In the Upper Tribunal Tax and Chancery Chamber case of HMRC v Astral Construction Limited , “Astral” supplied construction services relating to the development of a nursing home incorporating a redundant church as its office and reception centrepiece with two new 2 storey wings being added.
Astral thought the supplies were zero rated supplies for VAT being in the course of construction of a building designed for use for a relevant residential purpose.
HMRC said the construction works were not the construction of a building but were an enlargement of, or extension to, an existing building and, so, not zero rated. HMRC originally considered that the works were the conversion of the church to a relevant residential purpose chargeable to VAT at the reduced rate of 5% and had assessed Astral on that basis.
The Upper Tribunal said the phrase “construction of a building” in Item 2 of Group 5 of Schedule 8 of the Value Added Tax Act 1994 (“VATA”) is not restricted to the construction of a wholly new structure and is wide enough to include the construction of a new building or buildings connected to and incorporating an existing building if such works are not an enlargement or extension excluded by Note 16 to Group 5 of Schedule 8 to VATA. Indeed, the exception in Note 16(b) was predicated on the assumption that an enlargement or extension, that creates an additional dwelling or dwellings, is capable of being the construction of a building within Item 2 of Group 5 of Schedule 8 to VATA. If “construction of a building” were not to be so construed then Note 16 would be unnecessary.
If the work carried out to create the nursing home was otherwise the construction of a building for the purposes of Item 2 of Group 5 of Schedule 8 to VATA, was it nevertheless excluded from being the construction of a new building for zero rating by Note 16 as being an enlargement of or an extension to an existing building, namely the church?
So the next issue in this case was whether the construction of a new building or buildings connected to the church was an enlargement of or extension to an existing building, namely the church, so as to be excluded from zero rating by Note 16?
Whether or not the work was an enlargement of or an extension to the church was a question of fact, degree and impression. When you considered the size, shape, function and character of the new completed building, i.e. the nursing home, it was so different from the existing building, the church, that it could not be said to constitute an enlargement of or extension to the church.
So the building work carried out by Astral to create the nursing home was the construction of a building for the purposes of Item 2 of Group 5 of Schedule 8 to VATA and not an enlargement of or extension to an existing building excluded from Item 2 by Note 16, and so was zero rated.
Accordingly, HMRC’s appeal was dismissed.
Though no longer relevant the Tribunal went on to ask whether the work was a conversion of the church to a nursing home amounting to a special residential conversion within Group 6 of Schedule 7A to VATA chargeable to VAT at the reduced 5% rate?
The Tribunal concluded that the works were not a conversion of the church to a nursing home.
There was a clear conversion from a church or former church into a fully functioning reception and office area serving a care home.
Conversion there may have been but, as a matter of degree, in no way could it be said that the church had been converted into the care home. The church had been structurally integrated into the care home but formed a proportionately very small area of it in terms of size and function.
As a matter of impression, size, shape, function and character the nursing home was so different from the church that it could not be said to constitute the conversion of the church. This was the application of the same fact and degree test that had been used when considering whether the works were an enlargement or extension within Note 16.
HMRC now also contended that the conversion was not a special residential conversion within Group 6 of Schedule 7A to VATA because the premises being converted, i.e. the church, did not form, after conversion, the entirety of an institution, namely the nursing home, being used for the relevant purpose, as required by Note 7(6) to Group 6.
The Tribunal said the phrase “the premises being converted” could only refer, in this case, to the original church and the use of the words “after conversion” clearly indicated that the test was to be applied to the premises after the conversion works had been completed.
The question was whether the premises that were to be considered in determining whether the condition was satisfied were the pre-conversion premises, i.e. the original church building, or the post-conversion premises, i.e. the nursing home.
The words “after the conversion” did not rule out an increase in the size of the
premises as a result of the conversion. In Note 16 to Group 5 of Schedule 8 to VATA, ‘conversion’ appeared with ‘reconstruction’ and ‘alteration’ and separately from ‘enlargement’ and ‘extension’. That suggested to the Tribunal that conversion was a concept distinct from enlargement and extension for the purposes of Group 5. There was no equivalent distinction in Group 6 of Schedule 7A.
Indeed were HMRC’s interpretation of the condition in Note 7(6) correct then no conversion that increased the size of the building being converted could ever qualify as a special residential conversion. Such a result would be surprising as it would restrict the availability of the reduced rate not according to use, which was the “qualifying criterion”, but by reference to the size of the converted premises.
If that were the intended result. The Tribunal would have expected the condition to be more clearly worded. It would have been simple enough for the draftsman to have made it a condition that the premises after conversion must be no bigger than the premises before the conversion.
The correct approach to the condition in Note 7(6) was to look at the premises after the conversion had been carried out, i.e. the nursing home. The condition was that there had to be an intention that, after the conversion, the converted premises must form the entirety of an institution used for an institutional purpose, as defined.
Accordingly, had it been necessary for the Tribunal to decide it, in this case, it would have said that condition was satisfied as after the conversion, the converted premises formed the entirety of the nursing home i.e. of the relevant institution, and satisfied the condition in Note 7(6) to Group 6 of Schedule 7A to VATA.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.