Customs and Excise v Blom-Cooper

This is an appeal from an order made on 12 July 2002 by Mr Justice Peter Smith on an appeal by the Commissioners of Customs and Excise under section 11 of the Tribunals and Inquiries Act 1992 from the decision of the Value Added Tax and Duties Tribunal (Miss Judith Powell, sitting alone) released on 3 December 2001. The issue raised by the appeal is whether works carried out to convert a building of which part was formerly in non-residential use into a single dwelling constitute a residential conversion for the purposes of section 35 of the Value Added Tax Act 1994. The appeal is brought with the permission of this Court (Lord Justice Aldous) granted on 23 August 2002.

Section 35 of VATA 1994 is in these terms, so far as material:

By letter dated 9 November 2000 the Commissioners disallowed a claim made by Sir Louis Blom-Cooper on behalf of his wife for a refund of value added tax under section 35(1) of VATA 1994 in respect of works carried out to a building at 1 Southgate Road, London N1 formerly used as a public house. Lady Blom-Cooper appealed to the tribunal under section 83(1)(g) of the Act. The tribunal allowed the appeal to the extent that the works carried out consisted in the conversion to residential use of that part of the building which it had found as a fact to have been non-residential prior to the conversion. The Commissioners appealed to the High Court. It is from the order dismissing that appeal that they now appeal to this Court.

It is convenient to take the underlying facts, which have not been in dispute, as they are set out in paragraphs 4 and 5 of the tribunal’s decision:

Value added tax (“VAT”) is charged on any supply of goods or services made in the United Kingdom which is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him – section 4(1) VATA 1994. “Input tax”, in relation to a taxable person, includes VAT on the supply to him of any goods or services – section 24(1); “output tax” means VAT on supplies which he makes – section 24(2) VATA 1994. A taxable person is required to account for and pay VAT by reference to prescribed accounting periods – section 25(1); and he is entitled, at the end of each prescribed accounting period to credit for, and to deduct from any output tax due from him, so much of his input tax as is allowable - section 25(2). But input tax is allowable for that purpose only if attributable to supplies which he makes in the course or furtherance of his business – section 26(1); and then only if those supplies are themselves taxable supplies (or, if made outside the United Kingdom, would be taxable supplies if made in the United Kingdom) – section 26(2) VATA 1994.

The broad effect of those provisions is that the burden of VAT is borne by the ultimate consumer; that is to say, by the person who, for one reason or another, has no ability to recover – by refund or deduction – the tax charged on supplies made to him. Generally, a person will have no ability to recover the tax charged on supplies made to him (i) if he does not, himself, make supplies in the course or furtherance of any business carried on by him – because, in such a case, he will not be a taxable person (section 4(1) VATA 1994) – or (ii) if the supplies which he does make in the course of his business are not taxable supplies – because, in such a case, his input tax will not be allowable (section 26(2)) – or (iii) if his input tax is not attributable to whatever taxable supplies he does make (section 26(1) VATA 1994).

A person who carries out works to a building will, almost invariably, be a consumer of goods and services – in the sense that he will be a person to whom goods and services are supplied. He will bear the burden of the VAT charged on the supply of those goods and services – notwithstanding that it will be the supplier who is required to account for and pay that VAT – because (again, almost invariably) the amount of the VAT charged on the supply will have been passed on to him as an element in the amount which he has had to pay to the supplier. But he will not, himself, make a supply unless and until he comes to sell or let the building (or some part of the building). Absent some special provision he would not be entitled, until then, to recover what, if he is a taxable person, will be input tax. And, if the works are not carried out in the course or furtherance of a business - for example, the business of property development – the input tax would not be allowable.

Further, even a developer would not be entitled to recover, as input tax, the VAT charged on the supplies made to him unless the disposal of the building (in whole or in part) was itself a taxable supply. Prima facie, the disposal of the whole or part of the building which is to be used for residential purposes will not be a taxable supply – even if made in the course or furtherance of a business carried on by the developer. That is because it will be an exempt supply – sections 4(2) and 31(1), and item 1, Group 1, schedule 9, VATA 1994. But the conclusion that the disposal of the whole or part of a building which is to be used for residential purposes will not be a taxable supply is displaced in cases within Group 5 of schedule 8 to the Act. A supply by a taxable person of goods or services within schedule 8, VATA 1994, is zero-rated – section 30(2). Where a supply is zero-rated, then (whether or not VAT would otherwise be chargeable on that supply) it is to be treated as taxable supply – section 30(2) VATA 1994. The effect is that a developer will be entitled to recover, as input tax, the VAT charged on supplies made to him in the course of his business if the supply which he will make on completion of works which he is carrying out will be zero-rated as an item within Group 5 of schedule 8.

Items 1 and 3 in Group 5, schedule 8, VATA 1994 are described in these terms:

The inclusion of item 1, Group 5, in schedule 8 to VATA 1994 – so making the first grant by a person of a major interest in a building which has been constructed for, or converted to, residential use a taxable supply (albeit zero-rated) -–enables a developer who is a taxable person (and who is making such a supply in the course or furtherance of his business) to recover as input tax the VAT charged on supplies to him of goods and services. But that, of course, is of no assistance to a person who is carrying out comparable works, but who is not doing so in the course of a business and who (usually) will not be a taxable person. Such a person cannot take advantage of the provisions for the recovery of input tax which are contained in section 25 VATA 1994. It is to relieve such a person – a person “carrying out works . . . otherwise than in the course or furtherance of any business” - of the burden of the VAT charged on supplies to him of goods and services that section 35 VATA 1994 has been enacted. That section enables a person who (if he were carrying out the works in the course of a business) would be able to take advantage of the provisions for the recovery, as input tax, of the VAT chargeable on the supply to him of goods and services, but who cannot do so (because he is carrying out those works otherwise than in the course of a business) to claim a refund of the VAT element of monies paid to his suppliers.

It is no surprise, therefore, to find that there is a close similarity between paragraph (a) of item 1, Group 5, schedule 8 and paragraphs (a) and (b) of section 35(1A), VATA 1994; nor to find that there is a close similarity between paragraph (b) of item 1, Group 5, and paragraph (c) of section 35(1A) when read with section 35(1D). Works constitute a residential conversion for the purposes of section 35(1A)(c) when, and to the extent that, they consist in the conversion of a non-residential building, or a non-residential part of a building, into: “a building designed as a dwelling or a number of dwellings” or “a building intended for use solely for a relevant residential purpose”. The language of section 35(1D) - so far as it relates to cases within paragraphs (a) and (b) of that section – is indistinguishable from that of item 1(b) in Group 5. But section 35(1D) VATA 1994 includes the additional words in paragraph (c): “anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings”. I was, at first, inclined to the view that those additional words might be significant. On further consideration I am satisfied that, on the facts in the present case, paragraph (c) of section 35(1D) VATA 1994 is not in point.

It is important to have in mind: (i) that Group 5, schedule 8, VATA 1994 is to be construed in accordance with the notes contained in schedule 8 – section 96(9) VATA 1994 – and, in particular, in accordance with the notes to Group 5 itself; and (ii) that section 35(4) VATA 1994 requires that the notes to Group 5, schedule 8, apply for construing section 35 “as they apply for construing that Group”. Note (9) to Group 5 is in these terms, so far as material:

The purpose and effect of the works carried out at 1 Southgate Road was to convert a building formerly in mixed use into a building the whole of which is in residential use as a single dwelling. The claim, as made by Sir Louis Blom-Cooper on behalf of his wife, was for a refund of VAT charged on all supplies of goods and services attributable to the works of conversion – that is to say, without distinguishing between supplies attributable to the conversion of that part of the building which was formerly in non-residential use and the conversion of that part of the building which was already in residential use. The tribunal allowed the appeal to the extent of the VAT charged on supplies attributable to the conversion to residential use of that part of the building which had been non-residential.

In reaching that conclusion, the tribunal identified as “the real question” whether section 35 VATA 1994 applies “where the non-residential part is converted so as to become part of the new dwelling” or only “where the new dwelling is created exclusively out of the non-residential part” (decision, page 8 lines 30-34). The tribunal’s reasoning appears from the following passage (decision, page 9 line 27 to page 10, line 6):

The tribunal reached the conclusion that it did – as it recognised in the final sentence of the passage cited – on the basis that note (9) to Group 5 had no application to a case under section 35 VATA 1994. Its reasoning on that point appears earlier in the decision (page 6 lines 34-43):

On appeal to the High Court, the Commissioners challenged the tribunal’s decision on two grounds: first, that the requirements in section 35(1D) VATA 1994 are not satisfied unless the effect of the works is that the non-residential part is, itself, converted into a dwelling; second, that (in any event) note (9) to Group 5, schedule 8, requires that the result of the conversion must be to create an additional dwelling.

The judge rejected the first of those contentions. He held that it was enough if the building had comprised a non-residential part which was the subject of conversion works; provided that, after conversion, the building (taken as whole) was a building designed as a dwelling. As he put it, such a case fell plainly within paragraph (a) of section 35(1D) of the Act; but “If there was any doubt, the case would fall plainly within [paragraph] (c).” Although the judge’s conclusion on that point was challenged in the appellants’ notice as filed, that challenge was not pursued at the hearing. It was accepted by counsel for the Commissioners in this Court that the appeal could not succeed unless note (9) to Group 5, schedule 8, VATA 1994 could be invoked.

On that point the judge expressed his view succinctly, at paragraph 26 of his judgment:

The issue on this appeal – as I have said - is whether works carried out to convert a building of which part was formerly in non-residential use into a single dwelling constitute a residential conversion for the purposes of section 35 VATA 1994. That issue turns on the true construction and effect of section 35(1D). In construing that section, the notes to Group 5, schedule 8, “apply . . . as they apply for construing that Group” – section 35(4).

Note (2) to Group 5 gives meaning to the expression, found both in item 1(a) of Group 5 and in paragraph (a) of section 35(1D), “a building designed as a dwelling or a number of dwellings”. Note (4) gives meaning to the expression, found both in item 1(b) of Group 5 and in paragraph (b) of section 35(1D), “use . . . for a relevant residential . . . purpose”. It is plain that the building at 1 Southgate Road is not (and never has been) intended for use for “a relevant residential purpose”, within the meaning given to that expression by note (4). It is equally plain that the building (as converted) is “a building designed as a dwelling”. It is not “a building designed as a number of dwellings”.

Note (2) to Group 5 is in these terms (so far as material):

It follows, as it seems to me, that, on the facts in the present case, the only answer that can be given to the question “into what has the non-residential building or non-residential part of the building (in relation to which the works have been carried out) been converted?” is “a building designed as a dwelling” within paragraph (a) of section 35(1D) VATA 1994. In particular, the answer to that question cannot be “anything which would fall within paragraph (a) . . . if different parts of [the] building were treated as separate buildings”. The reason is that, if different parts of the building at 1 Southgate Road were treated as separate buildings, none of those “separate buildings” would fall within the description “a building designed as a dwelling” set out in note (2) to Group 5. On the facts in the present case, paragraph (c) of section 35(1D) can have no application.

In the present case the question “into what has the non-residential building or non-residential part of the building (in relation to which the works have been carried out) been converted?” arises in the context of section 35(1D) VATA 1994. In a case where the same works had been carried out by a developer in the course of his business, the same question would arise in the context of item 1(b) of Group 5, schedule 8. In a case where the same works had been carried out for the benefit of a relevant housing association (within the meaning of note (21) to Group 5), the same question would arise in the context of item 3 of Group 5. And, it has been unnecessary, in order to answer that question, to decide whether what has, or has not, been so converted is “a non-residential building or a non-residential part of a building”. The answer to that question will be the same whatever is the subject of conversion. But, in each of those cases, the answer to that question is not, of itself, a complete answer to the question whether VAT charged on supplies to the person by whom (or for whose benefit) the works have been carried out can be recovered by that person. In each case the ability to recover VAT charged on supplies depends, also, on the answer to the related question: “has there been converted into a building designed as a dwelling something within the description ‘a non-residential building or a non-residential part of a building’?”.

The answer to that related question is provided by note (7) to Group 5, schedule 8, VATA 1994; which is applicable not only to the items in Group 5 but also to section 35(1D) – section 35(4) VATA 1994. Note (7) is in these terms:

It is pertinent to have in mind that the only items in Group 5 to which note (7) can have any application are items 1(b) and 3. Those are the only items in which the phrase “non-residential” appears; and, where it appears in those items, the phrase is used as part of the expression “converting [or conversion of] a non-residential building or a non-residential part of a building”. The stated object of note (7) is to give meaning to the phrase “non-residential” in relation to a building or part of a building. And the only context in which that phrase needs to be given meaning is as part of the expression “converting [or conversion of] a non-residential building or a non-residential part of a building” in items 1(b) and 3. The words “included within items 1(b) or 3” which appear in note (9) are not themselves restrictive; they do no more than identify the only two items to which note (7) – and note (9), which (taken as a whole) restricts the effect of note (7) – can have any application. Note (9) would have exactly the same effect, as a note to Group 5, schedule 8, if it read: “The conversion . . . of a non-residential part of a building which already contains a residential part is not a conversion within this Group unless . . .”

So understood it is, to my mind, clear that the purpose and effect of note (9), in conjunction with note (7), is to give a restricted meaning to the expression “converting [or conversion of] . . . a non-residential part of a building” for the purposes of Group 5, schedule 8. The notes, taken together, have the effect that, where (before conversion) the building already contains a residential part, the conversion of a non-residential part will not be treated as “converting [or conversion of] . . . a non-residential part of a building” for the purposes of Group 5 unless the result of that conversion is to create an additional dwelling or dwellings.

If, on a true analysis, the purpose and effect of note (9), in conjunction with note (7), is to give a restricted meaning to the expression “converting [or conversion of] . . . a non-residential part of a building” for the purposes of Group 5, schedule 8, then the same restricted meaning must be given to that expression for the purposes of section 35(1D) VATA 1994. That is what section 35(4) plainly requires. The words of the section are “The notes to Group 5 . . . shall apply for construing this section as they apply for construing that Group”. The effect of section 35(4) and notes (7) and (9), taken together, is that, where (before conversion) the building already contains a residential part, the conversion of a non-residential part will not be treated as “converting [or conversion of] . . . a non-residential part of a building” for the purposes of section 35(1D) unless the result of that conversion is to create an additional dwelling or dwellings.

It follows that I think the judge was wrong to hold that note (9) to Group 5 had no application to the construction of section 35(1D); and wrong to hold that the express reference, in note (9), to items 1(b) and 3 of Group 5 “made it far more likely” that “where there are other references to the results of conversion works the requirements of note 9 are not required”. He overlooked, as it seems to me, the fact that there are no items in Group 5 (other than items 1(b) and 3) to which notes (7) and (9) can have any application. He failed to appreciate that the effect of those notes is to give a restricted meaning to the expression “converting [or conversion of] . . . a non-residential part of a building” for the purposes of Group 5; and that section 35(4) VATA 1994 requires that the same restricted meaning be given to that expression in the context of section 35(1D) VATA 1994.

I have already expressed the view that, on its facts, the present case does not fall within paragraph (c) of section 35(1D) VATA 1994. That conclusion makes it unnecessary to decide whether, in a case which did fall within paragraph (c), note (9) to Group 5 would have the effect which (as I would hold) it does have in this case. But, having considered the point, I will address it shortly.

In a case where the works consist in the conversion of a non-residential part of the building, paragraph (c) of section 35(4) VATA 1994 will be in point if, but only if, the effect of treating “different parts of [the] building . . . as separate buildings” is that one or more of those parts (treated as a separate building or buildings) would fall within paragraphs (a) or (b) of section 35(1D). For that condition to be satisfied, the effect of treating a part of the building as a separate building must be that that (hypothetical) separate building would (for example) be “a building designed as a dwelling”; that is to say, that the hypothetical separate building will meet the requirements in note (2) to Group 5, schedule 8. And, if that condition were satisfied, then it seems to me inevitable that, in a case where the actual building, taken as a whole, had (before conversion of the non-residential part) already contained a residential part, conversion of the non-residential part would result in the creation of an additional dwelling. At the least, I cannot conceive of circumstances in which it would not do so. It would follow that, on the facts, note (9) would not require a restricted meaning to be given to the expression “conversion . . . of a non-residential part of the building” in a case in which paragraph (c) of section 35(1D) VATA 1994 were in point. But that is not this case.

I would allow this appeal.

I agree.

I also agree.