Cantrell (t/a Foxearth Lodge) v Commissioners of Customs & Excise

The question on this appeal from the decision of the VAT and Duties Tribunal (Mr Angus Nichol and Miss Sheila Wong Chong) made on 9th September 2002 is whether the goods and services supplied to the appellants, Mr and Mrs Cantrell, in the course of the construction of buildings on their property at Foxearth Lodge, Little Green, Saxtead, Woodbridge, Suffolk are zero-rated. The Tribunal held that they were not.

The supply of goods and services is zero-rated if either the supply or the goods and services are of a description for the time being specified in Schedule 8 to the VAT Act 1994. Schedule 8 is subdivided into a number of groups. Group 5 deals with the construction of buildings. Paragraph 2 of that group specifies

“Item No

[1...]

2.

The supply in the course of the construction of –

(a)

a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose...

[(b)...]

of any services in relation to the construction...

[3]

4.

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)-(15)]

(16)

For the purpose of this Group, the construction of a building does not include –

(a)

the conversion, reconstruction or alteration of an existing building; or

(b)

the enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings, or

(c)

subject to note (17) below, the construction of an annexe to an existing building.”

(17)

Note 16(c) above shall not apply where an annexe is intended for use solely for a relevant charitable purpose and –

(a)

is capable of functioning independently from the existing building; and

(b)

the only access or where there is more than one means of access, the main access to:

(i)

the annexe is not via the existing building; and

(ii)

the existing building is not via the annexe.

[(18)-(24)]

It is common ground that the building in question comes within Item 2(a) as intended for use as an institution providing residential accommodation with personal care for persons who need such care because of old age or other specified causes. Likewise it is common ground that the provisions of Note (17) do not apply. The sole issue is whether the building in question was constructed as “an annexe to an existing building” within Note 16(c).

Mr and Mrs Cantrell own the premises at Foxearth Lodge, Little Green, Saxtead, Woodbridge, Suffolk with which this appeal is concerned. They acquired it in four stages, namely Foxearth Lodge in 1978, Mobbs Cottage in 1983, Woodlands in 1984 and the site of the road to the north in 1990. Foxearth Lodge, Mobbs Cottage and Woodlands were separate dwellings built to the north of a public road from which access was obtained.

Mr and Mrs Cantrell carry on the business of a nursing home and are duly registered with the Suffolk Health Authority under the Registered Homes Act 1984. The nursing home comprises two elements, namely, the EM (Elderly Medical) Unit and the ESMI (Elderly Severely Mentally Infirm) Unit. The relevant legislation requires the two to be kept separate. By the end of 1992 the former was housed in the original Foxearth Lodge and an extension to it (“the New Barn”) which had been built that year. The ESMI Unit was contained in Woodlands. Mobbs Cottage, which had been completely rebuilt in 1987, was the Matron’s residence.

In 1995 plans for the construction of a new dementia unit, the demolition of Woodlands and the construction of a completely new building on the Woodlands site to accommodate the ESMI unit were approved by the local planning authority. Amended plans were approved in 1996. Those plans provided for a single storey ESMI unit to house 24 patients covering a floor area of 1000 m². As recorded by the Tribunal in paragraph 6 of their decision

“The works were planned and carried out in two phases, in order to allow the continued occupation of the ESMI patients during building. They remained in the old Woodlands unit until Phase I was completed, after which they moved into the new ESMI unit.”

In February 1998 the Commissioners assessed the builders to VAT at the standard rate on the goods and services supplied by them to Mr and Mrs Cantrell in the sum of £60,559.42.

The appeal with which I am concerned arises from that assessment. The builders, Wright & Fuller Ltd, appealed to the VAT and Duties Tribunal. After a hearing in October 1998 their appeal was dismissed. The Tribunal took the view (para 22) that the new structure was an enlargement of the nursing home and might also be an extension or an annexe (para 23). On 28th January 2000 the appeal of Mr and Mrs Cantrell, who were substituted for the builders, was allowed by Lightman J on the grounds that the Tribunal had made a material mistake of fact and had taken into account extraneous and irrelevant considerations. In relation to the latter point his order declares that

“regard must be only to the physical character of the buildings in course of construction at the date of the relevant supply and that the subjective intentions on the part of the appellants as to their future use, their subsequent use and the terms of the planning permission regulating their future use are irrelevant, save only in so far as they throw light upon the potential use and functioning of the buildings.”

Lightman J remitted the matter to the Tribunal for a rehearing.

Mr and Mrs Cantrell had been advised that the works would be zero-rated. One consequence of the assessment was that the Phase II works had to be delayed because Mr and Mrs Cantrell could not immediately pay for them. They were not completed until October 2000. The position between the carrying out of the Phase I and the Phase II works, and therefore the position on the ground at the time of the hearings before the Tribunal and Lightman J were described by the Tribunal in paragraph 8 of their second decision in the following terms:

“Between the carrying out of Phases I and II, Woodlands was still standing. Its demolition was the first action taken in Phase II. Between phases, Woodlands was attached to the ESMI unit by two linking corridors. The kitchen and laundry were in the old building, in addition to the new facilities. Between 1998 and 2000 the kitchen in Woodlands was available for patients in the new Phase I. There was a laundry in Woodlands and also in the new building. The laundry in Woodlands was phased out because there were sufficient laundry facilities in the new building. The kitchen in the ESMI building is still in use.”

In paragraphs 9 to 16 of their second decision the Tribunal describe the various buildings now making up the Foxearth Nursing Home as a whole. The relevant parts are those which describe the outcome of both the Phase I and the Phase II works. They are the following:

“The new ESMI unit is a completely self-contained close care unit for that category of patient.” (para 9)

“The two units have separate nursing staff requirements under s.25(3) Registered Homes Act 1984. The nurses for each unit enter their units from the outside, and there is no need for nurses of one unit to go through the other unit on the way to their workplaces.” (para 9)

“There is one access door only between the EM Unit and the ESMI Unit.” (para 10)

[The Tribunal then explained how such door had not originally been included in the plans but was necessitated by fire and other regulations]

“The new ESMI unit is entirely independent of the rest of the nursing home. It has a separate kitchen, lounge, dining room and laundry, and its own main entrance and reception area which are entirely separate for the EM unit. In addition the ESMI has a separate supply of electricity and water, its own boiler and water softener which serve only the ESMI unit, and its own separate sewage system. The functions are duplicated to the extent that there are in effect two separate and independent buildings. If the electricity to one unit were cut off, separate generators would supply emergency power. The ESMI unit is used for a wholly different function from that of the EM Unit.” (para 11)

“Looked at externally, the new ESMI unit has an entirely different appearance from the rest of the nursing home. It is a single storey brick building, whereas the EM unit, which abuts it, is a two-storey barn. There were similarities in building materials used in the two phases, and these were for the purpose of satisfying planning requirements.” (para 12)

“A new building which includes Mobbs Cottage and Woodlands covers the site of the former garage and the other barn and extends to join the New Barn. This new building, which has one completely enclosed courtyard and one enclosed on three and a half sides, includes the ESMI unit of Phase I.” (para 14)

“The new ESMI unit is long and low, with a tiled roof similar to that of the roof of the EM Unit. It has two entrances on the north side of the building. The eastern side of the new ESMI unit was built round a courtyard...” (para 47)

“...the new ESMI unit is self-contained, having its own utility supplies and its own facilities. It is capable of being used for a purpose which is different from that of the EM unit.” (para 48)

“But the new ESMI unit merely abuts [the New Barn] at one corner, with a means of communication which is for emergency only. It is also so different from the New Barn that its relationship with the New Barn appears to us to be one of proximity rather than anything else.” (para 49)

“The degree of integration [of the new ESMI unit in the building complex] appears to us to be minimal, and, as we have already said, a matter of mere proximity. The buildings touch, and that is all, but for the fire escape. We do not consider that the fire escape, which exists only for rare emergencies, can be said to engender any real integration between the New Barn and the Phase I construction. That view is reinforced by the evidence that the two buildings are self-contained, and that there is no normal movement of staff or patients from the one to the other. At first sight, the new structure may look like an extension to an observer, but supply the observer with the relevant facts, and in our judgment that first sight view is bound to be rejected.” (para 55)

The extraneous and irrelevant considerations which the Tribunal took into account in arriving at their first conclusion appear from paragraph 10 of the judgment of Lightman J ([2000] STC 100, 105) where he said:

“...the Tribunal though having correctly posed for itself the two stage test, did not confine itself to considering the objective physical character of the buildings before and after the works were carried out, but took into account extraneous and irrelevant considerations....In particular it took into account the effect of the works on Mr and Mrs Cantrell’s nursing home enterprise as a whole....It lent weight to the “function” of the new structure in the sense of how Mr and Mrs Cantrell use parts of the nursing home for accommodating different patients. It lent weight...to the condition in the planning permission.”

The appeal was reconsidered by the Tribunal on 21st February 2002. As one of its members had died the rehearing was a complete rehearing, though much of the evidence was the same. In its second decision dated 9th September 2002 the Tribunal set out the relevant facts and quoted the material parts of the VAT Act 1994. They referred to the decision of Lightman J and recorded certain matters which were not and are not in dispute. Those matters (para 23) may be summarised as follows: (a) the words used in note (16) are not terms of art, (b) in applying them it is necessary to adopt a two stage approach, first identify the existing buildings as they were before the construction work began and, second, determine whether the new construction satisfies all or any of the terms in note (16), (c) cases decided on the provisions in force before 1st March 1995 are of doubtful help, (d) whether or not the construction works fall within note (16) is a question of fact and degree as held in Commissioners of Customs & Excise v London Diocesan Fund [1993] STC 369, 380 and Commissioners of Customs & Excise v Marchday Holdings Ltd [1997] STC 279 and (e) terms used in the grant of planning permission are not determinative of the nature of the works permitted by the VAT legislation.

The Commissioners originally relied on the provisions of Note (16)(b) and (c). They contended that the works were either the enlargement of or an extension or annexe to an existing building. They abandoned the contention that the works constituted an enlargement of an existing building at the second hearing before the Tribunal. In their second decision the Tribunal treated Phase I and Phase II as a single project but rejected the submission that the project constituted an extension to an existing building. The Commissioners do not challenge either of those conclusions. Accordingly the only issue is whether the project as a whole constituted an annexe to an existing building. It is common ground that to answer that question it is necessary to compare “the existing building” before Phase I was commenced with the buildings as they stood after Phase II had been completed.

The Tribunal decided, with reluctance, that the project did constitute the construction of an annexe to an existing building. In paragraph 56 they said:

“If the new structure is not an extension, is it an annexe to the existing building? In Macnamara an annexe was described by the Tribunal as connoting “something that is adjoined but either not integrated with the existing building or of tenuous integration.” We were not sure that it was necessary for an annexe to adjoin an existing building and could think of a number of annexes which were substantially separated from the buildings to which they were annexes. However, in Colchester the Tribunal looked again at that description, and said,

“Bearing in mind (as was pointed out in paragraph 28 of the Grace Baptist Church decision [Decision 16093]) that an annexe might not be connected with the existing building, it may be more accurate to add ‘associated’ after adjoined.”

Mr. Peacock conceded that the absence of internal access to the existing building and the fact that the structure is capable of independent function would not necessarily prevent a supplementary structure from being an annexe. He contended that where there is a difference in appearance, in layout, and in the uses that the buildings are physically capable of performing, one of the buildings will not be an annexe to the other. This proposition he attributed to paragraph 4 of Lightman J’s judgment; however, no such passage occurs there, and Lightman J did not have to consider whether the new structure fell within Note (16). In our view, it would be a strange proposition, since there can be no reason why a building should not be constructed as an annexe to another, which is some distance away, wholly different in appearance, and for purposes different from those carried on in the existing building, though necessary to the owner and occupier of the two buildings. The example of a hotel annexe springs to mind: these are not infrequently separate buildings, sometimes markedly different from the main building, and usually used to accommodate guests during busy times of the year, or sometimes to house the hotel’s offices. Indeed, if it be correct that an annexe need not be integrated, or only tenuously integrated, with the “existing building”, i.e. that to which it is an annexe, but must be associated with it, then there will be few, if any, supplementary structures, to borrow Mr. Peacock’s word, other than those falling within Note (16)(a) and (b) which will not be annexes. That argument seems to lead to the conclusion that a new building needs only to be associated with an existing building to be an annexe to it, unless it falls within Note (16) (a) or (b). In the present case, the new structure is undoubtedly associated with the New Barn, in that it is contiguous with it at one point, is within the same ownership and it is part of the some complex of buildings. Let it be supposed that the new ESMI unit, instead of abutting the New Barn, stood at that point separate from the New Barn by a short distance. Would that short separation have the result that it could not be an annexe? We think not. In our view it would make no difference. We have to agree that association with the existing building is of the essence of what an annexe is.”

It is apparent from that paragraph that the Tribunal identified the existing building as being that called the New Barn. The New Barn was an extension to Foxearth Lodge completed in 1992 and was used to accommodate the EM Unit. The Tribunal recorded (para 46) that one end of the new building is attached to the corner of the New Barn. They described the complex as a whole after the completion of the project in paragraph 47 of their decision in these terms:

“The external view of Foxearth Lodge and the New Barn shews that the New Barn now has an upper storey. Foxearth Lodge is as it was before. The new construction is all on one ground-floor level, Woodlands also having an upper floor. The new ESMI unit is long and low, with a tiled roof similar to that of the roof of the EM unit. It has two entrances on the north side of the building. The eastern side of the new ESMI unit was built round a courtyard which contains flower beds and is very attractive. On its southern side was Woodlands, and now is the replacement of Woodlands which, although of similar size and having a ground floor and first floor, does not closely resemble Woodlands. Between Phases I and II, it was possible to walk through Woodlands from the east side of the new ESMI unit and round the interior of that building. The corner of Mobbs Cottage was apparent simply as a blank wall. The west side of the new ESMI unit is built on three sides of another courtyard, which has a pond in it. Filling about three-quarters of the fourth side is the east wing of the New Barn. We have described the new ESMI unit as being roughly in the shape of a square P: the base of the upright of that P abuts the corner of the east wing of the New Barn. In that corner of the New Barn is situated the lift and the fire door, through which it is physically possible to communicate between the New Barn and the new ESMI unit. When we visited Foxearth Nursing Home, Woodlands had, of course, been replaced. Communication is now possible through the new building which forms part of the southern side of the new ESMI unit. Before Phase II, the new ESMI unit was entirely new construction save that it included Woodlands, and it abutted Mobbs Cottage and the New Barn. After Phase II the new ESMI unit is all new and abuts Mobbs Cottage and the New Barn.”

Counsel for Mr and Mrs Cantrell submits that the Tribunal’s second decision is wrong in law too. First, he contends that the decision has failed to follow the guidance given in paragraph 4 of the judgment of Lightman J. Second, he contends that the statement in the last sentence of paragraph 56 that “association with the existing building is of the essence of what an annexe is” is wrong in law. Counsel for the Commissioners disputes both propositions. He contends that the issue is one of fact. He submits that the Tribunal correctly directed themselves as to the test to be applied and duly applied it to the facts they found. In those circumstances this court, to which an appeal lies on a question of law only, has no jurisdiction to interfere.

I prefer to deal with the second submission first. The terms of Note 17 indicate that a building may be an annexe to an existing building notwithstanding that it is capable of functioning independently from the existing building and notwithstanding that the only or main access to each of the annexe and the existing building is different. The reference to an “annexe” in Note 16 when compared with the references to “enlargement” of or “extension” to the existing building introduces a different concept. Thus they may be physically separate so that the connection between the two is by way of some other association. But the Tribunal seems to have thought that any association is enough. In my view that cannot be right. If there were a sufficient association between building A and building B, on the Tribunal’s conclusion each would be an annexe of the other. So to hold would ignore the plain inferences to be drawn from the use of the word “annexe”.

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

It is in that context that I approach the first submission made by counsel for Mr and Mrs Cantrell. The starting point is paragraph 4 of the judgment of Lightman J given on the first appeal. Surprisingly there is a discrepancy between paragraph 4 of the judgment of Lightman J as signed by him and the report of it at [2000] STC 103. Counsel agree that I should look at the signed version. After referring to the two-stage approach exemplified in Commissioners of Customs & Excise v Marchday Holdings Ltd [1997] STC 279 Lightman J continued:

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

The contention of counsel for Mr and Mrs Cantrell is that, though Lightman J mentioned appearance, layout, capability of physical use and function, in paragraph 56 of their second decision the Tribunal singled out contiguity, ownership and inclusion in the same complex as the factors determining that the buildings constructed in Phases I and II were an annexe to the New Barn. He submits that identity of ownership is a prerequisite to the question arising but is irrelevant to its answer. He suggests that contiguity and inclusion in the same complex are both features of layout and are not themselves sufficient. He concludes that the Tribunal failed to have regard to all material factors and had they done so, particularly the matters mentioned in paragraph 9 above, would have been bound to conclude that the building comprised in Phases I and II was not an annexe of the New Barn.

The judgment of Lightman J was directed primarily to the conclusion of the Tribunal in their first decision that the Phase I works constituted the enlargement of the New Barn. In that context, and in the context of an extension, I understand and agree that the relevant considerations are those which arise from the comparison of physical features of the existing building before and after the works in question. But in the case of an alleged annexe the requirement that such a construction should be an adjunct or accessory to another may require some wider enquiry. It is unnecessary to reach any concluded view on that question to decide this case.

It is clear from the quotations of the Tribunal’s findings I have set out in paragraphs 9 and 14 above and from the plans and photographs put before the Tribunal and me that there is nothing in the physical features of the building comprising Phase I and/or II to suggest that it was an adjunct of or accessory to the New Barn so as to be an annexe to the New Barn. Neither contiguity, common ownership nor inclusion in the building complex as a whole does so. If it is legitimate to look more widely than the purely physical characteristics then the medical requirements for the separation of an EM unit from an ESMI unit show clearly that the latter is in no sense an adjunct of or accessory to the former. It follows that I consider that the second decision of the Tribunal also discloses an error of law in that on the facts as found by them I do not consider that any Tribunal properly directed could have reached the conclusion they did.

There was some debate as to what order I should make if I decided, as I have, that the second determination of the Tribunal should be set aside. Counsel for the Commissioners submitted, albeit without apparent enthusiasm, that I should remit the matter again for reconsideration by the Tribunal if I allowed the appeal solely on the basis that the reasoning of the Tribunal was not sufficiently clear. As that is not the basis of my decision the issue does not arise. Suffice it to say that I am satisfied that I have jurisdiction pursuant to CPR Rule 52.10(1) to exercise all the powers of the Tribunal (see definition of “lower court” in CPR Rule 52.1(3)(c)) so as to declare that the works comprised in Phases I and II did not constitute the construction of an annexe to any existing building with the consequence that they are zero-rated. I am equally satisfied that I should exercise that jurisdiction.

For all these reasons I allow the appeal, declare that the works comprised in Phases I and II did not constitute the construction of an annexe to any existing building with the consequence that they are zero-rated and discharge the assessment. I will hear counsel on the form of order and on any other consequential issues.