys, and provided an internal fire escape/new staircase for the first and second floors and new disabled facilities, new public rooms and new rooms for pupils. In total it is now about 10-15% of the floor area of the whole building.[91]HMRC took the view that the work in respect of the extensions amounted to construction rather than reconstruction. We disagree. Existing sections of the building were demolished and replaced. As we said above under our general conclusions, we find replacing sections of a building to be reconstruction. The reconstructions were very far from replicas: they looked very different, the footprints were similar but not identical and in the case of the old ablutions block the extension was now three floors high. But as we have said, we do not find it necessary for there to be reconstruction for replicas to be created. Showers/bathrooms[92]Some 6 new showers, 4 new bathrooms and 5 new toilets were created where none existed before, some existing facilities enlarged and in all cases the hardware was replaced. Kitchens[93]All kitchens were upgraded with new units, and one new kitchen was created where none existed before. Matron’s flat and tutor’s flat[94]The Tribunal was not told exactly what floor area these two areas comprised but roughly speaking it was the area on the second floor above the house master’s flat. We agree with Mr Friling and find that the works in respect of them were generally less extensive than elsewhere. There was some “upgrading” and redecoration with new bathrooms and kitchen. Hardplay area[95]This is outside and not part of the building, and therefore, it seems to us, irrelevant. It was relaid and a new gateway constructed. Some outbuildings were demolished. Basement[96]The boiler rooms were reconfigured. A new external entrance to the boiler rooms was created at the rear of the building replacing the entrance which had been at the front. An entirely new plumbing system was installed including new boilers (but now situated in a different room). Some rooms were dry-lined and converted into rooms for pupils to use. Doors and doorways[97]Of approximately some 166 doorways, some 28 new doorways were created and others were filled in, but the majority were unchanged. Virtually all doors were replaced with new fire doors to comply with safety standards and in some cases the architraves were also replaced. Windows[98]Virtually all windows were removed, “rebuilt” and replaced. This involved stripping the windows to the wood, replacing all rotten wood and broken glass, repainting and replacing in position. Services[99]All electrics, media, heating, plumbing and drainage was stripped out and totally replaced with new systems. A new fire alarm system was installed.[100]Although a minor matter, it seems the services were another area where the works went further than the specifications. As Mr Singh pointed out the specification did not require quite all of the plumbing nor the electrical trunking to be replaced but the Tribunal accepts Mr Friling’s evidence that in the event it was all replaced. Relevance of cost of works[101]The evidence from Appellant, which was not contradicted by HMRC, and which we accept, was that the cost of the works was roughly equivalent to the rebuilding cost for the entire building (as taken from an appraisal done for the purposes of buildings insurance). The works cost approximately £2.26million if ineligible expenses such as carpets and furniture are excluded. An independent valuation for insurance purposes in 2001 estimated the rebuilding cost to be £2.3m. Even allowing for inflation Mr Friling suggested this meant a current rebuilding cost of somewhere in the region of £2.5-2.87m which is not greatly more than the cost of the works. His point was that as far as the College was concerned the cost was the same as having it entirely rebuilt and the only reason it wasn’t rebuilt was because it was a listed building.[102]HMRC’s view was that the cost of the works was of no relevance to the question of “constructing” – although they considered that it might be relevant to question of “substantial”. The Tribunal does not consider that cost alone could be determinative of the issue of whether something was substantially reconstructed, but that it is a useful indicator. Boyne house[103]There was mention of Boyne house, another listed building used as a boarding house by the College, in respect of which similar arrangements had been entered into when the renovations were carried out. HMRC gave the Appellants clearance in 2001/2 that the sub-lease back would be a zero rated supply under Item 1 as a substantial reconstruction.[104]HMRC submitted that the facts were different and HMRC could not be held to a decision in a different case. The Appellant agreed that they were not making a case on the basis of holding HMRC to decision on Boyne House. This must be right: the Appellant sought clearance form HMRC on Hazelwell (which was not forthcoming) and clearly decided to go ahead with the project despite the risk on the VAT front: there was no detrimental reliance on the clearance given in respect of Boyne House even were the Tribunal to have the jurisdiction to take this in account (and it is far from clear that it does). The Tribunal has therefore ignored the position in respect of Boyne House. Our conclusion[105]Not to detract from outline of what work was actually done, our summary of it is as follows: · Roof was recovered but was not entirely reconstructed (as many roof timbers stayed in situ). Nevertheless the main part of the roof was substantially reconstructed; and another area of roof (over the corridor) was entirely reconstructed; · The two existing extensions entirely re-constructed with a slightly enlarged footprint and much larger floor area (as it now had 1 st and 2 nd floors); · All windows reconstructed and replaced; doors removed and replaced; · Some structural work to external walls · Some structural internal changes · All services stripped and replaced; · Walls stripped back to bare masonry and re-plastered in all rooms in basement, most rooms on ground floor and majority of rooms on first and second floors; ceilings replaced · No works at all to Housemaster’s flat (except fire alarm); · Cost was almost the same as the construction of a new building would have cost.[106]Clearly the housemaster’s flat was not reconstructed at all let alone substantially. All the other works listed above (apart from the necessary stripping back) were works of reconstruction of a building. They were also works of repair or refurbishment. As stated above we do not consider it necessary that the works were in many cases not structural as a building comprises its structural and non-structural elements.[107]Carrying out only any one of any of the above listed works would not amount to substantially reconstructing the building. But standing back and viewing all the works executed as a whole was the building substantially reconstructed? Our view is that it was: a substantial part of the building was substantially reconstructed (and in places wholly reconstructed). The fact that the cost of the works was almost as much as a new build reinforces the view we take that the physical works themselves amounted to a substantial reconstruction.[108]We consider that grant of the long lease of Hazelwell was a grant by a person who had substantially reconstructed a protected building and entitled to zero rating under Schedule 8 Group 6 Item 1 subject only to the question of whether it is excluded from zero rating because of Note (4). Our decision is therefore only a preliminary decision: if the parties cannot agree on whether the works meet one of the Note (4) conditions a separate appeal must be brought. Costs[109]As the Appellant has been successful in this appeal and we directed that the old costs rules applied, we award costs to the Appellant. Appeal rights[110]The Respondents have a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. BARBARA MOSEDALE TRIBUNAL JUDGE RELEASE DATE: 12 March 2010

Cited in 2 later judgments