When is the First-tier Tribunal not bound by a Court of Appeal decision? Apparently when it can distinguish the facts sufficiently to feel entitled to ignore it.
I have been pondering the First-tier Tribunal decision in DM and DD MacPherson (TC4756) insofar as it found it easy to dismiss the Court of Appeal decision in CCE v Jacobs  STC 1518.
In the latter case, Mr Jacobs bought a building which had been used as a residential school. It contained classrooms and other educational rooms on the ground floor, bedrooms and bathrooms for the pupils and bedsits for staff on the first floor.
He converted the school into a family home, which included three self-contained staff flats on the first floor. Mr Jacobs claimed a refund of VAT under the do-it-yourself builders scheme (VATA 1994, s 35) on the basis that he had carried out a residential conversion of the ground floor of the building. This is ‘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 (s 35(1D)(a))’.
Section 35(4) provides that ‘the notes to group 5 of Sch 8 shall apply for construing this section as they apply for construing that group’. Note (9) to group 5 states: ‘The conversion … of a non-residential part of a building which already contains a residential part is not included within items 1(b) or 3 unless the result of that conversion is to create an additional dwelling or dwellings’.
Item 1(b) refers to ‘converting a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings’. This is identical to the wording in s 35(1D).
The approach of Lord Justice Ward in the Court of Appeal was that note (9) has to be read as if it were part of s 35; it is s 35 as a whole that has to be construed. He held that, leaving aside note (9), s 35(1D) required three questions to be answered:
- Was Mr Jacobs converting the non-residential part of the old school?
- Was he converting that part, that is changing the character of that part, so that a new building emerged, which was designed as a number of dwellings?
- What extent of the total work consists in the conversion of the non-residential part?
He said note (9) is clearly aimed at the conversion taking place under s 35(1D)(a) because both are concerned with the conversion of a non-residential part into something which includes dwellings. Note (9) restricts the interpretation so that ‘the converted building must have an additional dwelling and must not end up with the same number of dwellings’. He concluded:
“In my judgment, note (9) has to be construed so that the result of the conversion is to create in the building an additional dwelling or dwellings. One counts the number of dwellings in the building before conversion and again after conversion. If there are more on the recount, note (9) is satisfied. If that is so, then Mr Jacobs is entitled to his refund”.
The MacPhersons bought a property consisting of old village shop premises, office space and associated storage on the ground floor as well as living accommodation on the ground and first floors. They obtained planning permission to convert the property into two semi-detached dwellings. Each one contained part of the living accommodation in the building as originally purchased. They claimed that they had converted a non-residential part of a building into one designed as two dwellings. So let’s apply Lord Justice Ward’s three tests:
- Were they converting the non-residential part of the old post office? Yes.
- Were they converting of that non-residential part? Yes.
- What extent of the total work consisted in the conversion of the non-residential part? The work on the shop premises, office space and storage space.
But, said the First-tier Tribunal, the Court of Appeal considered note (9) in the context of s 35. We are considering it in the context of s 30. How does s 30 differ from s 35? Section 30 zero rates work of a description specified in Sch 8. Item 1(b) of group 5 of Sch 8 refers to ‘converting a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings’. With the substitution of the word ‘converting’ for ‘conversion’ that is identical to the wording of s 35(1D)(a).
Reason for non-relevance
The tribunal explained why the decision was not relevant.
“When construing item 1(b) to see whether, in any particular case, a person is converting (or has converted) “a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings” one has, in our judgment, to examine the conversion actually carried out. In this case, it is clear that the property (taken as a whole) was not a non-residential building within the definition in the applicable note (7). This is because it was designed for use as a dwelling by virtue of the living accommodation contained within it … It would not be correct to describe the conversion works in this case as the conversion of the non-residential part of the building – they were works of conversion of the entire property. For this reason we held that the partnership has not converted a non-residential building or non-residential part of a building…
The position is not the same under s 35. There the words ‘to the extent that’ in the definition of residential conversion in s 35(1D) … introduce the concept of works qualifying as a residential conversion even if what is converted includes a residential part of a building (as was the position in Jacobs)…
Note (9), the interpretation of which was at the centre of the Jacobs appeal … is not engaged. That is, it is irrelevant on the facts of the present appeal that two dwellings were created in a building in which there had only been one dwelling before the works of conversion, because the threshold condition for zero rating in item 1(b), group 5, Sch 8 is not satisfied.”
Note (7) (meaning of non-residential) does not apply to s 35(1D). Note (7A) applies instead (s 35(4A)). What is the difference between the two notes? The relevant part of note (7) reads ‘a building or part of a building is non-residential if it is neither designed, nor adapted, for use as a dwelling or number of dwellings’, whereas that of note (7A) reads ‘a building or part of a building is non-residential if it is neither designed, nor adapted, for use as a dwelling or number of dwellings’. In other words, the two are identical.
So the only statutory difference between the two provisions is that s 30 zero rates a residential conversion, but s 35 allows recovery of input tax on a residential conversion only to the extent that the work was carried out to the non-residential element of the building. But the definition of a residential conversion is identical for both provisions and note (9) applies to both provisions.
So how can note (9) be engaged in interpreting one, but not the other? Even odder, note (9) restricts the relief. This surely means that Jacobs would have been decided the same way even without note (9). That note was not necessary for the Court of Appeal to decide that a conversion of a building, which was part residential and part not, was a residential conversion. It came into play only to determine that it was not precluded from being one because it resulted in an increase in the number of dwellings.
Interestingly, in Alexandra Countryside Investments Ltd (TC2751) and Languard New Homes Ltd (TC4917), which dealt with similar conversions, the tribunals applied the reasoning in Jacobs. HMRC has appealed the Languard New Homes decision so perhaps it will eventually arrive in the Court of Appeal for it to apply some joined-up thinking to the issue.
HMRC bases its approach on a 15-year old VAT tribunal decision (Calam Vale Ltd 16869) in which the tribunal held that note (9) was irrelevant because no ‘additional dwelling’ was created when two new dwellings were formed, both of which incorporated part of an earlier dwelling. It therefore felt itself ‘forced by an absurd (and perhaps none too carefully drafted) law into an absurd decision, which flies in the face of common sense of equity and of the social purpose which is supposed to underlie and inform zero rating’. As the tribunal in Alexandra Countryside Investments Ltd said, unfortunately no one seemed to draw Calam Vale to the attention of the Court of Appeal in Jacobs.
On the basis of Lord Justice Ward’s reasoning in Jacobs, it would appear to most people outside HMRC that Calam Vale was wrongly decided. It will be good to see what the Upper Tribunal makes of it.