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IN THE SUPREME COURT OF JUDICATURE QBCOF 95/1257/D

IN THE COURT OF APPEAL (CIVIL DIVISION )

(MR JUSTICE LAWS )

Royal Courts of Justice

Strand

London W2A 2LL

Wednesday 11th December 1996

B e f o r e

LORD JUSTICE STUART-SMITH

LORD JUSTICE ALDOUS

LORD JUSTICE WARD

COMMISSIONERS FOR CUSTOMS & EXCISE Appellants

v.

MARCHDAY HOLDINGS LIMITED Respondents

(Handed down transcript of

Smith Bernal Reporting Limited, 180 Fleet Street

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

MR NIGEL PLEMING QC (instructed by Messrs D Nissen Esq, London SE1 9PJ) appeared on behalf of the Appellants (Plaintiffs).

MR RODERICK CORDARA QC and MISS PERDITA CARGILL-THOMPSON (instructed by Messrs Thaimprice & Co, London W1W 9AD) appeared on behalf of the Respondents (Defendants).

J U D G M E N T

(As approved by the court)

©Crown Copyright

LORD JUSTICE STUART-SMITH: This is an appeal from the decision of Laws J., (1995) STC 898, brought with the leave of the Judge, given on 5 July 1995 in which he dismissed the Commissioner's statutory appeal against the decision of the London Value Added Tax Tribunal dated 18 March 1994. By that decision the Tribunal allowed the company's appeal against a decision of the Commissioners regarding the treatment for Value Added Tax (VAT) purposes of a construction project carried out by the company at 44-52 Banner Street, London EC1.

The question at issue concerned the entitlement of the company to input tax credit which depends on whether the supply to which it is attributable, namely the supply of a major interest in (or any part of) the building, was zero-rated under item 1 of Schedule 5 Group 8 of the Value Added Tax Act 1983. This turns on whether the Company was " a person constructing a building" within Item 1 or whether the case fell within the exclusion contained in Note 1(A). The Commissioners held that it fell within the exclusion and was therefore standard-rated; the Tribunal held that it did not fall within the exclusion and was zero-rated.

Where a supply is zero-rated within S.16 of the Value Added Tax Act 1983 the consequences (by S.16(i) are that no tax shall be charged on the supply, but in all other respects it shall be treated as a taxable supply. The result is that the taxpayer will be entitled to credit in respect of input tax upon supplies made to him in connection with the zero-rated supplies made by him.

S.16 (2) provides:

"A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for the time being specified in Schedule 5 to this Act or the supply is of a description for the time being so specified."

The relevant part of Schedule 5 for the purpose of this case is "Group 8 - Construction of Buildings etc." The material provisions are as follows:

"Item No.

1. The granting by a person constructing a building of a major interest in, or in any part of, the building or its site

2. The supply in the course of the construction or demolition of any building or any civil engineering work, of any services other than the services of an architect, surveyor or any person acting as consultant or in a supervisory capacity.

Notes

(1A) Any reference in item 2 or the following Notes to the construction of any building or the construction of any civil engineering work does not include a reference to

(a) the conversion, reconstruction, alteration or enlargement of any existing building or civil engineering work; or

(b) any extension or annexation to an existing building which provides for internal access to the existing building or of which the separate use, letting or disposal is prevented by the terms of any covenant, statutory planning consent or similar permission.

and the reference in item 1 to a person constructing a building shall be construed accordingly."

The critical question the Tribunal had to answer was whether work carried out at 44-52 Banner Street, for and on behalf of the company amounted to "the conversion, reconstruction, alteration or enlargement of an existing building" within Note (1A).

The facts can be taken very largely from the Tribunal's decision. There was undoubtedly an existing building before the company commenced any work. It was a light industrial building erected in 1955 on three storeys with a basement. It had lifts, and four sets of stairs. The Tribunal described the front of the building as being:

"... constructed of plain London brick with most of the first and second floors between horizontal brick panels taken up with long patent metal framed single glazed windows. At ground floor level apart from the two loading bay entrances, there was a main entrance about eight feet wide and two large windows of similar construction."

There are photographs before the court, as there were before the Judge and the Tribunal which give a clear impression of the building before, during and after the work was done.

The company acquired the lease of the property in December 1981 at which time the building was vacant. In due course planning permission was granted for change to office use. Over a period time the company's plans for the development became more extensive and substantial. Like the Judge I derive little assistance from the various descriptions which appear from time to time in planning or sale documents.

First of all demolition work was carried out between January and March 1986. When it was over the Tribunal described the position as being:

"The parts of the existing structure which were retained were as follows:

(1) The reinforced concrete columns and beams forming the frame of the structure;

(2) the concrete slabs forming the floor of the ground floor, first floor and second floor and the roof of the second floor with gaps where the old stairs, lift and loading bays had been and with holes cut out for the new lifts, stairs and the ramp to the basement;

(3) the entire brick party wall on the east which was at ground level some 90 feet and 36 feet at first floor level and above;

(4) the brick party wall on the west side of about 30 feet deep, the six feet return where the flats were set back from the road being demolished;

(5) the brick wall at ground floor level only on the west side extending back by a little more than a further 90 feet; and

(6) the foundations."

The Tribunal continued:

"Photographs taken during demolition and examination of the plans show that with the exception of the party walls and the retained ground floor wall on the east and west sides a person standing in the street could have seen right through the remaining structure and a person standing inside would have seen the sky through the substantial gaps in the floor and ceiling where the old lifts and stairs had been removed and the new ones were to be inserted. It might fairly be described as an incomplete skeleton albeit of substantial construction."

The building works which followed were carried out under a management contract agreed with Bovis Construction Ltd. between April 1986 and March 1987.

The architect's outline specification, to which Mr. Pleming QC on behalf of the Commissioners attaches some weight, sets out a "General Description" in its opening paragraph as follows:

"The works comprise the complete refurbishment and enlargement of an existing building, giving approximately 34,700 sq ft of gross area on five floors including the basement. The existing reinforced concrete frame is being reused, with the addition of a steel frame mansard level and plant room. The external fabric of the building, all internal walls, lift, stairs and services are being replaced and brought up to present standards. A core area to all floors, the reception, and the ground floor offices are being completely fitted out. The office areas to the 1st, 2nd and 3rd floors will be left suitable for complete fitting out to tenants' choice."

Again for my part I do not think this description is determinative of the question the Tribunal had to answer.

The Tribunal described the building as it was at the end of all the works. The basement floor was raised, new concrete slabs being laid over crushed brick hardcore which had been left by the demolition contractor. There is a new lift. An LEB transformer chamber has been retained, but there is a new electrical switch room and fire exit stairs have been modified because of the raised floor level at the basement. The dimensions of the building have been changed, for instance by a reduction of the floor space at ground floor level to allow for new patios. Raised steel floors have been superimposed on the existing concrete bases and false ceilings installed. The concrete columns have been encased and painted. The ground, first and second floors are all open plan save for the lift and lavatory areas. The third floor mansard is, of course, entirely new. Its gross area is a little more than three quarters of the two floors below, and above it is a plant room and air-conditioning plant.

After the building work had been completed the Tribunal said:

"Leaving aside the basement, some 15 per cent. of the concrete slabs were new. The basement floor was in effect new. One third of the structural frame was new; some of the outermost columns and beams were found to be out of alignment and had to be replaced."

Thus a substantial part, but not the whole, of the "incomplete skeleton albeit of substantial construction" which was left after the demolition contract still remained after all the works were completed.

As the Tribunal says, and as is plain from the photographs, the appearance of the Banner Street facade is wholly different from what it was before any works were started. The Tribunal describes the difference as follows (at 263):

"There is substantially more brick than before and of a much better quality, namely Red Leicester Ibstock, with black mortar. Instead of the long window effect there are rectangular windows at regular intervals, ten each on the first and second floors and eight on the ground and third floor. There is a new front entrance and a circular window above and central at third floor level."

The important part of the Tribunal's conclusion is to be found in three paragraphs at p.40 and 41.

"The question which we must ask ourselves is whether the work done by Marchday at No. 44/52 Banner Street amounted to the conversion, reconstruction, alteration or enlargement of the existing building, in the sense in which these words are commonly used or whether the end result is a new building. We must compare the end result with the building as it was.

We accept Mr. Pleming's submission that the question whether the end result is the original existing building or a new building must be considered in the context of Note (1A). It is clear however that the words "existing building" must be given due weight. If what might otherwise be described as conversion, reconstruction, alteration or enlargement is so extensive that the building is essentially a new building, then Note (1A) does not apply.

Having seen plans, photographs, specifications and correspondence, visited the site and considered the evidence of the witnesses, it is our unanimous impression viewed from our differing professional experience, that considered as a totality the work was so extensive that the building was essentially new. In our opinion to describe the work as the conversion, reconstruction, alteration or enlargement of an existing building is unrealistic."

It is Mr. Plemings submission that the Tribunal fell into error in considering whether the end result was a new building. He accepts that if the words which I have underlined are omitted, the Tribunal asked themselves the right question; but the addition of the words, he submits,vitiates the test. The sole question he contends is whether there has been a conversion, reconstruction, alteration or enlargement of the building that existed before any work was done. Moreover, save in the case where there is a total demolition of the existing building, any work done to the existing building must be either a conversion, alteration or enlargement, and possibly also a reconstruction of it. This will be so, subject to a de minimis extreme, no matter how little of the pre-existing building remains. Mr. Pleming also submits that the Tribunal were in error in applying a before and after test. All one has to do where there is an existing building, is to ask whether it has been converted, altered or enlarged (leaving aside reconstruction). The answer he says must inevitably be "yes" unless the building is totally demolished to ground level. If it is so demolished, and construction work is carried out upon the site, then he accepts that there cannot be conversion, alteration or enlargement of an existing building, whatever shape or form the new construction work takes, but it may be a reconstruction of the existing building, if there is a substantial rebuilding or replication of what was there before. Mr. Pleming relies on a further paragraph in the Tribunal's conclusion in which it is said:

"Subject to the 'newness' point, we do accept that the work had elements of all four words in Note (1A) although the element of reconstruction was very limited."

Mr. Pleming submits that the Tribunal's approach confuses the extent of the work of conversion, alteration and enlargement, with the fact of such conversion etc. The concept of newness is an unnecessary and confusing gloss on the language of the Statute.

Laws J. rejected Mr. Pleming's submission. The core of his reasoning is at p.904 F where he said:

"If the matter were res integra , my view of the relationship between item 2 and Note (1A) would be as follows: (1) the notion of "the construction... of any building" is capable of embracing the notion of "the conversion, reconstruction, alteration or enlargement of any existing building" since otherwise Note (1A)(a) would be redundant. (2) Note (1A)(a) excepts from item 2 a case where works falling within the meaning of any of the four nouns in Note (1A)(a) are carried out to an existing building, and such works may plainly be very substantial. (3) The touchstone for the application of Note (1A)(a) is whether a reasonable person, apprised of all the facts, would conclude that the building which existed before the works started still retains its identity - in that sense, still exists - at their completion, though it may have been transformed by conversion, etc. Whether that is the correct conclusion in any particular case will be a matter of fact and degree. The key is the continuity or otherwise of the identity of the building which was there before the works started."

At p.905(a), referring to Mr. Pleming's argument that the Tribunal had confused the extent of conversion etc. with the fact of it, he said:

"His position entails the proposition that the continuity of the pre-existing building's identity is not at all the touchstone for the proper application of the note. The difficulty with this argument, in my judgment, is not only that it fails to give due weight to the expression 'existing building', but also that it fails to confront the very sense of the four nouns used in the note - or at least three of them. The words 'conversion', 'alteration' and 'enlargement' seem to me to connote a state of affairs in which the building upon which such works are done necessarily remains after they are done. One cannot sensibly ascribe any of these three descriptions to a case where the old building is, in effect, destroyed; it continues to exist though it may have been substantially transformed."

For my part I agree with and would adopt the Judge's reasoning. It seems to me that Mr. Pleming's construction does not give any or sufficient weight to the word "existing". Indeed it could perfectly well be omitted. I also think that Mr. Cordara QC is correct when he submits that the reference in Note (1A)(b) to existing building supports the conclusion that what must still be there after the conversion, alteration or enlargement is something that as a matter of common sense must be described as the existing building. Obviously it will not be precisely the same, however minor the works of alteration that are carried out. But a reasonable person, who is fully informed as to the work that has been carried out both externally and internally can say whether or not the old building has been altered. I would regard this as a jury question; and is very much a question of fact, degree and also of impression.

I agree with Mr. Pleming that it is not necessarily helpful to introduce the concept of newness or whether the building is the same or different, unless it is clear that this is simply the antithesis of conversion, alteration or enlargement. But if it is, it adds little to the question that has to be answered. I was at one stage concerned that the Tribunal might have fallen into error by their reference to the end result being a new building. But I am satisfied that they have only used the expression as the antithesis to conversion, alteration or enlargement of the existing building.

Each of the words in Note (1A)(a) are important, although there may often be overlap between them. The word reconstruction is somewhat different from the others. It involves a replication or construction anew of what was there before. The appearance and function of the building will be substantially the same as what previously existed. There may be minor differences and the use of more modern techniques to achieve what is essentially a replication of the old building. (See Wimpey Group Services Ltd. -v- Customs and Excise Commissioners [1988] SIC 625)

The word conversion as applied to buildings is defined in the Oxford English Dictionary as "adaptation of a building to a new use". It must inevitably involve some alteration, and if it did not would not amount to "construction" within item 2. I doubt therefore whether it adds materially to the word alteration.

Enlargement clearly involves some addition to the existing building and involves an increase in the available space. Again in my view it will be a question of fact and degree whether something can properly be described as an enlargement of an existing building. The additional works may be so extensive in comparison with the original, that it would be a misnomer.

In my opinion the word alteration probably has the widest meaning, and may well encompass conversion in the sense I have indicated and enlargement. But the scale of alteration may be almost infinite. At one end one could have what would be regarded plainly as de minimis , for example the change of a door handle. At the other there may be virtually nothing left of the original building. Somewhere along that line it is possible to say, the original building has ceased to exist, what is being done cannot be sensibly or realistically described as an alteration of it. That was the approach of the Tribunal in this case; my judgment is more correct in law.

So far as the authorities are concerned I do not think it necessary to consider them at any length; none are binding on this Court. It seems to me that the before and after test adopted by the Judge in this case is consistent with the approach of the Court of Appeal in Wimpey's case. At p.629g Woolf LJ said:

"With regard to the various matters referred to in the note to Group 8, it is important to bear in mind that there can be a considerable overlap. However, being concerned in this appeal only with reconstruction, it appears to me important to recognise that what is required is first of all to look at the area covered by the new building, which it is accepted is being constructed, and then look at what was on that area before. Is what has been substituted properly describable as a reconstruction"

In Customs & Excise Commissioners -v- London Diocesan Fund [1993] STC 369 McCullough J. propounded the test adopted by the Tribunal in this case. At p.380h he said:

"Where, as will ordinarily be so, it is beyond argument that a building was in existence before the work began, all that para (a) of note (9) requires is to consider the building as it was, to consider the end result and to ask whether the work done amounts to the conversion, reconstruction, alteration or enlargement of the original building in the sense in which those words are commonly used or whether the end result is a new building. If a number of buildings existed before the work began the question will be whether the work amounted to the conversion, reconstruction, alteration or enlargement of one or more of them. The matter is one of fact and degree."

I think so long as it is appreciated that the words "or whether the end result is a new building" are purely the antithesis of what has gone before, there is no harm in postulating it in that way. But I think it is preferable not to pose the antithesis, but merely to ask the question, at any rate when one is considering whether what has been done amounts to the conversion, alteration or enlargement of the existing building as opposed to its reconstruction.

McCullough J. also criticised the three stage approach (as opposed to the before and after two stage approach) adopted by the Tribunal in St. Andrew's Building Co. Ltd. -v- Customs & Excise (EDN/86/12) of looking first at the building prior to commencement of any works. Secondly asking was there still an "existing building" once the projected demolition had been carried out and thirdly was the completed work to be described as the conversion, alteration or enlargement of that existing building. He considered and I agree that the second stage should not be part of the test. But he added at p 380j:

"In answering this question it will, in most cases, be helpful to look at the finished work and ask how much of the original has survived. If there happens to have been a stage during the work when all the demolition had been done and none of the new work had started, it may be useful to consider how the site would then have looked."

I think this can be a useful exercise, but only as part of the evidence to be taken into account when considering the appropriate question.

The decision of Kennedy J. in Customs & Excise Commissioners -v- Great Shelford Free Church (Baptist ) [1987] STC 249, where the question was whether there had been an enlargement of an existing building is also consistent with the conclusion to which I have come. In Customs & Excise Commissioners -v- Lewis [1994] STC 739 Brooke J. also followed the London Diocesan Fund case . The only decision to the contrary effect is that of the Tribunal in Swan Developments (Land Co.) Ltd . [1992] BVC 853. I would hold that to the extent that a different test was applied in that case it was wrongly decided.

The law has now been changed by Statute. The Finance Act 1989 abolished zero-rating in relation to the construction of buildings other than those designed as dwellings. In relation to dwellings the Value Added Tax 1994 by Note 18 to Group 5 (introduced by the Value Added Tax (Construction of Buildings) Order 1995, S1 1995 No. 280, with effect from 1 March 1995) provided that a building only ceases to be an existing building when it is demolished completely to ground level. Although this is subject to an exception in Note 18(b) where the facade is left standing as a condition of planning consent.

I would dismiss the appeal.

LORD JUSTICE ALDOUS: I agree with the judgment of Lord Justice Stuart-Smith.

LORD JUSTICE WARD: I regret that I find myself in the minority. I shall state my reasons for disagreeing as succinctly as I can.

The question in this case, correctly identified by Laws J., was whether the supplies fell within Items 1 & 2 of Group 8 of Schedule 5 of the Value Added Tax 1983, in which case they are to be zero-rated, or whether they were excepted from Item 2 by virtue of Note (1A) in which case they will be standard-rated. The Tribunal also identified the issue in terms which were perfectly acceptable, namely:-

"Put shortly, the issue is whether Marchday constructed a building or carried out works to an existing building."

They concluded that:-

"... the end result of the work constituted a new building."

They reached that conclusion having set for themselves the test which, as I understand it, was confined to determining only whether the case fell within Note (1A). They directed themselves that:-

"the question which we must ask ourselves is whether the work done by Marchday ... amounted to the conversion, reconstruction, alteration or enlargement of the existing building, in the sense in which these words are commonly used or whether the end result is a new building."

If I correctly understand their approach, they were not asking whether the end result was a new building in order to determine the issue as they first defined it, namely whether Marchday had constructed a building as opposed to carrying out work to an existing building. Nevertheless, the consequence of their finding was that this was not a case within Note (1A) has to be that they did find this to be within Item 2. It has to be one thing or the other. Nowhere do they test their conclusion nor ask the question which is the pre-requisite for treating the supplies as zero-rated:- Was this truly a case of "construction of any building"?

What do these words mean? In my judgment, the answer was given by the House of Lords in Customs & Excise Commissioners -v- Viva Gas Appliances Ltd . [1983] STC 819. Lord Diplock said at p.823G:-

"Once what constitutes the relevant 'building' has been identified, 'construction'... in the absence of any reference to 'part of a building', means erecting the building as a whole and 'demolition' means destroying it as a whole, so 'alteration' is left to cover all works to the fabric of the building which fall short of complete erection or complete demolition."

True it is that their Lordships were there construing the words originally used in Schedule 4 of the Finance Act 1972, namely:-

"The supply, in the course of the construction, alteration or demolition of any building..."

That provision was amended by deleting reference to alteration and by introducing Note (1A). In my judgment that deletion cannot alter the sense of ordinary words like "construction" and "demolition". If, as I believe, those words bear the same meaning now as they did for their Lordships, then it seems to me that no Tribunal properly directing itself could have concluded that Marchday were constructing a building as a whole or that what they did amounted to the complete erection of the building. They did not erect the whole building because they used a substantial part of the existing building (or at least a part which was not so slight or trivial as to attract the application of the de minimis rule.)

I see the Tribunal's error to lie in the introduction of the test "whether the end result is a new building." They seem to have found it necessary to introduce that question because:-

"It seems to us that the concept of a new building is simply the converse of an existing building."

I do not agree. The contrast between the Note (1A) case and the Item 2 case is the contrast between conversion etc. of an existing building and the construction of a building: in the former case one starts with that existing building (whatever it may be), in the latter one starts with nothing because at that stage there is no building in existence. Bearing in mind that one must render tax invoices throughout the period of conversion or construction, as the case may be, the supplier should be in a position easily to judge whether the supply is zero-rated or standard-rated and he can the more easily do that if attention is focused on whether there is any building in existence at the beginning of the process, not on whether "a new building" will be the end product of the supply. To introduce the concept of newness is to confuse: ex hypothesi all work of conversion, reconstruction, alteration or enlargement produces something new. I see no need for this before and after test. I see no need for the almost metaphysical consideration of whether the change is so substantial that the old identity has been lost and a new identity gained. If the notion of newness has to be introduced at all, then I would formulate the question in terms of whether or not one starts from new and then constructs an entire building or whether one starts with an existing building and carries out some work of alteration to it. I deliberately use the phrase "alteration" of any building because it seems to me that the legislative purpose of the amendments made in 1984 was to leave complete construction and complete demolition, as the House of Lords used those words, as zero-rated supplies under Items 1 and 2 and then, to give effect to the change in fiscal policy, to impose standard rating on other supplies where one does not begin with a clean slate, but with an existing building which is to be altered by work which can fairly be described as conversion, reconstruction, alteration or enlargement of it. It seems to me that this construction gives a cohesion to the scheme as a whole. On the other hand, the decision as it stands seems to me to produce a departure from the opinion expressed in Viva Gas Appliances because there can now be construction of a building for Item 2 purposes which is less than the construction of the whole building but more than the conversion etc. of the existing building. If fact and degree determine "construction" why then should it not also determine "demolition"? That would cause havoc in the building industry. When the home owner wishes to have a grand large drawing room in place of his small front room and his back parlour, is this a work of conversion of the existing building or does the reality that the major element of the project consists in knocking down the dividing wall, result in this being treated as a supply which is in essence a work of demolition?

To my mind the meaning of Schedule 5 is clear and simple. If there is a construction of a whole building where no building was in existence when the work started, or if the demolition is of the entire building, then the case falls under Items 1 & 2. If, on the other hand, there is an existing building, then the supply is almost inevitably standard-rated (which, after all, is how most supplies are treated) because, unless it is de minimis , the work will inevitably fall within a description of conversion, reconstruction, alteration or enlargement. The difficulty in separating the Item 2 case from the Note (1A) case will often be in deciding whether - and this is a matter of fact and degree - what one starts with is a "an existing building" or whether the original structure has been so damaged or decayed that it can no longer be properly so described. I do not have to decide where that dividing line is to be drawn because there is no doubt at all that there was an existing building at Banner Street London EC1 when these supplies began.

I note that in Customs & Excise Commissioners -v- London Diocesan Fund [1993] STC 369 McCullough J. could not think that everybody - including the Commissioners themselves - could have been blind to this simple approach and he refused to follow it. Out on my limb of dissent where no one will take any notice of what I say, there is less restraint. I feel free to declare that I do think everyone has indeed shut their eyes to the obvious and that they have all got it wrong.

I would have allowed the appeal.

Order: Appeal dismissed with costs;

application for leave to appeal

to the House of Lords refused.