DECISION

1. The Appellant appeals against a decision of HMRC, contained in letters dated 21 October 2008, 27 November 2008 and 20 January 2009, to refuse part of her claim for repayment of input tax incurred in relation to the construction of two dwellings, on the ground that the requirements of section 35 of the Value Added Tax Act 1994 (“DIY builders scheme”) have not been met.

2. The only dispute between the parties is whether, as the Appellant says, the carrying out of the works of construction of one of the two dwellings was “… otherwise than in the course or furtherance of any business”. In essence HMRC say that the works were in the course or furtherance of a business, namely the letting of the dwelling in question following its construction.

3. The Appellant appeared in person and Alan Bates appeared for HMRC. We are grateful to them both for their helpful submissions.

The Facts

4. There was no dispute on the facts. We derive the following summary from the documents admitted before us and from the uncontested evidence of the Appellant.

(1) Prior to 2003, the Appellant was based in London, working both as a professional architect and as a lecturer. She was offered a full-time post at Cardiff University to run a course on sustainable architecture, as a consequence of which she moved to Cardiff and began looking for a property as her residence for weekdays. At weekends she would return to London, where her partner continued to reside.

(2) That same year the Appellant found a building plot in the Cardiff area in respect of which planning permission for a single house had been granted. Given her background and personal convictions she determined to create an aspirational building, a super-insulated zero heating building, one of the features of which would be that it would generate zero CO². She considered that it would be hypocritical of her to build, on the basis of the existing permission, one three-bedroomed house for her single occupation on weekdays only, and instead applied for planning consent for the erection of two flats.

(3) Part of the reason for deciding to apply for permission to build two flats was also financial. The Appellant’s intention from the outset was that she would live in one of the flats only (“Flat A”) and would let the other flat (“Flat B”). This gave the Appellant the opportunity to subsidise the cost of a mortgage taken out (on her property in London) to finance part of the costs of the development.

(4) Planning consent took some little time to obtain, but was eventually received on 18 December 2003. The Appellant then put the project out to tender, and approached some eight builders in total, but without being able to engage any of them. Some were not interested, or freely admitted that the unusual nature of the project meant they were not competent to handle it. Only one quotation was obtained, and that was so unrealistically low that the Appellant considered that the builder in question did not understand the project, and accordingly rejected the quotation. She had to adopt a different, piecemeal, approach, necessitating much greater involvement on her part, and resulting in her obtaining materials in respect of the development on which VAT was charged, and in respect of which this appeal has now been brought.

(5) Because of this approach which the Appellant had been compelled to adopt, the development itself proceeded rather slowly. The Appellant was working full-time at the university and thus had little time to devote to the project. A contractor was on the site from the start of 2006, but there were other delays – partly due to problems with a sewer connection – which resulted in the development not being completed until 2007. On completion, as intended by the Appellant, Flat B was let. This was not done through an agency, but the letting was a private one, at less than a market rent, to one of the Appellant’s own architecture students at the university who had an interest in the project. Subsequently, Flat B has been let through an agency, to another student unconnected with the Appellant.

(6) We heard from the Appellant, and we accept, that part of the background purpose for the development was as a research project in connection with her own work and convictions. The development phase itself represented a project of this nature, and was described by the Appellant as an “open house” to professionals interested in the project. It was visited by government agencies. Since completion of the development, and the letting of Flat B, the Appellant has continued to monitor the building to assess its performance in terms of the low energy design and has lectured and published magazine articles on the project. She explained that she had been teaching this subject for 15 years, and there were very few examples to draw upon in the UK. She fairly admitted that her level of access to Flat B was no greater, for this reason, than any other landlord would have; indeed, she explained that it might well in practice be less, as there were no gas installations to inspect.

(7) The Appellant told us, and it was not disputed by HMRC, that it had never been her intention to make a profit from the development, nor from the letting of Flat B. The building could not be said to be in the best part of Cardiff; the plot was close to industrial buildings of a similar nature to the workshop that had originally been on the site and which had been demolished prior to her purchase of the site. The Appellant said that the development costs per square metre for the project had worked out at approximately £2,200 in contrast to a normal cost in the region of £900 to £1,000. She said that the cost exceeded the current market value. She did not believe that buildings of this nature would command a premium for many years to come.

(8) The Appellant claimed repayment of £9,357.72, representing VAT claimed to have been incurred on goods purchased for the overall development project. HMRC made minor downwards adjustments to that sum to correct for certain errors (which adjustments are not disputed in this appeal). HMRC refunded 50% of the balance: the total amount refunded was £4,587.05.

(9) The Appellant no longer lives in Flat A. She left her post at Cardiff University in 2008, and moved to a teaching post in Oxford. Flat A has also been let to a tenant.

The Issues

5. Essentially, HMRC say the reason why only half of the VAT incurred by the Appellant on goods purchased for the overall development project could properly be reclaimed under s 35 VATA is that only Flat A met the conditions specified in that section. Flat B had been constructed with a view to letting it out on a continuous basis, and the construction of that flat was therefore “in the course or furtherance of [a] business” that was being, or was to be, carried on by the Appellant.

6. The Appellant put forward three grounds of appeal:

(1) The Appellant alleges that she relied on misleading information given to her in a telephone conversation with an HMRC officer. Having provided the officer with all relevant information, she was informed that she would be able to claim for both flats under s 35.

(2) The claim relates to a newly-built dwelling. Since such properties are generally zero-rated and input tax incurred in the supply can be reclaimed, the refusal of the Appellant’s claim is not within the spirit of the legislation, and based on a procedural rather than a substantive error.

(3) The rental of the flat was never intended to realise a profit. As such it is not commercial, and the Appellant in constructing the property was not acting in the course or furtherance of a business.

The Law

7. Section 35 VATA provides, so far as is material:

“35 Refund of VAT to persons constructing certain buildings

(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

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…”

8. Section 94(1) VATA provides a definition of “business”:

“94 Meaning of “business” etc

(1) In this Act “business” includes any trade, profession or vocation.”

9. Article 9(1) of Council Directive 2006/112/EC of 28 November 2006 (“the Principal VAT Directive”) provides:

“Article 9

1. 'Taxable person' shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.

…The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.”

Discussion

Misleading advice

10. The Appellant says that when she requested the forms necessary for making the claim for a VAT refund she explained the position regarding the two flats to the HMRC officer. The claim forms were sent to her, but she was at no time advised that her claim would not be met in full. She considers that she was misled by HMRC. This is not, however, a matter within the jurisdiction of this Tribunal. HMRC have said that they have been able to identify one conversation between the Appellant and the National Advisory Service, which related to a technical query on recovery of VAT on windows purchased from Germany, but have not been able, from the information provided by the Appellant, to verify other advice given. They have said that if the Appellant is able to give further details of other contact with HMRC in this regard, they will consider that. But this is not something that the Tribunal can take any further.

The spirit of the legislation

11. Nor is the Tribunal able to assist the Appellant by reference to the spirit of the legislation, even though it does have some sympathy for the points that the Appellant makes in this regard. In their letter to the Appellant dated 20 January 2009, informing the Appellant of the result of their reconsideration, HMRC say that:

“The Refund Scheme puts DIY builders and converters in a broadly similar position to a developer selling a zero-rated property, by refunding them the VAT on their main construction or conversion costs.”

There is nothing wrong with that statement, dealing as it does with the position on a sale of a dwelling, but it does not address the inequity that exists between the case where a landlord engages a builder to build a property for the purpose of a letting business, and a DIY-builder who incurs VAT on materials in building a property for the same purpose. As vividly illustrated by the VAT and Duties Tribunal in Michael Patrick Curry (Decision no 20077), in the former case the builder’s services including the supply of materials would be zero-rated, and the landlord would suffer no VAT cost; in the latter s 35 VATA provides no relief, because the building works would have been carried out in the course or furtherance of a business.

12. Notwithstanding this, we are confined to applying the law as it stands. This appeal therefore resolves entirely on whether the activities of the Appellant were, or were not, “in the course or furtherance of any business” within the express terms of section 35.

In the course or furtherance of any business

13. The Appellant argued that her purpose in developing the site was primarily to provide herself with a home. She aimed to build an aspirational building, and in the circumstances chose to build two flats, rather than one house. The development was not a commercial venture. It was never intended to make a profit; the rent on Flat B was intended only to subsidise the cost of the financing of the development as a whole. That this was the case was clearly illustrated by the fact that the value of the property today was less than its construction cost. She submitted that what she did was not in the course or furtherance of any business.

14. Mr Bates argued that, although it was accepted that the development project as a whole had laudable aims, the fact was that the Appellant had always intended to let Flat B in order to fund the overall project. He said that there was plenty of authority to the effect that the carrying out of construction works on a building that is intended to be let is “in the course or furtherance of [a] business”. He referred us to a number of authorities. In Nicholas Peter Charlton (VAT and Duties Tribunal, decision no 18628), for example, it was held that the DIY-builder had intended to let out the residential conversion in that case for student accommodation and the fact that the rent was sufficient only to cover the rates and mortgage payments did not prevent the conclusion that he was carrying on a business activity. The Tribunal in that case had referred to Customs and Excise Commissioners v Morrison’ Boarding Houses Association [1978] STC 1, in which it was held that the absence of a profit motive did not prevent lettings at rates that would result in neither profit nor loss being a business. More recently, in Riverside Housing Association v Revenue and Customs Commissioners [2006] STC 2072, a case not on s 35 VATA but on whether a building was to be used for a relevant charitable purpose, which depended on it not being used in the course or furtherance of a business, it was held in the High Court (Lawrence Collins J) that the whole of the association’s very substantial activity was concerned with the letting of properties on assured tenancies and selling properties to tenants and third parties and that the lettings were in the course or furtherance of a business. This conclusion was not displaced by the fact that the association did not set out to maximise its profits.

15. We accept that the motive or purpose of the Appellant cannot determine the question whether her activities amount to a business. That depends on the intrinsic nature of the activities themselves (see Customs and Excise Commissioners v St Paul’s Community Project Ltd [2005] STC 95). We also accept that the absence of profit motive does not result in the activities not constituting a business. However, we do not regard that as the end of the matter. In Customs and Excise Commissioners v Yarburgh Children’s Trust [2002] STC 207, Patten J likewise accepted the motive argument, but held that the exclusion of motive or purpose did not require or allow a tribunal to disregard the observable terms and features of the transaction in question and the wider context in which it came about. The questions which we will consider in this decision cannot “be answered by reference only to the fact that a service was provided at a price. That is the beginning not the end of the enquiry.” (per Patten J, at [23]).

16. We have referred above to the definition of “business” in s 94(1) VATA and to Article 9(1) of the Principal VAT Directive with regard to “economic activity”. On established authority it is clear that the word “business” ought to be construed, so far as possible, to mean “economic activity” (see Riverside Housing Association at [68]). This expressly includes the exploitation of property for the purpose of obtaining income therefrom on a continuing basis. This phrase was considered by the European Court of Justice (“ECJ”) in van Tien v Staatsecretaris van Financiёn (Case C-186/89) [1993] STC 91. That case concerned the grant of building rights over land for a period of 18 years subject to an annual payment of Nfl3,000. This was held to be an economic activity. The Court of Justice said (at [18] to [19]):

“18. … in accordance with the requirements of the principle that the common system of VAT should be neutral, the term “exploitation” refers to all transactions, whatever may be their legal form, by which it is sought to obtain income from the goods in question on a continuing basis.

19. Therefore, the grant by an owner of immovable property to a third party of a building right over that property must be deemed to be an exploitation of the property if that right is granted in return for a consideration for a specified period. That condition must be deemed to be satisfied when, as is the case in the main proceedings, the building rights are granted for a period of 18 years in return for an annual consideration.”

17. The question whether an activity is an economic activity or a business merely because it generates an income or consideration was considered in Yarburgh Children’s Trust. That case concerned the supply of services in the course of construction of a building intended to be used solely for relevant charitable purposes. The question was whether the letting of the building to a charitable community playgroup for use as a children’s playgroup and other children related activities was otherwise than in the course or furtherance of a business. It was held that it was. After referring to article 4(1) of the Sixth Directive (now article 9(1) of the Principal VAT Directive) and to the passage from van Tien cited above, and in particular to Wellcome Trust Ltd v Customs and Excise Commissioners (Case C-155/94) [1996] STC 945, Patten J said (at [22]):

“It seems to me that the balance of authority is against treating a transaction or activity as economic or as part of a business merely because it results in a consideration or produces income. If the test was as simple as that it is difficult to see how the distinction made in the context of the sale of shares in Wellcome could be justified. As I have already said, even the private investor buys in order to provide himself with income in the way of dividends. On this basis a lease at a rent could only automatically qualify as economic activity if lettings fall to be treated in a different way. There is no obvious reason why this should be so. Article 4(2) does of course refer to the exploitation of tangible or intangible property for the purposes of obtaining income on a continuing basis as being an economic activity but this language is in marked contrast to that (for example) of art 13B which merely refers to the leasing or letting of immovable property.”

18. In Wellcome Trust the ECJ equated the activities of the trust in selling investments in the course of its normal management of the trust’s assets to the position of a private investor who confined his activities to managing an investment portfolio. In considering the ECJ’s decision in that case, and in particular the opinion of the Advocate-General (Lenz), Patten J explained that to deal in property, whether real or personal, in order better to invest it does not per se render that transaction a form of business activity for VAT purposes. He made clear that this is the case notwithstanding that the sale of the existing investments might be carried out to secure a better income for the investor elsewhere. It is necessary to look beyond the fact that a transaction has taken place for consideration or even that it has been profitable. The wider context needs to be looked at in order to determine whether the transaction is, or is indicative of, a business.

19. Having accepted, as we have in this case, the submission of counsel for HMRC in Yarburgh Children’s Trust that the motive of the person who makes a supply of goods or services is not relevant and could not dictate the correct tax treatment of the transaction, Patten J continues (at [24] to [25]):

“[24] None of this detracts from the principle of tax neutrality which forms the bedrock of the submission that the motive or purpose behind the activity under consideration is irrelevant. The commercial letting of property in order to fund the charitable activities of a particular body does not make those lettings less of a business or economic activity. That is dictated by the nature of the lettings rather than the use to which the income is to be put. It is the means rather than the end which counts. But conversely as Lord Slynn recognised in the Institute of Chartered Accountants case [Institute of Chartered Accountants in England and Wales v Customs and Excise Comrs [1999] STC 398] an activity which is not in any real sense commercial is not converted into a business simply because fees are charged. I should make it clear that a single letting might properly be treated as a business activity even if not preceded by a course of regular lettings of a similar kind. But in cases of isolated or infrequent transactions it seems to me to be more rather than less important to identify the nature of the transaction from the overall context in which it takes place.

[25] In my judgment the mere fact of the letting at a rent is not sufficient in itself to render that transaction an economic or business activity. In the case particularly of an isolated letting as opposed to one by a property company or other concern with a recognisable letting business it is relevant as I have said to consider the wider circumstances of the grant including the identity and nature of the parties before deciding whether it falls within art 4(2).”

20. This case is not of course on the same or similar facts to those found in Yarburgh Children’s Trust. But it shows that we need to consider the letting of Flat B in its context and to take account of the wider circumstances. To do this we turn to the well-known six indicia described in Customs and Excise Commissioners v Lord Fisher [1981] STC 236, and derived to an extent from Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1. The six indicia are:

(1) Whether the activity was a serious activity earnestly pursued.

(2) Whether the activity is an occupation or function which is actively pursued with reasonable or recognisable regularity.

(3) Whether the activity has a certain measure of substance in terms of the quarterly or annual value of the taxable supplies made.

(4) Whether the activity was conducted in a regular manner and on sound and recognised business principles.

(5) Whether the activity is predominantly concerned with the making of taxable supplies to consumers for a consideration.

(6) Whether the taxable supplies are of a kind which, subject to differences of detail, are commonly made by those who profit from them.

21. Before seeking to apply these indicia to the activity in question it is first necessary for us to determine the nature of the activity itself. In our view this is not a case where the sole activity to be analysed is that of letting Flat B for an income. We are bound, particularly in the case of an isolated letting, or infrequent transactions, to consider that letting in its context. Here there was a letting of a single dwelling, and although it was the intention of the Appellant that the lettings of that dwelling would be ongoing (in the sense that as one tenancy expired it would be renewed or replaced by a new tenancy with the existing or a new tenant), we consider that this case falls at the isolated or infrequent end of the spectrum. The activity of the Appellant in this case goes further than that of a person who simply builds a property and lets it out for income. The Appellant certainly did that, but her activities both in the construction phase and subsequently from the time of her own and her tenants’ occupation, have also included designing and creating a sustainable building for use not only as a dwelling but for ongoing research and academic activities. It is in this context that we must consider whether, taken as a whole, the activity of the Appellant in this case amounts to a business for VAT purposes.

22. We conclude on this basis that the activity of the Appellant was a serious one, and it has been pursued with reasonable and recognisable regularity. This refers both to the continuing rental income streams and to the research and academic activities. The supplies made, in the form of the letting for rent, do, in our view, have sufficient substance. And the supplies of lettings for rent are commonly made by those who profit from them.

23. On the other hand, in our view it cannot be concluded that the activity as a whole was conducted on sound and recognised business principles. It seems to us that the project was singularly lacking in commerciality, being more concerned with the environmental and sustainability issues than with those of commerce. This is demonstrated by a consideration of the project as a whole, by the overall costings and by the fact that the first letting was in the event made to one of the Appellant’s students, at less than a market rent, rather than taking a third party tenant. Nor do we consider that, viewed objectively, the overall activity was predominantly concerned with the making of supplies for a consideration. In that regard, we should say that we are satisfied that the reference in Lord Fisher to “taxable” supplies is not intended to draw any distinction for this purpose between taxable supplies and, as in this case, exempt supplies such as the letting of a dwelling. This test was derived from Morrison’s Academy Boarding Houses Association, where it was not in dispute that the supplies in question were taxable supplies. The Lord President held that where the activities in question were predominantly concerned with the making of taxable supplies it seemed to require no straining of the language of the statutory provision to conclude that the taxable person was in the “business” of making those supplies. The same accordingly applies for s 35 purposes if the predominant nature of the activity were to be the making of exempt supplies. In this case, having regard in its context to the activity of the Appellant as a whole, which includes both the making of exempt supplies and the activities of research and academic study that do not involve such supplies, we have concluded that the predominant nature of the Appellant’s activity overall was not the making of supplies for a consideration.

24. In view of our conclusions on the indicia we need to weigh those in favour of a conclusion that the Appellant’s activity constitutes a business against those which indicate that it is not. In this case the indicia we have found to be met are not in our view on their own conclusive of business activity. To our minds, the fact that the Appellant’s activity as a whole was not conducted on sound and recognised business principles and is not, as we have found, predominantly concerned with the making of supplies for a consideration, outweighs the other factors and is decisive of the fact that the overall activity was not a business, and we so find.

25. For these reasons, we conclude that for the purpose of s 35 VATA the works carried out by the Appellant were carried out otherwise than in the course of any business, and we allow the appeal.

The Respondents have a right to apply for permission to appeal against this decision. 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: 23 October 2009

Cases cited in argument and not referred to in this decision:

Mr R and Mrs L Watson (VAT and Duties Tribunal, decision no 18675)

William John Terry (in business as Wealden Properties) v Revenue and Customs Commissioners [2009] UKFTT 202 (TC)

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT) Respondents