[2010] UKFTT 258

TC00552

Appeal number: TC/2009/12256 

VAT – DIY housebuilders scheme – VATA, s 35 – whether construction of a dwelling – Note 18, Group 5, Sch 8 VATA – whether no more than single facade - whether a residential conversion – Notes (8) and (9), Group 5, Sch 8 – effect of garage in existing building – whether additional dwelling

FIRST-TIER TRIBUNAL

TAX 

	JOHN CLARK	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

		TRIBUNAL: JUDGE ROGER BERNER
				MISS SHEILA WONG CHONG FRICS									

Sitting in public at 45 Bedford Square, London WC1 on 2 June 2010

The Appellant appeared in person

Christiaan Zwart, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	Mr Clark appeals against HMRC’s refusal, in a decision dated 16 June 2009 and confirmed on 7 July 2009, to refund to him VAT of £9,230.74 under the Refund Scheme for D-I-Y housebuilders contained in section 35 of the Value Added Tax Act 1994 (“VATA”).
2.	The dispute arises in respect of certain works carried out by Mr Clark himself in converting an existing garage/stable block into a dwelling to be used by himself and his wife as their residence.  Mr Clark incurred VAT on supplies used by him for the purpose of the works, and made a claim, refused by HMRC, for the refund of that VAT under section 35.
3.	The essence of the dispute between the parties is that HMRC say that, contrary to the argument of Mr Clark, for reasons we will describe in more detail later, the works carried out by Mr Clark neither comprise the construction of a building designed as a dwelling within section 35(1A)(a) nor a residential conversion within section 35(1A)(c).
4.	Mr Clark appeared in person.  HMRC were represented by Christiaan Zwart.  We are grateful to them both for their helpful submissions; to Mr Zwart for his helpful summary of the background and the underlying law, and to Mr Clark who, despite the daunting task of dealing with legislation that, whilst designed to assist the layman, is less than user-friendly, nevertheless presented his case clearly and with some skill.
The facts
5.	There was no dispute on the facts, which we summarise as follows:
(1)	“Larkhill” is a dwelling located on the Ambury Road in West Berkshire.  The property, which is a Grade II listed building, included, along with the dwelling house, three outbuildings and a pond.  It is within a conservation area.
(2)	Of the outbuildings, one – which is the subject of this appeal – was initially a garage/store under planning permission issued in 1973.  That building was, with planning permission, extended in 1977.
(3)	In 2005 Mr and Mrs Clark were offered a plot of land comprising part of the garden of Larkhill, including the garage/store, to buy and build on.  They were advised by the local planning department that it was unlikely that planning permission would be granted for an outright new development, but that using some of the existing garage/store might be a possibility.  On this basis they applied for permission on the basis of plans that made some use of the existing building and, despite the objections of the planning officers, the council planning committee itself resolved to grant permission at its meeting on 28 June 2006.  Permission was granted on 5 September 2006.
(4)	We were shown a copy of the original plan attached to the application for planning permission which showed the then existing building.  This was described as a “Garage and Stable Block”.  The drawing shows the building as including four rooms.  Of these one is described as a stable, accessed by a door on the north-east elevation; another is described as a garage, accessed on the north elevation; and finally a tack room is also shown.
(5)	Mr Clark’s evidence was to the effect that the garage section of the existing building occupied less than 50% of the ground floor area of the building.  He said that, in addition, the roof space was wholly used for storage, bringing the total of the building used for storage to 80%.  There was no argument on these figures, but in view of the decision we have reached on the law we do not at this stage propose to make a finding of fact as to the precise percentage of the existing building that was used as a garage.  We can consider that question as a separate matter if there remains any dispute on it between the parties.
(6)	We were also shown a copy of the plan of the new proposed cottage.  This shows, in relation to the existing building, existing external walls to be retained on both the north-east and south-west elevations.  One of the conditions of the planning permission was that the development be carried out in accordance with the application drawings.
(7)	The work was carried out by Mr Clark between August 2007 and March 2009. 
(8)	One of the walls that had been marked for retention on the approved plan, that we have described as being on the south-west elevation, had, in accordance with the planning permission, been retained, and was supported by timber whilst other works were undertaken.  However, this wall collapsed while it was being worked on, when the builder was attempting to remove bricks to create the opening for the window in that elevation.  Mr and Mrs Clark decided to rebuild it to the same size (including the new large window opening) using the original bricks, to keep within the planning permission and to stabilise the building as quickly as possible.  The section of this wall that remained was the corner section with the new north wall.  The wall that had collapsed was rebuilt to the size and shape specified in the plans.
(9)	A final certificate under section 51 of the Building Act 1984 and the Building Regulations 2000 (as amended) was issued on 25 March 2009 in respect of the building works for the “conversion of stable block and new build extension to create dwelling with 2 bedrooms at Larkhill, Ambury Road”.
(10)	On 7 April 2009 Mr Clark telephoned the HMRC National Advice Service to enquire whether his works should be treated as a new build or a conversion.  The HMRC officer who took the call referred to section 4.1 of Public Notice 719, and is recorded as having confirmed that “as exterior wall retained as preconditions may be treated as new build”.  Section 4.1 of the Notice is explicit in referring to the new building making use of no more than a single façade (or a double façade on a corner site).  The response was therefore given on the basis that there was retention of only a single façade.
(11)	On 11 June 2009 Mr Clark applied under the Refund Scheme for the refund of VAT in respect of the building works.
(12)	On 16 June 2009, Mr Clark’s claim was rejected on the ground that the original building did not qualify as a non-residential building on the basis that before its conversion the building was used as a residential garage, and that Note 8 of Group 5 of Schedule 8 VATA accordingly precluded relief.  Following representations by Mr Clark, including that only part of the original building was used to keep a car and the rest of the building was used for storage, the original decision was upheld on the footing, firstly, that the planning permission had not included a specific condition as to the retention of existing walls, and secondly that the existing plans of the building attached to the planning application had showed that a large portion of the building was a garage.
(13)	Mr Clark appealed these decisions.  In the process of the appeal, the issues have been refined from those set out in the decisions themselves, as we shall describe below.
Legitimate expectation
6.	Before we move on to consider the substantive issues on this appeal, we should first deal, as a preliminary matter, with the complaint made by Mr Clark that he was misled by HMRC into proceeding with the project as he was not advised until after his claim was made that there was an exclusion in respect of the conversion of garages.  Mr Clark said that he and Mrs Clark read all the documents supplied to them by HMRC in the pack entitled “VAT refunds for DIY self builders and converters Claim Pack”.  There was no reference to the exclusion for garages in any of those documents.  He argued that these documents were critical to himself and Mrs Clark in their understanding of the rules for the reclaiming of VAT, and that as first time developers they had to rely on those documents for their information.  They did not consider the legislation itself.
7.	Mr Clark said that he and his wife also spoke to the VAT helpline and to HMRC staff at self-build shows.  He said that all the staff were very informative and that the information supplied was thorough and helpful, but no mention had been made of the exception for garages in Note (8) of Group 5, despite the project having been clearly explained.  He said that the careful financial planning that had been done was informed by the information he and Mrs Clark received from these sources and that they decided to proceed with the project only after consideration of all the facts they had been given.
8.	This issue requires consideration having regard to the observations of Sales J in Oxfam v Revenue and Customs Commissioners [2010] STC 686 in relation to the jurisdiction of the tribunal in respect of claims based on legitimate expectation, and the discussion of the jurisdictional issue in the recently reported tribunal decision in CGI Group (Europe) Ltd v Revenue and Customs Commissioners [2010] UKFTT 224 (TC), with the conclusions of which we concur.  However, although we consider that we do have jurisdiction to consider questions of legitimate expectation, we do not consider that the evidence in this case comes anywhere near to establishing such a claim.  In our view, the reliance of Mr and Mrs Clark on general advice contained in VAT notices or given by means of helplines or at self-build events cannot approach the level of specificity that could found a claim based on legitimate expectation.  Similarly the advice given in the call to the National Advice Service on 7 April 2009 was based on information provided by Mr Clark, and was correct in its reference to the relevant section of Notice 719.  For these reasons, therefore, we reject Mr Clark’s submission that he was misled by HMRC.
The law
9.	A do-it-yourself housebuilder who is not engaged in the building business cannot, unlike his business counterpart who is making zero-rated supplies, recover input tax on supplies received for the purpose of the building works, because he is regarded as the ultimate consumer.  To alleviate unfairness, section 35 VATA provides for a refund of VAT to such persons constructing certain buildings if relevant conditions are satisfied.  The material parts of that section for the purposes of this appeal are set out below:
(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.
…
(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.
…
(4)     The notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group but this is subject to subsection (4A) below.
(4A)     The meaning of “non-residential” given by Note (7A) of Group 5 of Schedule 8 (and not that given by Note (7) of that Group) applies for the purposes of this section but as if—
(a)    references in that Note to item 3 of that Group were references to this section, and
(b)    paragraph (b)(iii) of that Note were omitted.
10.	Sections 35(4) and (5) refer to the notes in Group 5 of Schedule 8 VATA.  So far as material, and as applicable to section 35, those notes are:
(7A)     For the purposes of [section 35], and for the purposes of these Notes so far as having effect for the purposes of [section 35], a building or part of a building is “non-residential” if—
(a)     it is neither designed, nor adapted, for use—
(i)     as a dwelling or number of dwellings, or
(ii)     for a relevant residential purpose; or
(b)     it is designed, or adapted, for such use but—
(i)     it was constructed more than 10 years before the commencement of the works of conversion, and
(ii)     no part of it has, in the period of 10 years immediately preceding the commencement of those works, been used as a dwelling or for a relevant residential purpose, and
…
(8)     References to a non-residential building or a non-residential part of a building do not include a reference to a garage occupied together with a dwelling.
(9)     The conversion, other than to a building designed for a relevant residential purpose, 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.
…
(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
…
(18)     A building only ceases to be an existing building when:
(a)     demolished completely to ground level; or
(b)     the part remaining above ground level consists of no more than a single facade or where a corner site, a double facade, the retention of which is a condition or requirement of statutory planning consent or similar permission.

The issues
11.	The issues for our determination are:
(1)	Were the works carried out by Mr Clark construction of a building designed as a dwelling within section 35(1)(a)?  Mr Clark says they were, relying upon the fact that, in the event, having regard to the collapse of the wall on the south-west elevation, there was only a single façade remaining, which had been retained as a condition of the planning permission.  Accordingly, the building had ceased to be an existing building.  HMRC say that Note (18) does not apply because the approved plans do not show “no more than a single façade” retained.
(2)	Were the works a residential conversion within section 35(1A)(c)?  There are two question for us to resolve in this connection:
(a)	The first is whether, as HMRC submit, Note (8) has the effect of preventing the whole of the garage and stable block from qualifying within section 35(1D); and
(b)	The second is whether, as HMRC further submit, if Note (8) does not have that effect, Note (9) precludes relief on the basis that the result of the conversion was not to create an additional dwelling.
Issue (1) – construction of a dwelling
12.	We accept Mr Zwart’s submission that Notes (16) and (18) of Group 5 apply for the purposes of section 35; this is the clear effect of section 35(4).
13.	According to Note (16) the conversion of an existing building takes the works outside the meaning of “the construction of a building” so that the works could not fall within section 35(1A)(a).  In this case there was clearly an existing building, so it could only be by virtue of the deeming provision in Note (18) that such building would fall to be treated as having ceased to exist.  If that applies, there would no longer be an existing building for the purpose of Note (16) or section 35, and the consequence would be that the works would be the construction of a building, and the works would fall within section 35(1A)(a).
14.	In this case, as a factual matter, the existing building was not demolished completely to ground level.  It can nevertheless be regarded as ceasing to be an existing building if the part remaining above ground level consists of no more than a single façade, the retention of which was a condition or requirement of the planning permission.
15.	In its decision from which Mr Clark now appeals, and in its statement of case for the purpose of these proceedings, HMRC submitted that Mr Clark had not satisfied the condition in Note (18) because it was not an explicit condition of the planning permission that the façade had to be retained.  However, Mr Zwart did not pursue this before us.  We think he was right not to do so.  Mr Clark referred us to Kevin Almond v Revenue and Customs Commissioners [2009] UKFTT 177 (TC) in which the tribunal had rejected a similar argument.  We respectfully agree with that decision.
16.	We need to consider therefore whether the fact that in the event the wall on the south-west elevation, which as a condition of the planning permission was to have been retained, collapsed during the works and was reconstructed using the same bricks, means that this is not to be counted as a façade within Note (18), so that there was but a single façade remaining, as Mr Clark contends.  It was not suggested that there had been any contravention of the planning condition.  Mr Clark nevertheless submitted that, having been rebuilt, the wall on the south-west elevation cannot be described as part of the original building and should not be counted as a retained façade.
17.	We do not consider that would be the correct analysis.  What Note (18)(b) is looking at is the position in comparison to a complete demolition.  Although the material condition in relation to the planning permission must refer, expressly or by implication, to the retention of the façade, the requirement that the part remaining above ground consists of no more than a single façade does not depend on there having been no disturbance to an existing façade in the course of the building works.  One simply looks to see whether the façade that remains above ground is one which was required to be retained; if so, it is a façade to be counted for the purposes of Note 18(b).  So, if a façade that is required to be retained under the terms of the planning permission does in the event remain above ground level, even if it requires to be reconstructed in order to do so, that is a facade that must be taken into account for the purposes of Note (18).
18.	In this case, therefore, we find that the collapse of the wall on the south-western elevation, followed by its reconstruction, did not mean that it should not be included in the number of retained facades for Note (18) purposes.  There was therefore, in our judgement, more that a single façade included in the part remaining, and accordingly the garage and stable block building did not cease to be an existing building.  In consequence, the works carried out by Mr Clark did not fall within section 35(1A)(a).
Issue (2) – a residential conversion
(a) Note (8)
19.	If the works did not fall within section 35(1A)(a) as the construction of a building designed as a dwelling, Mr Clark can nevertheless qualify for a refund if the works are a residential conversion within section 35(1A)(c).  This requires the works to satisfy the conditions in section 35(1D).
20.	Under section 35(1D) works constitute a residential conversion to the extent that they consist of the conversion of a non-residential building, or a non-residential part of a building into (inter alia) a building designed as a dwelling.
21.	In this case it is common ground that the conversion was into a building designed as a dwelling.  Even if only part of the building is non-residential it is not necessary that the non-residential part must itself be converted into a dwelling.  It is sufficient for this purpose (but subject to Note (9) to which we shall refer later), if the building comprised a non-residential part which was that subject of the conversion works, that after conversion the building (taken as a whole, including both residential and non-residential parts) was a building designed as a dwelling.  This was the part of the judgment of Peter Smith J in Customs and Excise Commissioners v Blom-Cooper [2002] STC 1061 which was not pursued on appeal to the Court of Appeal in that case: see [2003] STC 669 per Chadwick LJ at [17]. It was also confirmed in Customs and Excise Commissioners v Jacobs [2005] STC 1518; see per Ward LJ at [34].
22.	In order that the conditions of section 35(1D) can be satisfied, it is necessary that there has been a conversion of a non-residential building or a non-residential part of a building.  Since it is common ground that part of the building with which we are here concerned comprises a garage occupied together with a building, we must consider the effect of Note (8) of Group 5.
23.	In doing so we must also consider Note (7A).  This is not, in our view, and contrary to Mr Zwart’s submission, a two stage process involving a sequential application of Note (7A) and Note (8).  It is instead a single application of the provisions in Notes (7A) and (8).  In our view this accords with the approach of the Court of Appeal in Blom-Cooper, namely to take Notes (7) and (9) together in construing section 35(4); see per Chadwick LJ at [26].
24.	On this basis, the part of the building consisting of the garage cannot by virtue of Note (8) be a non-residential part of the building, notwithstanding that it would otherwise qualify under Note (7A).  On the other hand, the remainder of the building, apart from the garage area, does qualify as a non-residential part of the building.  There has therefore been a conversion of a non-residential part of a building comprising the building apart from the area of the garage.
25.	The application of Note (8) in circumstances similar to those arising in this appeal was considered by the VAT and Duties Tribunal in Sally Cottam v Revenue and Customs Commissioners (Decision no 20036, released 8 March 2007), a case relied upon by Mr Clark in arguing that the building converted was not a garage in its entirety as the majority of it had been used for general storage, and previously as stables.  Mr Zwart, by contrast, argued that the approach adopted by the tribunal in Sally Cottam was wrong in principle – although there had been no appeal from that decision by HMRC – and that we should not adopt the same reasoning.
26.	In Sally Cottam the building that had been converted was an outbuilding which was partly two-storey and partly one-storey.  It was used generally to store fruit and garden equipment and machinery.  The one-storey area, which had a high pitched roof, was used as a workshop, and to repair and store cars.  The tribunal found that the lower part of the one-storey area was a garage.
27.	On the Note (8) issue the tribunal, having referred to the fact that the end product of the conversion was a dwelling, then considered what building (or part of a building) had been converted, and determined that there had been a single composite conversion of the outbuilding in its entirety.  On that basis the tribunal went on to say that the concluding issue was whether the outbuilding in its entirety was a garage occupied with a dwelling.  Unsurprisingly, on the facts in that case, the tribunal held that it was not.
28.	With great respect to the tribunal in Sally Cottam, we are unable to adopt the analysis the tribunal applied in that case.  We think that the tribunal addressed the wrong question in this respect.  A conversion is only a residential conversion for the purpose of section 35(1A)(c) to the extent that it is a conversion of a non-residential building or a non-residential part of a building.  Any part of a building that does not satisfy Note (7A) or falls within the restriction in Note (8) is not within section 35(1D).  A whole building cannot be within section 35(1D) unless it is wholly non-residential.  To the extent that it is not wholly non-residential, it can only be a non-residential part of a building.  In Sally Cottam, therefore, it was in our respectful view wrong for the tribunal to have identified the whole outbuilding as having been converted and only then to consider if it was in its entirety a garage occupied with a dwelling.  We agree with Mr Zwart’s submission that the tribunal’s approach involved assuming the answer to the question whether there had been a conversion of a non-residential building or only a part of a non-residential building before applying the tests in Notes (7A) and (8), which are the very tests that must be applied before that question can be resolved.  The correct analysis, in our view, is as we have described above, namely that part of a building used as a garage is not non-residential having regard to Note (8), and that accordingly only the remainder is a non-residential part of the building.  The result is that there is a conversion of a non-residential part of a building for the purposes of section 35(1D).
29.	Mr Zwart placed considerable reliance on the recent tribunal decision in Joseph Podolsky v Revenue and Customs Commissioners [2009] UKFTT 387 (TC), in which he had appeared for HMRC.  In that case a garage/workshop was converted into a five-bedroomed detached dwelling.  Part of the building prior to conversion was used as a garage occupied together with a dwelling.  Accepting Mr Zwart’s submissions in that case, the tribunal held that the expression “residential conversion” in section 35(1D) had to be construed by reference to the following sequential criteria:
(1)	qualification within Note (7A) (applied by section 35(4A);
(2)	no qualification within Note (8) (applied by section 35(4));
(3)	in consequence, qualification within section 35(1D);
(4)	subsequent qualification within section 35(1D)(a);
(5)	subsequently, that Note 9 (applied by section 35(4)) does not apply to the “result”.
30.	Having referred to Note 8 and to the fact that this makes it clear that a building can be residential (or not non-residential) in whole or in part, and that consequently the tribunal had carefully considered all parts of the building, the tribunal in Podolsky went on to say (at [15]):
“Note 8 (applied by section 35(4)) applies to prevent qualification of a subject building or part within section 35(1D) where at least part qualifies as a garage and where it has been occupied at some time within a period coincident with that applied within Note 7A(b)(ii) together with the dwelling.  The Appellant accepts that part of the subject building was used as a garage and it was therefore decided that the subject building falls within Note 8 and therefore cannot qualify as a “non-residential building”.  The subject building was physically used as a garage.  The fact that part of the subject building was used as a garage means that Note 8 is applied in respect of the whole of the subject building and which therefore excludes the conversion from falling within section 35(1D).  As the conversion falls within the qualification of Note 8 (applied by section 35(4)) the Appellant is unable to satisfy the provisions of section 35(1D) and whether the subject building falls within section 35(1D)(a) and consideration of Note 9 is not relevant.”
31.	With respect, we do not consider this to be a correct construction of Note (8).  There is nothing in Note (8) itself that would, in our view, support the conclusion that if part of a building is used as a garage the result is that the whole building must be excluded from the description of non-residential.  We have expressed our own view above that, following the approach of the Court of Appeal in Blom-Cooper, the Notes to Group 5 must be taken as a whole, and that a sequential approach is not appropriate.  It cannot in our view be correct to take Note (7A) in isolation from Note (8) and determine first that the building as a whole is a non-residential building according to Note (7A) and only then to apply Note (8) to the building as a whole so as to conclude that the whole building is, as Mr Zwart put it to us “tainted” by the partial use as a garage.
32.	The tribunal in Podolsky unfortunately gives no reasoning for its conclusion on this issue, and we can only surmise that this was the analysis on which it based its finding.  But in any event we do not regard its conclusion can be supported by Note (8) properly construed.  Taking Note (7A) and (8) together it is clear to us that the existence of a garage occupied together with a dwelling in part of a building that is otherwise non-residential does not result in the whole of the building not being non-residential; it has the effect instead of treating the garage element as not non-residential, and the remainder of the building then constitutes a non-residential part of a building for the purpose of section 35(1D).
33.	We have the misfortune, in reaching our conclusions on the proper analysis of the application of Notes (7A) and (8) in respect of section 35(1D), to differ from the decisions of two tribunals.  However, we consider that our own analysis accords not only with the natural reading of the Notes, but also with the evident purpose of section 35(1D) itself.  That subsection clearly envisages a case where part of a building is non-residential and part is residential (or not non-residential).  It specifically does not deny relief in those circumstances, but instead provides for works to be within the meaning of “residential conversion”, and so to qualify for relief, “to the extent that” the works consist of a conversion of the relevant part of the building into, for example, a building designed as a dwelling or a number of dwellings.  The use of the expression “to the extent that” itself demonstrates that relief may be only partially available, and that some allocation or apportionment may be required.  This militates against the “all or nothing” approach taken, albeit in different directions, by the tribunals in Sally Cottam and Podolsky, and in our view supports the conclusion we have reached.
(b) Note (9)
34.	The application of Note (9) in relation to section 35(1D) has been considered in two cases that have reached the Court of Appeal, Blom-Cooper and Jacobs, both of which we have referred to earlier.
35.	In Blom-Cooper there was a conversion of a former public house, the first and second floors of which had been used by the publican as residential accommodation, into a single family dwelling.  In that case both the tribunal and the judge on appeal in the High Court had decided in favour of the taxpayer in respect of the refund of VAT on the basis that Note (9) had no application to a case under section 35.  The Court of Appeal rejected this approach and held that, taken together, Notes (7) and (9) as then applicable had the effect that where, before conversion, the building already contained a residential part, the conversion of a non-residential part would not be treated as conversion of a non-residential part of a building for the purposes of section 35(1D) unless the result of that conversion was to create an additional dwelling or dwellings.  The purpose and effect of Note (9), in conjunction with Note (7), was 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 the same restricted meaning must be given to that expression for the purposes of section 35(1D) (see per Chadwick LJ at [27]).
36.	Blom-Cooper was considered by the Court of Appeal in Jacobs.  There the conversion was of a substantial building which had been used as a residential school.  Part of the building was residential, and part was non-residential.  As well as the non-residential educational areas, there was an existing dwelling in the form of a self-contained maisonette for the headmaster, and residential bedrooms and bathrooms for the boys and staff bedsits that were all residential accommodation (but not themselves dwellings).  The Court of Appeal held that it was not correct to limit additional dwellings within Note (9) to dwellings created wholly from the non-residential part of a building.  Additional dwellings created in the building as a whole were within Note (9); an additional dwelling did not have to be created wholly from the non-residential part.  In this regard there was no dispute in this appeal.  The fact that, on our analysis, the new dwelling was created by conversion of both the non-residential and residential parts of the existing building would not preclude the relief.
37.	In reaching the conclusion in Jacobs that the additional dwelling or dwellings for the purpose of Note (9) had to be a dwelling or dwellings found in the building as a whole, and not just in the non-residential part converted, Ward LJ said (at [39] to [40]):
“… The result of the conversion of the non-residential part of the building which already contains a residential part must be to create an additional dwelling or dwellings and the vital question is: additional to what?  It must be additional to what is there already.  One cannot have a dwelling additional to the non-residential part which is being converted because it would not be a non-residential part if it already contained a dwelling.  A non-residential part and a part which already contains a dwelling are mutually exclusive concepts.  The dwelling has to exist outside the area contained within the non-residential part.  It must therefore be a dwelling to be found in the building as a whole.  
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 and the commissioner’s appeal must be dismissed.”
38.	It was common ground before us that Note (9) applies in the circumstances of this appeal.  Note (9) draws a distinction between non-residential and residential parts of a building.  If part is non-residential the other part must be treated as residential, i.e. not non-residential (see Jacobs, per Ward LJ, at [34]).  It is possible for there to be a residential part of a building that does not constitute a dwelling.  In Jacobs, on the facts in that case, dormitories, bathrooms and staff bedsits were classed as residential, but were not dwellings.  That is equally the case in relation to a garage that is precluded by Note (8) from being treated as a non-residential part of a building.
39.	On that basis, we need to consider whether the conversion works did create an additional dwelling.  Mr Clark argued that there was no dwelling before conversion, and following conversion there was one, so applying Lord Justice Ward’s arithmetical test the condition in Note (9) was satisfied.  In this he was supported by the decision of the VAT and Duties Tribunal in Robert Duncan Blacklock (No 20171, released 22 May 2007).  The facts of Blacklock were similar to those in this case, involving the conversion of a building comprising stables, a tack room, a food preparation room, a domestic double garage and first-floor office accommodation, although there Mr Blacklock had restricted his claim for input tax recovery to the conversion work on the non-residential part of the building, omitting from it the VAT paid on the work carried out in converting the garage.  The case therefore concerned the application of Note (9) alone.
40.	The tribunal in Blacklock held that the conversion of the existing building in that case, which contained no dwelling, into a single dwelling did satisfy Note (9).  In applying paragraphs [39] and [40] of the judgment of Ward LJ in Jacobs, the tribunal said (at [21]):
“In most cases where the tribunal is dealing with a conversion of a building, part of which is non-residential and part residential, the residential part will consist of a dwelling as defined in note (2) to Group 5.  But since a garage occupied together with a dwelling is excluded from the definition ‘non-residential’ by note (8), that will not always be so.  We see no reason why, applying Ward LJ’s observation in paragraph 39 of his judgment that the ‘additional dwelling’ to which note (9) refers ‘must be additional to what is there already’ there cannot be a situation where from there being no dwelling to there being one dwelling, note (9) is satisfied.  That results in the number of dwellings in the building before conversion and after conversion being more on the recount as required by paragraph 40 of the judgment, thus also satisfying note (9).”
41.	Mr Zwart submitted that the tribunal in Blacklock failed to properly direct itself in law in applying the observations of Ward LJ in Jacobs (although there had been no appeal against the tribunal’s decision).  He said that the terms of those observations assumed the pre-existence of a dwelling within the physical parameters of the subject building.  The counting had to be of the number of dwellings in the building both before and after conversion.  Only if there are more on the recount is Note (9) satisfied.  Consequently, he argued, there can only be “more” within the four corners of the subject building if a dwelling previously existed in the building.
42.	  We do not agree with Mr Zwart.  We consider that Blacklock applied the correct legal test, and we agree with the reasoning in that decision.  It is not surprising that in Jacobs Lord Justice Ward should refer in paragraph [40] of his judgment to “the number of dwellings in the building before conversion”; in that case on the facts there was already a dwelling in the existing building, and the argument was on whether the additional dwelling or dwellings had to be created (either entirely or in part) from the non-residential part of the building or in the building as a whole.  There is no reason to conclude that his reference to the number of dwellings in the building before conversion requires there to be an existing dwelling.  In our view, in a case where Note (9) applies because there is a residential (or not non-residential) part of a building where the non-residential part is converted to one or more dwellings, but one which falls short of comprising a dwelling, the reference by Ward LJ at [39] in his judgment in Jacobs to the additional dwelling being additional to what is already there is entirely apt to cover the case where before conversion there is no dwelling and after conversion there is one.
43.	We conclude therefore that the conversion of the non-residential part of the existing building in this case did create an additional dwelling for the purpose of Note (9), and that the conversion was accordingly to that extent within section 35(1D) and was a residential conversion within the meaning of section 35(1A)(c).
Decision
44.	For the reasons we have given we decide:
(1)	In relation to Issue (1), that the works carried out by Mr Clark were not the construction of a building designed as a dwelling within section 35(1A)(a) VATA; and
(2)	 In relation to Issue (2), that the works carried out by Mr Clark constituted a residential conversion within section 35(1A)(c) VATA to the extent that they consisted of the conversion of the part of the existing building excluding the garage.  
45.	Accordingly, we allow this appeal, subject to adjustment to exclude from Mr Clark’s claim VAT attributable to the conversion of the garage area.
46.	We hope that the parties will be able to agree the required adjustment.  We adjourn the proceedings for a period ending 30 days after the release of this decision for the parties to seek to achieve such agreement and to notify the Tribunal.  The parties have liberty to apply for a hearing to determine any remaining dispute on the adjustment.      

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.

ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE: 10 June 2010