Richmond Hill Developments (Jersey) Ltd vs HMRC: Listed building conversion and VAT
Jan Garioch CA discusses the case of Richmond Hill Developments (Jersey) Ltd v HMRC where the FTT heard a dispute on whether a listed building can be regarded as substantially reconstructed.
The Royal Star and Garter Home was built in the early 1920s to provide nursing facilities for servicemen returning from WW1. It is a grade 2 listed building, and was sold to Richmond Hill Developments (Jersey) Ltd (RHD) when the charity which previously owned the building moved its operation elsewhere. RHD, in a major project costing £95million, converted the building into 86 residential units. The issue for the FTT to determine was whether the sale of the flats was zero rated or exempt for VAT purposes. If zero rated, then RHD could recover all the VAT incurred on the conversion work and if exempt, then it could not.
The relevant legislation
Groups 5 and 6 Sch. 8 VATA 1994 provide for the zero rating by a developer of the supply of certain new dwellings. Group 6 Item 1 zero rates the sale of dwellings which result from the “substantial conversion” of a listed building. The precise battleground for this dispute is Note 4 to Group 6 which states that to qualify for that zero rating “the reconstructed building incorporates no more of the original building (that is to say, the building as it was before the reconstruction began) than the external walls, together with other external features of architectural or historic interest”.
HMRC’s position is that RHD cannot benefit from zero rating because, in accordance with the planning application and consent, certain internal features were retained. These included the majority of concrete floor slabs, steel framework, chimney stacks and a marble staircase.
RHD stated that removal of the floor slabs would have posed a risk to the structural integrity of the building because there would have been no lateral constraint on the walls. It also stated that protection of the external walls by scaffolding was impractical as it would have necessitated removal of the roof which was not allowed under the planning permission. Retention of the steel truss frame was essential to transfer the load of the roof to the external walls. Similarly, retention of the internal chimney stacks was critical to carrying the weight of the building through to the foundations.
RHD also raised the issue of HMRC’s approach to another listed building. As part of due diligence work on a potential acquisition, an officer of RHD had reviewed correspondence between HMRC and the owners of Balfon Tower which is a listed 25 storey tower block in brutalist architectural style. HMRC had confirmed that the redeveloped flats would be zero rated, and accepted that the provisions of Note 4 would be satisfied if the size of the building and scale of the development warranted the retention of internal elements necessary to the structural integrity of the building.
RHD acknowledged that an exemption must be strictly applied, but pleaded that it is not necessary to apply the strictest construction possible. It contended that the outside appearance of its building was preserved but anyone going inside following the reconstruction would say that the interior is new or incorporates only a de minimis amount of the original building.
The FTT accepted that strict construction does not require the strictest construction, but it was unpersuaded by RHD’s arguments that Note 4 was satisfied. In the FTT’s view, floor slabs may provide structural stability to walls but that is not their only purpose. They provide a place to walk and are not mere adjuncts to walls. Turning to the steel trusses, those that were cast into external walls to support them were part of the walls. However, as the remainder of the steel structure did not purely support the walls or roof, but also supported the upper floors, the FTT held it was a separate feature. Although the FTT concluded it would not be possible to retain the external chimneys without preserving the interior chimney stacks, the FTT concluded the internal stacks could not be accepted as external features.
Moving on to RHD’s appeal to apply a de minimis test, it had argued the retained interior items were trivial given the large scale of the works. Although the FTT acknowledged that it could have been persuaded to ignore trifling items, it decided to make its judgement in the context of the building as a whole, and by reference to the significance of retained interior items and not just by reference to the volume they occupy. The retention of the marble lined entrance and grand staircase was not trifling in the eyes of the FTT, and in consequence the FTT held that under domestic law zero rating was not available to RHD.
EU Law – Fiscal Neutrality and Proportionality
Turning to the implications of EU law, the FTT contemplated whether the position of Balfon Tower should assist RHD under the principle of fiscal neutrality. It concluded not because, in its view, the retention of internal floor slabs in Balfon Tower was not de minimis, and prevented that from being a substantial reconstruction. The European Court of Justice held (in CCE v Rank Group plc) that the fact fiscal authorities had given a treatment to supplies which was in contravention of domestic legislation did not permit another taxpayer making similar supplies to demand the same treatment under the principle of fiscal neutrality. Therefore, the FTT held the Balfon Tower redevelopment does not assist RHD’s case.
Finally, the FTT considered RHD’s argument that even through Group 6 is a derogation, the UK must ensure its provisions are necessary and proportionate to achieve the objectives of the legislation. RHD argued that Note 4’s objective is to protect national heritage and relieve burden on owners of listed buildings. Therefore, it would not be proportionate if Note 4 prevents the retention of interior features even where they are necessary to the structural integrity of the building. Unfortunately for RHD, the FTT saw this issue from an entirely different perspective. For the FTT, applying the principle of proportionality to this derogation is to question whether domestic legislation disturbs fiscal harmony by being too widely drawn. Consequently, a test of whether a provision is too widely drawn cannot assist RHD in its argument that a provision is too narrowly drawn.
RHD’s appeal was dismissed, and it remains to be seen if there will be an appeal.