Article by John Davison, Indirect Tax Partner with Baker Tilly. This article was published in the October 2002 issue of Tax Adviser.
Many sensible, logical and well thought out decisions give rise to as many problems as answers that they provide. The recent decision by Dr John Avery-Jones CBE and Sunil Das, in the appeal by Amicus Group (No. 17,693) gives a clear definition of what is a dwelling. It does, however, raise the problem of what the draftsman was trying to do when writing the legislation that allowed conversions into dwellings and new construction of dwellings the zero-rate relief.
The Amicus Group was the representative member of a couple of Housing Associations and thus was entitled to zero-rating under Value Added Tax Act 1994 (VAT Act 1994), Sch. 8, Grp. 5, item 3, for construction services when converting a non-residential building into dwellings. There was no doubt that the property when converted would contain dwellings, but the property had previously been used as bedsit accommodation. The question, therefore, was whether the building was non-residential before the conversion works?
The appellant argued that the building was non-residential, as it did not incorporate self-contained accommodation prior to conversion. Zero-rating is available for a building designed as a dwelling. Group 5, Note 2 requires a building designed as a dwelling to have self-contained living accommodation. This would seem to support the appellant’s argument. The appellant also argued that the Look Ahead Housing Association  BVC 2,107 tribunal decision supported the argument that an ordinary meaning of dwelling would require all the major activities of life - thus being self-contained living accommodation.
The Commissioners argued that the Look Ahead Housing Association (and presumably all the subsequent decisions) had been wrongly decided. They based their submissions upon the House of Lords Decision in Uratemp Ventures Ltd v Collins  3 WLR 806. This was a Housing Act 1988 (HA 1988) case and determined that a room in a hostel with virtually no cooking facilities was indeed a dwelling.
The tribunal found for the Commissioners and specifically departed from the decision in Look Ahead Housing - a decision given on seemingly identical facts. The tribunal recognised that although the Uratemp case was a HA 1988 case, which would have different considerations from VAT, it was an important precedent when determining the ordinary meaning of dwelling. The tribunal based its decision on this ordinary meaning of dwelling and was mindful of the need to construe exempting provisions narrowly. Thus, the tribunal found that the bedsits were dwellings and the works were not a conversion from non-residential to residential (or dwellings).
What is zero-rating for?
The logic of the decision is difficult to fault. While it is necessary to construe exemptions and the zero-rate relief narrowly, this poses a problem with the rationale of the zero-rate provisions. The United Kingdom (UK) is permitted to maintain zero-rates for clearly defined social reasons and for the benefit of the final consumer. The UK’s use of this relief was discussed in EC Commission v UK (No2) C416/85  STC 456. In its submission, the Commission stated that it would not challenge zero-rating:
‘taken in pursuance of a member state’s social policy unless it can be shown that the social policy is not sufficiently clearly defined or that the measures in question either are not justified by or are disproportionate to the social reasons advanced’.
The European Commission (EC) did not object to social housing provided by local authorities, but did object to the widespread application of zero-rating to private house construction as being disproportionate. It would appear that both the EC and the UK agreed that the provision of social housing was suitable for zero-rating – the Commission’s objection being the widespread application of zero-rating to private home ownership. The UK legislation does, however, deny the objective of allowing zero-rating for the poor and needy in hostel or bedsit accommodation.
It may be questioned why a dwelling needs to be self-contained to obtain zero-rating. Dr Avery-Jones highlighted in his decision that the person drafting the legislation was clearly mindful of the fact that a dwelling did not have to be self-contained to be a dwelling – hence the exclusion of the bedsits from the zero-rate relief. If my memory serves me correctly, the reason for the self-contained accommodation requirement was an anti-avoidance measure to prevent granny flats being built and qualifying for zero-rating. It is, therefore, ironic that the legislation supports zero-rate construction for private ownership (and self-contained dwellings for rent), but an anti-avoidance provision aimed at the wealthy can deny zero-rating for the provision of accommodation for the needy in hostels or bedsits.
Morton’s Fork was named after a 15th Century Lord Chancellor, John Morton, who devised a new system of assessing the King’s subjects for taxation. If a taxpayer appeared wealthy he could afford to pay more tax; if he did not appear wealthy, he was obviously hiding his wealth and could afford to pay more tax. The legislation for zero-rating dwellings apparently follows this convention.
Most hostels and bedsits do not qualify for zero-rating when constructed. It would be thought, therefore, that when a bedsit or hostel is converted into something that does qualify for zero-rating, then it would be eligible for the zero-rate relief. No - we are caught by the second prong of the fork. The bedsit or hostel is residential accommodation, but not one that qualifies for zero-rating on construction and, as it is residential, the zero-rate relief on conversion costs into self-contained dwellings is not available. This is a modern Morton’s Fork – two differing definitions of the same thing, a dwelling, residence or place to live.
As we all know, there is no fairness in taxation. Why that should be the case is incomprehensible to me. The government has stated that it is committed to fairness in taxation. This fairness, however, only seems one-way. On 3 December, 1998, Dawn Primarolo stated in the Standing Committee, when discussing the VAT (Input Tax) (Amendment) Order 1998 that the government was committed to fairness, and was determined to deal with avoidance. While there seems to be a commitment to dealing with avoidance to ensure all pay their share of taxes, there may not be the same commitment to ensuring that an unfair burden is not imposed (though I am sure that this lacuna in the legislation will now be rectified). It appears that the objective of the legislation is to provide a zero-rate relief for dwellings. This relief is restricted by an anti-avoidance clause. To remove this unfairness it seems that either zero-rating should be allowed for hostels and bedsit accommodation, or Customs & Excise should allow conversion into dwellings to be zero-rated. The opportunity to allow this arose with the Look Ahead Housing Association decision. It has to be asked why Customs seem intent on frustrating the aim of the relief and imposing a tax burden when it appears that there is an objective to allow zero-rating for dwellings.
The situation is further confused by the recent Tribunal decision in Kingscastle Ltd (not yet reported). It was argued in this case that the Amicus decision was incorrect as there was not a ‘use’ requirement in the VAT legislation. The test is ‘designed nor adapted for use as a dwelling’. Thus, it was the design that was important, not the use. Whether or not this interpretation is correct depends on whether it is thought the legislation is ‘designed as a dwelling or adapted for use as a dwelling’ or ‘designed for use as a dwelling or adapted for use as a dwelling’. I think it is the latter.
We are left in the position where it is difficult to determine whether use or a premise is a dwelling or not and whether the zero-rate or reduced rate relief can apply. This is not satisfactory and I think that the very least that can be expected of Customs & Excise is a statement of practice outlining what is a dwelling. In addition, the Department should consider the spirit of the law when determining when to assess, is it a case where the relief should arise, rather than looking for technicalities to deny the relief. Surely, anything else would be an abuse of right?
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