In HMRC v Astral Construction Limited2 , the Upper Tribunal (UT), dismissed HMRC’s appeal against a decision given in July 2013 by the First-tier Tribunal (FTT), in relation to works carried out by Astral Construction Limited (Astral). 

Background

Astral supplied construction services relating to the development of a nursing home on the site of, and incorporating, a redundant church. Astral treated the supplies as zero-rated supplies in the course of construction of a building to be used for a relevant residential purpose.

HMRC decided that the construction works were not the construction of a building but were an enlargement of, or an extension to, an existing building and accordingly not zero rated. In HMRC’s view, the works were the conversion of the church to a relevant residential purpose, chargeable to VAT at the reduced rate of 5%. Astral was assessed to VAT on that basis and appealed to the FTT. 

FTT’s decision

The appeal before the FTT turned on whether the construction works were a conversion of and/or enlargement of, or an extension to, an existing building, namely, the church and thus excluded from being the construction of a building (for zero-rating) by virtue of Note 16(a) and/or (b) to Group 5 of Schedule 8 to VATA. The FTT answered this question in the negative and allowed Astral’s appeal.

Appeal to the UT

HMRC appealed the FTT’s decision.

Although it had not been part of the decision, subject to the appeal or argued before the FTT, HMRC amended its grounds of appeal for the UT to contend additionally that, if they succeeded in its appeal, the supplies of construction services by Astral were not chargeable to VAT at the reduced rate, but instead at the standard rate because, after the conversion, the church did not form the entirety of the nursing home. The UT decided that it should therefore consider whether the works were a conversion. HMRC also applied to make a further amendment to its grounds of appeal shortly before the hearing on the basis that the construction of a building in Item 2 of Group 5 of Schedule 8 to VATA, meant the erection of a building as a whole. HMRC submitted that even if the works were not an enlargement of, or an extension to the church, the supplies would not be zero-rated because they were not in the course of construction of a completely new building as the new structure incorporated the church.

Facts

Molescroft Nursing Home (Holdings) Limited (Molescroft) acquired a redundant church and its land. The site consisted of the main church building, which had been extended to the rear in the past, a presbytery with access into the church on the north side and a social club to the south. The site also contained several freestanding garages and outbuildings. 

In June 2010, the local authority granted Molescroft planning permission for the development of a new 72 bed nursing home on the site of the church. In April 2011, Molescroft entered into an agreement with Astral for the construction of the new nursing home. Astral demolished all the buildings on site, including the presbytery, the social club and the single storey extension to the back of the church. All that remained on site was the church in its original unextended form.

The original church building formed the main entrance and reception area for the nursing home. It had an office, shop, activity room and a small chapel on the ground floor.

UT’s decision

The UT considered that the first point it must address was whether the work was the construction of a building. 

The UT did not accept HMRC’s submission that the decision in Customs and Excise Commissioners v Viva Gas Appliances3 required the phrase “construction of a building” in Item 2 of Group 5 to be interpreted as only applying to the erection of a building as a whole. The UT said they agreed with the Judge in Customs and Excise Commissioners v London Diocesan Fund4 that Viva Gas was not concerned with the meaning of construction in the current context. Accordingly, the phrase construction of a building is not restricted to the construction of a wholly new structure. The UT noted that if that were the case, Note 16 to Group 5 of Schedule 8 of VATA would be unnecessary and it considered that it showed that an enlargement, or extension, can be a construction of a building. The UT therefore concluded that the FTT did not make any error of law on this issue. 

The UT then moved on to consider the question of whether the construction of a new building connected to the church was an enlargement of, or an extension to, the church within Note 16(b) to Group 5 of Schedule 8 of VATA.

The FTT concluded that the work was not an enlargement of, or an extension to, the church, because, applying Customs & Excise Commissioners v Marchday Holdings Limited5 , as a question of fact and degree and considering the size, shape and function and character of the new work and the completed building, the nursing home was so different from the existing building, the church, it could not be said to constitute an enlargement of, or extension to, the church. The UT said it considered that the FTT had applied the correct test and in its view it was clear from the Marchday case that the question of whether the construction of new buildings connected to the church was an enlargement of, or an extension to, the church, was a question of fact, degree and impression.

HMRC’s appeal was dismissed. 

Comment

When determining whether a construction project is an enlargement of an existing structure, or the creation of a new building, it will remain a question of degree. However, this case provides useful guidance and analysis on the legal backdrop (in the form of Part 2, Group 5 of Schedule 8 to VATA) to the factual analysis.

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