Phillips v Revenue & Customs [2011] UKFTT 372 (TC)

FTT-Tax
Phillips v Revenue & Customs
[2011] UKFTT 372 (TC) · 2011-06-07
[1]The Appellant (“Mr Phillips”) made a claim under the DIY Builders Refund Scheme (“the Scheme”) for a refund of Value Added Tax (“VAT”) in respect of the construction of a property known as “Ardachy”, situated next to Wester Brae Highland Lodges. By letter dated 5 May 2010, Her Majesty’s Revenue and Customs (“HMRC”) refused the claim in full. The Tribunal allows Mr Phillips’ appeal against that decision.[2]A Notice of Appeal had been lodged on behalf of Mr Phillips on 19 September 2010. A Statement of Case was lodged by HMRC, and the Appeal was set down for hearing at Inverness on 3 May 2011. A Direction was issued whereby HMRC were required to lodge with the Tribunal two copies of a bundle incorporating inter alia all the documents on which each party intended to rely. Two copies were duly lodged with the Tribunal.[3]The documents in the bundle were as follows:-(a) (A) Items 1-7, comprising the Notice of Appeal.(b) (B) Items 8 -16 comprising HMRC Statement of Case and the disputed decision of 5 May 2010.(c) (C) Items 17-51 comprising copy correspondence.(d) (D) Items 52-96 comprising plans, Planning Permission (2), Completion Certificate, record of enquiry to Contact Centre, completed Application Form and blank Form VAT 431NB with notes.(e) (E) Items 97-107 comprising s35 Value Added Tax Act 1994 and Group 5 of Schedule 8.(f) (F) Items 108-113 comprising the following Reports HMRC v Lunn [2009] UKUT 244 (TCC) , AE & Mrs JM Harris (2004) (VTD18822) Dr RW Nicholson (2004) (VTD19412) Paul Cussins (2006) (VTD20541) Mrs ME Wendels [2010] UKFTT476 (TC) .[4]In the course of the hearing, HMRC Document V1-8A was also produced.[5]Mr Phillips and Ms Tilling addressed the Tribunal. In the course of Mr Phillips’ submissions, he provided certain evidence (which was not in dispute) but he was not cross-examined by Ms Tilling. Ms Tilling did not lead any evidence for HMRC.[6]It was acknowledged by Ms Tilling that HMRC had not adjudicated on the quantum of Mr Phillips’ claim. It was agreed that the Tribunal should issue their decision in principle; and that in the event of Mr Phillips being successful and there was a dispute in regard to the substance of the claim, then that would be the subject of a separate appeal. Material Facts[7]The material facts, which were not in dispute, were as follows:-(1) Mr Phillips’ parents, Ian Robertson Phillips (“Mr Phillips Senior”) and Mrs Elizabeth Mary Phillips (“Mrs Phillips Senior”) bought an area of land on the Black Isle (approximately 20 miles north of Inverness) in 1974. In 1976 Mr Phillips Senior built two small chalets on the ground. Mr Phillips Senior and Mrs Phillips Senior operated the business, known as Wester Brae Highland Lodges, for many years before being able to extend and build a further two chalets. The success of the business continued and latterly they owned and operated seven chalets.(2) In early 2003 Mr Philips and his wife decided to return to the Highlands to assist in the running of the business. There was an area of land adjacent to his parent's home and on 27 February 2004, they made a planning application to The Highland Council, the local planning authority, to build a dwellinghouse.(3) Outline planning permission (reference 04/00189/OUTRC) was granted by The Highland Council on 11 August 2005 with a number of conditions attached. In particular, condition 3 required that Prior to the issue of approval of any Reserved Matters Application to follow hereon, the proprietors shall enter into an agreement with the Planning Authority under Section 75 of the Town and County Planning Act (Scotland) 1997. Specifically this agreement shall cover A) Restriction on further development B) Restriction on the holiday chalets being sold off individually and restriction on the holiday chalets being sold off independently from the house hereby approved. This Agreement shall be in respect of the entire family holding in the vicinity of the site. Reason - In order that the Planning Authority can retain effective control over the site in recognition of the substandard nature of the access.(4) A detailed planning application was made on 22 March 2007.(5) On 10 August 2007, Mr Phillips Senior and Mrs Phillips Senior conveyed to Mr Phillips, a plot of ground extending to 0.680 hectares, being the site of the proposed dwellinghouse . The plot of ground is adjacent to the subjects on which the chalets are situated.(6) An application was made to The Highland Council (reference 07/00283/FULRC) to vary the outline consent reference 04/00189/OUTRC by removing the aforesaid condition.(7) On 6 February 2008, Mrs Phillips Senior entered into a Minute of Agreement wherein she and her successors in ownership were described as “the proprietor”. Condition (FIRST) of this Minute of Agreement declared that:- The House shall be occupied, and the Proprietor will ensure that the house is occupied, only by persons engaged in the management or operation of the existing holiday chalet letting business operating on the Subjects together with their family members or other persons normally resident with them.(8) The Highland Council granted detailed planning permission on 18 February 2008 (reference 07/00283/FULRC). The detailed planning permission was subject to the following condition:- 1. That the house subject of outline planning permission reference 04/00189/OUTRC shall be occupied only by persons engaged in the management or operation of the business trading as Wester Brae Highland Lodges, together with family members. Reason - To accord with the terms of the planning permission and the legal agreement dated 6th February 2008.(9) Mrs Phillips Senior subsequently conveyed the site of the proposed dwellinghouse to Mr Phillips and his wife.(10) Mr Phillips commenced building the house to become known as Ardachy.(11) When the construction was nearing completion Mr Phillips reviewed the information within HMRC guidance note VAT 431 NB and sought advice from HMRC. He spoke to an HMRC representative on 5 January 2010(12) The Highland Council issued their Acceptance of a Completion Certificate on 27 January 2010.(13) By letter dated 15 February 2010 Mr Phillips wrote to The Highland Council requesting clarification as to whether the house could be used separately from the business, to which The Highland Council replied on 9 March 2010 as follows:- As you will be aware, the terms of the Section 75 Agreement that was negotiated with you in 2008 are that the house shall be occupied and the proprietor will ensure that the house is occupied only by persons engaged in the management or operation of the existing holiday chalet letting business together with their family members or other persons normally resident with them: The agreement does not prevent severance of the house from the business but it clearly requires the occupants to be engaged in the management or operation of the chalet business. The terms of the agreement therefore suggests that the house cannot be used separately from the business. You imply in your letter that while you and your family have taken residence in the house but are not involved in the operation of the business. I am advised that this would appear to be in breach of the agreement and the terms of the planning permission. I would be obliged if you would explain the circumstances to me. Mr Phillips wrote to confirm that the booking and reservation records for Wester Brae Highland Lodges were administered by his wife; and The Highland Council responded on 8 April 2010 to the effect that that this was sufficient to satisfy the terms of the Section 75 Agreement and the relative planning permission.(14) In the meantime, on 30 January 2010, Mr Phillips had submitted a form 431NB containing his VAT Claim for a total of £20,618.81.(15) By letter dated 5 May 2010, HMRC rejected the claim.(16) Mr Phillips requested an independent review. There was a further exchange of correspondence and by letter dated 20 August 2010, the claim was again rejected.(17) Mr Phillips issued a Notice of appeal on 9 September 2010. Legislation[8]The relevant provisions of the Value Added Tax Act 1994 are as follows – 35.— Refund of VAT to persons constructing certain buildings.(1) Where— (a) a person carries out works to which this section applies, (b) his carrying out of the works is lawful and otherwise than in the course or furtherance of any business, and (c) VAT is chargeable on the supply, acquisition or importation of any goods used by him for the purposes of the works, the Commissioners shall, on a claim made in that behalf, refund to that person the amount of VAT so chargeable. (1A) The works to which this section applies are— (a) the construction of a building designed as a dwelling or number of dwellings; (b) the construction of a building for use solely for a relevant residential purpose or relevant charitable purpose; and (c) a residential conversion. (1B) For the purposes of this section goods shall be treated as used for the purposes of works to which this section applies by the person carrying out the works in so far only as they are building materials which, in the course of the works, are incorporated in the building in question or its site. (1C) Where— (a) a person (`the relevant person') carries out a residential conversion by arranging for any of the work of the conversion to be done by another (`a contractor'), (b) the relevant person's carrying out of the conversion is lawful and otherwise than in the course or furtherance of any business, (c) the contractor is not acting as an architect, surveyor or consultant or in a supervisory capacity, and (d) VAT is chargeable on services consisting in the work done by the contractor, the Commissioners shall, on a claim made in that behalf, refund to the relevant person the amount of VAT so chargeable. (1D) For the purposes of this section works constitute a residential conversion to the extent that they consist in the conversion of a non-residential building, or a non-residential part of a building, into— (a) a building designed as a dwelling or a number of dwellings; (b) a building intended for use solely for a relevant residential purpose; or (c) anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings. Schedule 8 ZERO-RATING: GROUP 5) CONSTRUCTION OF BUILDINGS, ETC. The grant by a person— (a) constructing a building— (i) designed as a dwelling or number of dwellings; or (ii) intended for use solely for a relevant residential or a relevant charitable purpose; or (b) converting a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings or a building intended for use solely for a relevant residential purpose, of a major interest in, or in any part of, the building, dwelling or its site. 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; or (b) any civil engineering work necessary for the development of a permanent park for residential caravans, 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. The supply to a relevant housing association in the course of conversion of a non-residential building or a non-residential part of a building into— (a) a building or part of a building designed as a dwelling or number of dwellings; or (b) a building or part of a building intended for use solely for a relevant residential purpose, of any services related to the conversion other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity. The supply of building materials to a person to whom the supplier is supplying services within item 2 or 3 of this Group which include the incorporation of the materials into the building (or its site) in question. Notes: (1) “Grant” includes an assignment or surrender.(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied— (a) the dwelling consists of self-contained living accommodation; (b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling; (c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and (d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent. Submissions[9]Mr Phillips accepted that in order to demonstrate that the construction of Ardachy met the requirements of Note 2 (c) it was necessary to consider both disposal and separate use of the dwelling; and in the first instance, he submitted that it would be possible to dispose of Ardachy separately from Wester Brae Highland Lodges without breaching the terms of the planning permission and Section 75 Agreement.[10]He further submitted that the "Occupation Condition" imposed by the Planning Authority did not prohibit or restrict the separate use of Ardachy in that the condition referred to the occupants of the property and not the building and that the words within the planning permission and Section 75 Agreement do not prohibit or restrict the separate use of the property from the business.[11]In support of this, Mr Phillips referred to the Tribunal decision in the case of Mrs ME Wendels where the condition attached to the planning permission was that "The occupation of the dwelling hereby permitted shall be limited to a person solely or mainly employed or last employed in the cattery business or a widow or widower of such a person, or any resident dependant". Mr Phillips contrasted this with the following three Tribunal decisions where, in each case, there was a specific prohibition on the separate use of the property.[12]In the Upper Tribunal decision of HMRC v Lunn the restriction was that "The development hereby permitted shall only be used for purposes either incidental or ancillary to the residential use of the property known as [the manor] and shall not be used f or commercial purposes ". There was a similar limitation in the case of AE & Mrs JM Harris where the new building was only to be used as ancillary to the main dwelling and not as a separate unit of accommodation. In each of those cases, it was held that there was a prohibition on the separate use. In the case of Dr RW Nicholson, the condition was that "The annex hereby approved shall be used only for purposes incidental to the enjoyment of the dwelling house as such and shall not be used for any business, commercial or industrial purposes whatsoever". In this case, Dr Nicholson was successful in his appeal, but in the subsequent case of Lunn , the Upper Tribunal expressly stated that his appeal should not have been allowed as the planning permission clearly contained a prohibition on the separate use of the dwelling.[13]Mr Phillips added that if the planning authority’s intention had been to prevent the separate use of Ardachy and Wester Brae Highland Lodges, then the condition attached to the planning permission or within the Minute of Agreement associated with the Section 75 Agreement would have specifically stated that separate use was prohibited.[14]Mr Phillips also referred to the HMRC Guidance Note VAT 431 NB wherein it is stated that one cannot qualify for a refund under the Scheme if the building is an annex, extension or any other form of ancillary structure of building which cannot be disposed of or used separately from another property as it does not have independent status . In support of his submission that Ardachy did indeed have independent status, Mr Phillips pointed out that he and his wife funded the construction and that the house was built on land owned by them. It is their family home and the only link to the business of Wester Brae Highland Lodges is that his wife administers the booking and reservation records.[15]Mr Phillips claimed that his position would have been different if he had employed a single builder to construct Ardachy.[16]Reference was made to HMRC's letter dated 20 August 2010 wherein it was stated that : O ccupancy restrictions do not prevent the separate use or disposal of a dwelling. They are not, therefore, prohibitions within the meaning of Note (2)(c) of Schedule 8 to the VAT Act 1994 and do not affect whether a building is “ designed as a dwelling”. Common examples of occupancy restrictions include those that limit the occupancy of a dwelling to persons working in agriculture or forestry, or persons over a specified age. However, where a restriction goes beyond identifying a particular class of person and ties the use of a dwelling to, for example, a commercial activity being carried out in another building, this is a prohibition within the meaning of Note (2)(c) to Group 5 of Schedule 8 to the VAT Act 1994 and the dwelling is not, therefore a building designed as a dwelling. And after considering the specific circumstances of Ardachy, the letter concluded : The terms of your planning consent clearly restrict the occupancy of Ardachy to persons engaged in the management or operation of a particular business, (Wester Brae Highland Lodges), together with their family members/other persons normally resident with them, rather than to a particular class of person. In response to which Mr Phillips suggested, after noting that agriculture and forestry are common examples of occupancy restrictions, that his occupancy condition also defines a class of person, namely "a tourist industry worker".[17]Mr Phillips also referred to HMRC Guidance document V1-8A. In Section 15.2.4 it is stated that:- A building is not `designed as a dwelling or number of dwellings' when it is prohibited from either separate: use as a dwelling; or disposal. For example, this condition applies to exclude `granny' annexes constructed in the grounds of a main house. It can also be found where a dwelling cannot be used or sold separately from other premises, such as a caretaker's house at a school. Often the prohibition only prevents the building being used as a separate dwelling. Although a separate disposal could still be made, such as to another family member, the prohibition on separate use means that the Note 2(c) condition would have been broken and the building is not `designed as a dwelling or number of dwellings'. Occupancy restrictions do not prevent the separate use or disposal of a dwelling. They are, therefore, not Note 2(c) prohibitions. Examples include restrictions that limit occupancy to people: working, or last working, in the locality in agriculture or in forestry, or a widow or widower of such a person, and to any resident dependents; or over a certain age. With reference to the foregoing, Mr Phillips submitted that that the condition detailed within the planning permission for Ardachy complied with this (occupancy) category as his wife was working in the locality of the holiday letting business.[18]Mr Phillips also considered HRMC's assertion that, in his case, the restriction goes beyond identifying a particular class of person and ties the use of a dwelling to, for example, a commercial activity being carried out in another building, and that this is in effect a prohibition within the meaning of Note 2(c) to Group 5 of Schedule 8 of the Vat Act. Using the examples of farming and forestry, as detailed within guidance V1-8A, Mr Phillips contended that these are also commercial activities which require the use of other buildings and that the effect of HMRC's interpretation of Note (2)(c) would be to rule out all properties of this nature and that this was clearly not the intention of document V1-8A and the VAT Act 1994. 19. Mr Phillips also sought to distinguish the case of Paul Cussins which HMRC had identified in their letter of 5 May 2010. In that case, the specific wording of the condition attached to the planning permission had been "The residential accommodation hereby permitted shall only be occupied in conjunction with the commercial use hereby approved. Reason - The site lies in an area where new residential development is restricted". HMRC's decision to reject Mr Cussins’ claim was upheld by the Tribunal, but Mr Phillips distinguished this case in that Mr Cussins’ business and the residential accommodation were located within the same converted barn whereas Ardachy is totally separate from the Highland Lodge accommodation. Also, Mr Cussins owned both the residential and commercial parts of the dwelling, and it was established (at paragraph 10 of the report that the occupation of the residential accommodation could not be separated from the commercial use of the business premises.[20]Reverting to the case of Mrs ME Wendels, Mr Phillips submitted that occupancy is about who lives there, not about how they are permitted to use a property, and that the basis of that decision was that any kind of occupancy clause which restricts who lives there is not a prohibition on separate use.[21]In conclusion, Mr Phillips’ understanding was that the condition within the planning permission for Ardachy placed a limitation on the use and disposal of the property but was not a prohibition on the separate use or disposal of the property. A limitation is materially different from a prohibition. Mr Phillips adopted the submissions of Mrs Wendel at paragraph 27 of the report to the effect that a limitation permitted something to happen within specific restrictions of boundaries where as a prohibition forbade the act in question; adding that in his specific case the wording of the planning condition and Section 75 did not tie the use of Ardachy to the holiday business as it only requires the occupants to be involved not the actual dwelling.[22]In the opinion of Mr Phillips, the construction of Ardachy did not fall within the provisions of Section 35 of the Vat Act 1994 and HMRC were incorrect to reject his claim for a refund of the VAT paid on the building materials purchased for the construction of Ardachy.[23]Ms Tilling explained that Mr Phillips’ claim had been refused on the basis that the grant of Planning Permission dated 18 February 2008 and the Section 75 Agreement had contained a condition that Ardachy had to be occupied only by persons engaged in the management or operation of the existing holiday chalet letting business together with family members. In respect of this, HMRC considered that the property could not be used separately from the business.[24]Ms Tilling added that the Scheme allows for the refund of VAT on building works to DIY builders and converters, thereby putting them in a similar position to developers who sell properties which are zero rated by reason of Group 5 of Schedule 8; and that accordingly, the Notes should be interpreted in a consistent fashion whether they apply to DIY builders or to property developers.[25]It was submitted that as z ero rating is an exception to the normal application of VAT to economic activity, the provisions permitting the same are to be narrowly construed and conversely provisions which define or limit the application of zero-rating such as Note (2) to Group 5 should not be narrowly construed – even although the Scheme is not itself a provision concerned with zero rating. In making this submission, Ms Tilling founded on the decisions of Blasi v Finanzamt Munchen 91986 Case C345195 and HMRC v Lunn. In particular, it was stated in paragraph 19 of the report in Blasi v Finanzamt Munchen The phrase 'excluding ... the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function' in Article 13.B(b)(1) of the Sixth Directive introduces an exception to the exemption which Article 13.B provides for the leasing or letting of immovable property. It thus subjects the transactions to which it refers to the general rule laid down in the Directive, namely that VAT is to be charged on all taxable transactions, except in the case of derogations expressly provided for. That phrase cannot therefore be interpreted strictly.[26]Ms Tilling claimed that t he purpose of Note (2)(c) was to prevent zero rating where a relationship either in physical or legal terms existed between one building and another or others. She submitted that occupancy restrictions as such did not prevent satisfaction of Note (2)(c) and she pointed out that common examples of occupancy restrictions included those that limited the occupancy to classes of persons, for example those working in agriculture or forestry.[27]In the case of Paul Cussins , the Tribunal had recorded that farm buildings had been converted into residential accommodation with commercial premises attached thereto. The Planning Authority imposed a condition to the Grant of Planning Permission which was construed as follows : The wording of Condition 8 to our mind established a close nexus between the residential and commercial premises and taken in the context of the Published planning policies of Ryedale District Council and the reason for the decision as clearly stated this defines the domestic enjoyment as conjoined together with the commercial . And Ms Tilling submitted that where, as in the present case, a property may only be occupied by a person who works in a specific identified business and it is known that but for that particular business the property could not have been built there, then that is a condition of significantly different character to an occupancy condition .[28]Ms Tilling explained that a sound practical interpretation of the wording of Note (2)(c) was that a dwelling is used by being occupied. If that occupation is subject to a planning condition so obviously and rigidly tying that property to a specific identified business then there is a prohibition on separate use. The property cannot be used separately from that business.[29]Ms Tilling referred to the en quiry raised by the Local Planning Authority in their letter dated 9 March 2010 as to how the current occupation of the property satisfied the terms of the condition as imposed if the family had taken up residence but were not involved in the operation of the business and she submitted that the correspondence clearly demonstrated that the Local Planning Authority established use through occupation.[30]Ms Tilling found support from t he Upper Tribunal decision in the appeal of HMRC v Lunn and in particular the opinion that `separate use' should be interpreted as `separate from' and that therefore any restriction as to use, expressed either in positive or negative terms, had the effect of prohibiting separate use.[31]In response to an earlier assertion by Mr Phillips to the effect that whilst an occupancy condition existed upon Ardachy it did not exist upon the business and therefore if the business ceased to trade the condition would fall and become irrelevant, Ms Tilling responded that the application of Note (2)(c) of Group 5 could only be judged according to the facts at the date of the planning consent in issue at not at some undefined future point in time or event. Ms Tilling also disregarded the possibility that a Section 75 Agreement might not subsequently be insisted upon.[32]Ms Tilling did not seek to establish that the separate disposal of Ardachy was prohibited, and she submitted that it was sufficient for her to show that separate use was prohibited[33]Ms Tilling explained that HMRC had indeed considered the decision in the case of Mrs ME Wendels and had concluded that it was incorrectly decided; and that there was no requirement upon HMRC to appeal to a higher court any decision they viewed as incorrect . The case was decided upon its own facts and did not create a binding precedent. The condition in the present case is more restrictive in that it does not provide for occupation by a successor who is not engaged in the management or operation of the business.[34]Ms Tilling also pointed out that in HMRC v Lunn the Upper Tribunal specifically expressed the view that the previous Tribunal had erred in the case of Dr RW Nicholson ; and that decision should therefore not be followed.[35]In conclusion, Ms Tilling submitted that HMRC might only allow a claim under the Scheme when that claim satisfies the eligibility criteria as set out in the relevant legislation, namely s 35 of the VAT Act 1994 and Group 5 of Schedule 8, together with the notes thereto. In the present case, t he grant of planning permission had contained a condition which prohibited the separate use of the property; and as such Note (2)(c) was not satisfied. Reasons[36]The question before the Tribunal was whether Mr Phillips’ claim under the Scheme satisfied all the provisions in the relevant legislation.[37]The material facts were not in dispute and it was agreed that with the exception of Note (2)(c) Mr Phillips’ claim satisfied all the relevant provisions.[38]The Tribunal is satisfied that under the legislation, do-it-yourself builders who receive a refund of VAT under the Scheme are in a similar position to developers who sell properties which are zero rated by reason of Group 5 of Schedule 8.[39]Note (2) set out the following:- (2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied—(a) …………………………..(b) ………………………….(c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision.[40]It was acknowledged by Ms Tilling that there was no prohibition of a disposal of the building; and therefore the only issue was whether “the separate use” of Ardachy was prohibited.[41]Ardachy is a detached dwellinghouse and although it appears to have been constructed on part of the ground on which Mr Phillips’ parents operated the business of Wester Brae Highland Lodges, Mr and Mrs Phillips had taken a title to the particular ground before Ardachy was constructed; and there was no suggestion that the building of Ardachy was in any way connected with the business premises.[42]Considerable assistance in the interpretation of Note (2)(c) can be obtained from the opinion of the Upper Tribunal in the case of HMRC v Lunn 10 We consider first the purpose of note 2(c). If the 'separate from' meaning of 'separate use' is correct, the purpose of the note is to prevent zero-rating unless the new subsidiary dwelling could, in accordance with planning restrictions, be used independently of the main building. A planning restriction preventing use separate from the main building would commonly apply on the creation of a 'granny' annex. We have taken the liberty of looking up the reference made in Cartagena v Revenue and Customs Comrs (2006) VAT Decision 19454 to the model planning conditions in Planning Permission Circular 11/95 which under the heading ' “Granny” Annexes' contains the model provision that: 47. The extension (building) hereby permitted shall not be occupied at any time other than for purposes ancillary to the residential use of the dwelling known as [ ] …. This suggests that the planning restriction in this case, which is similar except that it also refers to incidental use, is a common one, and therefore something that Parliament might have had in mind as the purpose of note 2(c). On the other hand, if the 'separate household' meaning is correct note 2(c) would mean that what is (by virtue of note 2(a)) self-contained living accommodation must not be prevented from being used as such. The only case where this might possibly apply is where the planning permission restricted the use to holiday lets for a limited duration. It seems less likely to us that the draftsman of note 2(c) had this in mind when referring in general terms to separate use being prohibited. Also the concept of planning considerations requiring that a dwelling containing self-contained living accommodation must not be used as such seems unusual, and therefore it is less likely that VAT legislation would want to deal with such a possibility. 11 The context of note 2(c) is that it can apply only where the rest of note 2 is satisfied, that is(a) that the dwelling consists of self-contained living accommodation, and(b) that there is no provision for direct internal access from the dwelling to any other dwelling (or part of a dwelling). Both of these consider the separateness of the dwelling from another dwelling, so that the dwelling in question must (a) contain all the necessary facilities for self-contained accommodation (and therefore not rely on any facilities in the main dwelling), and (b) not be interconnected with the main building. Interpreting note 2(c) as the 'separate from' meaning follows naturally from the foregoing parts of note 2. It would be looking not at physical separation but separation in actual use. On the other hand the 'separate household' meaning would mean that although in (a) the accommodation must be self-contained, the use as a separate household must not be prohibited, which does not fit the context and would be dealing with what seems to be an unlikely state of affairs. 12 The issue of whether a restricted use is a prohibited use can apply only to the 'separate household' meaning; the restriction on use to purposes incidental or ancillary to that of the main dwelling can properly be described as a restriction rather than a prohibition on use as a separate household. On the other hand, if the 'separate from' meaning is correct a restriction to purposes incidental or ancillary to that of the main dwelling is necessarily a prohibition on use separate from the main dwelling. The word 'prohibited' is the natural expression to use with the 'separate from' meaning. 13 A number of other tribunal decisions have dealt with a variation on the planning restriction in this case to which we have added italics, including the following to which the tribunal referred: The barn conversion to form a granny annex herby permitted shall be occupied solely for purposes incidental to the occupation and enjoyment of Poplars Place as a dwelling and shall not be used as a separate unit of accommodation . ( Ford v Customs and Excise Comrs (1999) VAT Decision 16271 ). That the annex shall only be used for ancillary accommodation in association with the main dwelling and for no other purpose whatsoever and in particular shall not be occupied as an independent unit of residential accommodation . ( Clamp v Customs and Excise Comrs (1999) VAT Decision 16422 ). The accommodation hereby approved shall be occupied solely in connection with and ancillary to the main dwelling at 176 Long Street, Atherstone, and shall not be occupied as an independent dwelling house . ( Milligan v Revenue and Customs Comrs (2005) VAT Decision 19224 (see para 8)). The italicised parts are missing in this case but if one considers the meaning of them they must all have the 'separate from' meaning; it is inconceivable from the context that they can have the 'separate household' meaning, which would mean that that the use must be (a) incidental to that of the main building, and (b) not as a separate household at all. On that basis these planning restrictions are effectively the same as the one in this case. In spite of Miss Choudhury's careful analysis of the cases we do not consider that the decisions in all of these cases, that there was such a restriction as is mentioned in note 2(c), can be distinguished because of the different wording of the planning restriction in this case. 14 We agree with Mr Thomas that Dr Nicholson is out of line with these cases. The following question and answer by the tribunal in that case is only meaningful if they had the 'separate household' meaning in mind:
'Can a use of residential accommodation be only incidental to the use of another dwelling, yet also be a separate use? We believe it can.'
We consider that it is wrongly decided and should not be followed. 15 These considerations all point to the 'separate from' meaning of 'separate use' and we conclude that this is the correct meaning. On that basis the planning restriction in this case means that the Building cannot be used separately from that of Radbrook Manor. Note 2(c) is not satisfied and therefore the building services in this case are not zero-rated.[43]The circumstances of HMRC v Lunn and each of the cases referred to, all contain a direction for the use of the particular property in relation to the adjoining subjects. This is in contrast to the present case where the Agreement contains an occupancy restriction on the proprietor, namely The House shall be occupied, and the Proprietor will ensure that the house is occupied, only by persons engaged in the management or operation of the existing holiday chalet letting business operating on the Subjects together with their family members or other persons normally resident with them. The wording attached to the grant of planning permission slightly differs in that there is no stated obligation on the proprietor the house ………………shall be occupied only by persons engaged in the management or operation of the business trading as Wester Brae Highland Lodges, together with family members. The essential element in each case is that there is a positive obligation on one or more of the occupants of the house to be engaged to a greater or lesser extent in the management of Wester Brae Highland Lodges. There is no obligation which requires the house to be used in the management of the same.[44]Ms Tilling founded on the following paragraph in The Highland Council’s letter of 9 March 2010:- The agreement does not prevent severance of the house from the business but it clearly requires the occupants to be engaged in the management or operation of the chalet business. The terms of the agreement therefore suggests that the house cannot be used separately from the business. The second sentence implies that the house had to be used in connection with the business, but it is significant that when it was subsequently explained that Mrs Phillips administered the booking and reservation records for Wester Brae Highland Lodges, The Highland Council accepted that that this was sufficient to satisfy the terms of the Section 75 Agreement and the planning permission.[45]The separate concept of an occupancy restriction was noted in Section 15.2.4 of HMRC Guidance document V1-8A, and acknowledged in HMRC’s letter of 20 August 2010 when the decision of 5 May 2010 was reviewed -. Occupancy restrictions do not prevent the separate use or disposal of a dwelling. They are not, therefore, prohibitions within the meaning of Note (2)(c) to Group 5 of Schedule 8 to the VAT Act 1994 and do not affect whether a building is “designed as a dwelling” . Common examples of occupancy restrictions include those that limit the occupancy of a dwelling to persons working in agriculture or forestry, or persons over a specified age. Significantly, the examples in document V1-8A extended to to people: working, or last working, in the locality in agriculture or in forestry, or a widow or widower of such a person, and to any resident dependents.[46]The Tribunal did not accept the relevancy of Mr Phillips’s suggestion that his wife might be “a tourist industry worker”, or that she was working in the vicinity of the holiday letting business.[47]This concession in the letter of 20 August was apparently qualified when the paragraph went on to say However, where a restriction goes beyond identifying a particular class of person and ties the use of a dwelling to, for example, a commercial activity being carried on in another building, this is a prohibition within the meaning of Note (2)(c) to Group 5 of Schedule 8 to the VAT Act 1994 and the dwelling is not, therefore, a building “designed as a dwelling”. But this comment has to be considered in the context that it is dependant on the same word “use” as appears in Note (2)(c). The Tribunal heard that it was only Mrs Phillips that was engaged in relation to the business. Her work was confined to the administration of the booking and reservation records. There was no indication whether this work was carried out from the house or elsewhere, and indeed there was no obligation that Ardachy had to be used in any way in connection with the business.[48]The separate concept of an occupancy restriction was considered in the case of Mrs ME Wendel . In that case, the associated business was a cattery, and Mr Wendel had previously lived and run the business from his mother’s house, where he had resided. The new house was established when Mr Wendel had married, and the background as found by the Tribunal was as follows – 19. The building, Benaiah, was located in the countryside outside the built up area of Southwell. The development was subject to strict planning control which required a special justification for its construction. The Planning Inspector who granted permission for the development was satisfied that such a justification existed, namely, that there was a clear functional need for a full-time worker to be in sight and sound of the cattery. The Inspector found that the cattery business was well-established, profitable, and financially sound. Further he decided that the cattery could not be run from the other properties on the orchard owned by Mr Wendels' mother and brother because the properties had no functional relationship with the business. The Planning Inspector concluded that the need for a full-time worker at the cattery and the unavailability of suitable alternative accommodation constituted a special justification for the dwelling in relation to prevailing policies on residential development in the countryside. The opinion of the Tribunal was45. In the Tribunal's view the question whether the separate use or disposal of Benaiah was prohibited by the relevant planning consent should be determined by the proper construction of the wording of that consent, not by the extraneous circumstances surrounding the granting of the consent. Note 2(c) uses the phrase that the separate use, or disposal of the dwelling is not prohibited by the term of any statutory planning consent.. The wording of the planning condition imposed in respect of the development of Benaiah restricted the occupation of the dwelling to a person solely or mainly employed or last employed in the cattery business or a widow or widower of such a person, or any resident dependent. The condition correctly construed placed no prohibition or even a restriction on the separate use and disposal of the property. The condition was in all respects an occupancy condition.46. The Tribunal considers it helpful to compare the wording of the condition imposed on Benaiah with that considered by the Upper Tribunal in Lunn which was:
"the development hereby permitted shall only be used for purposes either incidental or ancillary to the residential use of the property known as Radbrook Manor and shall not be used for commercial"
. It is clear from the wording of the Lunn condition that the use the disputed development was subservient and connected to the residential use of the larger development known as Radbrook Manor. In contrast the condition imposed on Benaiah did, not link its use or its disposal with the cattery business. The condition imposed related to the category of persons occupying the property, and in no way restricted its separate use or disposal as a dwelling house.[49]The restriction in the above case was relaxed to the extent of allowing the occupation to include the widow or widower of a permitted person (the same phrase as appears in document V1-8A) , and this demonstrates the differing nature of an occupational restriction in that it is personal in nature, in contrast to a restriction associated with the property itself.[50]In the opinion of the Tribunal, the restriction relating to Ardachy was an occupational restriction which did not affect the use of the property; and it is in this context that the Tribunal finds that the provisions of Note (2)(c) do not take Mr Phillips’ claim outwith the Scheme.[51]The appeal is accordingly allowed.[52]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. 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. JOHN M BARTON, WS TRIBUNAL JUDGE RELEASE DATE: 7 June 2011

Cited in 4 later judgments