Commissioners for Customs & Excise v Marchday Holdings Limited

For VAT construction zero-rating, the question is whether works are properly described as conversion, reconstruction, alteration or enlargement of an existing building. The expression existing building requires the pre-existing building to retain its identity at completion, although the works may be substantial. The issue is one of fact, degree and overall impression, assessed by an informed reasonable person comparing the building before and after the works. References to a new building are permissible only as the antithesis of work to the existing building; they do not create a separate test. Reconstruction denotes substantial replication. Alteration has a wide meaning, while conversion and enlargement retain their ordinary building-related meanings. The appeal was dismissed by a majority.

Marchday Holdings Limited claimed input-tax credit for supplies connected with redevelopment works at Banner Street, London. The Commissioners treated the supplies as standard-rated, contending that the works fell within the exclusion in Note (1A) to Group 8 of Schedule 5 of the Value Added Tax Act 1983. The VAT Tribunal allowed Marchday’s appeal and treated the supplies as zero-rated. Laws J dismissed the Commissioners’ statutory appeal: [1995] STC 898. The Commissioners appealed to the Court of Appeal. The central issue was whether the works constituted construction of a building or conversion, reconstruction, alteration or enlargement of an existing building.

By a majority, the Court of Appeal dismissed the appeal with costs. Stuart-Smith LJ gave the leading judgment, and Aldous LJ agreed. Ward LJ dissented and would have allowed the appeal.

1. Statutory scheme. Under the Value Added Tax Act 1983, zero-rating under section 16 depended on the relevant supply falling within Group 8 of Schedule 5. Item 1 and item 2 had to be read with Note (1A), which excluded conversion, reconstruction, alteration or enlargement of an existing building.
2. Applicable test. The word existing had to be given substantial weight. The question was whether a reasonable person, fully informed of the works, would conclude that the building which existed before the works retained its identity at completion. That was a question of fact, degree and overall impression. A before-and-after comparison was appropriate. The intermediate state after demolition could be considered as evidence, but was not a separate stage of the legal test.
3. Meaning of the statutory terms. Reconstruction involved replication or new construction of what had previously existed, with substantially the same appearance and function. Conversion involved adaptation to a new use. Enlargement involved addition to the existing building and increased available space. Alteration had the widest meaning, but the works could become so extensive that describing them as alteration of the original building would be unrealistic.
4. Application. The Tribunal was entitled to conclude that the Banner Street works were so extensive that the resulting building was essentially new. Its reference to newness was understood merely as the antithesis of conversion, alteration or enlargement, rather than as an additional legal test. The Tribunal had therefore applied the law correctly.
5. Authorities. The approach was consistent with Wimpey Group Services Ltd v Customs and Excise Commissioners and was supported by Customs & Excise Commissioners v London Diocesan Fund, Customs & Excise Commissioners v Great Shelford Free Church (Baptist) and Customs & Excise Commissioners v Lewis. The three-stage approach discussed in St Andrew’s Building Co Ltd v Customs & Excise was rejected. Swan Developments (Land Co) Ltd was wrongly decided to the extent that it applied a different test.
6. Dissent. Ward LJ relied on Customs & Excise Commissioners v Viva Gas Appliances Ltd and considered construction to mean complete erection of the building as a whole. Because substantial parts of the existing structure had been retained, he would have treated the works as alteration of an existing building and allowed the appeal.

Leave to appeal to the House of Lords was refused.

1. Court of Appeal (Civil Division): The Commissioners’ appeal was dismissed with costs. Leave to appeal to the House of Lords was refused.
2. High Court, Queen’s Bench Division: Laws J dismissed the Commissioners’ statutory appeal from the VAT Tribunal: [1995] STC 898.
3. VAT Tribunal: On 18 March 1994, the Tribunal allowed Marchday’s appeal and held that the redevelopment was zero-rated.