HM Revenue & Customs v Jacobs

For a residential conversion under section 35 of the VAT Act 1994, only works converting a non-residential building or part qualify. Where a non-residential part of a building containing residential accommodation is converted, Note 9 requires the resulting building to contain more dwellings than before. The additional dwelling need not be created wholly or partly from the non-residential part. The comparison is made across the building as a whole. Section 35(1D)(a) asks whether the non-residential part has been changed in character and made part of a new building designed as a dwelling or dwellings. The provisions are construed strictly, but not by inserting words which Parliament has not used.

Mr Jacobs converted a former residential school into a mansion with three staff flats and claimed a refund of VAT under section 35 of the VAT Act 1994. The VAT and Duties Tribunal allowed the claim. Evans-Lombe J broadly dismissed HMRC’s appeal, but held that Note 9 applied and limited recovery to works relating to non-residential parts, in a judgment reported at [2004] EWHC 2358. HMRC appealed to the Court of Appeal. The central issues were whether Note 9 required an additional dwelling to be created from the converted non-residential part, and how the former school’s accommodation, including staff bed-sits, should be classified.

Ward LJ gave the judgment of the court. Clarke and Laws LJJ agreed. The appeal was dismissed on the principal issues, and the Tribunal’s decision was restored, although the recovery might require assessment to exclude VAT attributable to former residential parts.

1. Section 35(1D) of the VAT Act 1994 qualifies works only to the extent that they consist in converting a non-residential building or non-residential part. Works converting what is not non-residential fall outside the subsection. Under section 35(1D)(a), the relevant question is whether the non-residential part has been changed in character and made part of a new building designed as a dwelling or dwellings. The legislation does not require that part itself to become a dwelling.
2. Note 9 must be read with section 35 as a whole. It applies where a non-residential part of a building which already contains a residential part is converted under section 35(1D)(a). The additional dwelling requirement is measured by counting the dwellings in the building before and after conversion. The additional dwelling need not be created exclusively, or even partly, from the non-residential part. The new property contained four dwellings, whereas the former school contained only the head’s flat as a dwelling, so Note 9 was satisfied.
3. The Court of Appeal’s decision in Customs & Excise Commissioners v Blom-Cooper [2003] EWCA Civ 493 correctly established the restrictive effect of Notes 7 and 9, but did not decide where the additional dwelling had to be created. The earlier High Court approach that Note 9 did not apply to section 35(1D) could not stand.
4. Residential accommodation for school pupils may include facilities ordinarily forming part of their accommodation, including staff accommodation required for night supervision and care. Staff need not themselves be pupils. This finding did not alter the claim because the disputed first-floor works had not been claimed.
5. The statutory scheme is an exception to the general VAT charge and must be construed strictly. That approach did not make the result impermissible: facilitating home ownership for the whole population was capable of constituting a social reason for permitted zero-rating.

If agreement could not be reached, the Tribunal was to assess the recoverable refund in light of the judgment.

• Court of Appeal (Civil Division): dismissed HMRC’s appeal and restored the Tribunal’s decision for different reasons: [2005] EWCA Civ 930.
• Chancery Division: Evans-Lombe J broadly dismissed HMRC’s appeal from the Tribunal, while holding that Note 9 applied: [2004] EWHC 2358.
• VAT & Duties Tribunal: allowed Mr Jacobs’s appeal on 13 February 2004.