The Upper Tribunal’s criticism of Judge Thomas seems harsh.
Around a year ago, in Tax Journal (24 June 2016), I commented on Judge Thomas’s analysis of VATA 1994 Sch 8 Group 5 note 18 in a case where a house was almost demolished and then ‘re-built’ to create one made overwhelmingly of new fabric (J3 Building Solutions [2016] UKFTT 318). The judge considered that note 18 had ‘missed fire’, owing to the difficulty in imagining cases where the boundary line it set would change the conclusions that should be drawn from Group 5 note 16.
It seems, now, that I may have been wrong to draw attention to this, since the Upper Tribunal decision on HMRC’s appeal of this case has roundly disagreed with Judge Thomas (see [2017] UKUT 253 (TCC), reported in Tax Journal, 14 July 2017). And I accept the views of Justice Mann and Judge Bishopp of the Upper Tribunal, but in the process I think they have been unfair on Judge Thomas.
Note 18 defines when we can assume a building no longer exists. Note 16 tells us which works that are performed on an existing building can be standard rated (and it proceeds on the basis that anything ‘left over’ from the works mentioned would be zero rated). Note 16 therefore is not in point if the note 18 test tells us that the building no longer exists. You look at note 18 before turning to note 16.
Note 16 was drafted earlier than note 18, which was inserted to help refine the definition in note 16 of an ‘existing building’. Note 16 was not, otherwise, changed.
The Upper Tribunal says that Judge Thomas ‘considered Note 16 without reference to Note 18, only then turning to the latter’. But that is not correct. Paragraph 35 of the FTT judgment says: ‘we turn to the group and in particular Notes 16 and 18…’ This statement is under a section heading of ‘Note 16’. Judge Thomas clearly recognises that one cannot take Note 16 separately from the potential effect of note 18. In para 54, he says: ‘all of these [previously mentioned] appeals related to periods before Note 18 was added to the group… They were therefore construing “reconstruction” of an “existing building” without any legislative gloss on the latter term.’ How does that statement sit with the Upper Tribunal’s criticism concerning ‘the FTT’s … reliance on old authority which preceded that paragraph’?
The whole point about note 16 is that it is only engaged where note 18 is not. Judge Thomas accepted that note 18 was not engaged, and he then construed note 16. He happened to make further comments about note 18 and its apparent inadequacies, but he did not decide the case on that basis. So, what impact could note 18 have on construing note 16, save in the broadest contextual sense? Once note 18 is out of the picture, surely note 16 stands alone.
And note 16 requires that, for works to be standard rated, they must be a conversion, or reconstruction, or alteration (or enlargement/extension, which were not relevant) of the existing building. So, what is meant by these words, and how do any of them delimit the category that might have arisen if, say, one phrase was substituted for them, such as ‘any works on…’?
Turning back to the UT, it quotes one of the pre-note 18 cases, Marchday [1997] STC 272, saying: ‘the scale of “alteration” may be almost infinite. At one end … to change a door handle. At the other there may be virtually nothing left of the original building.’ The UT then says: ‘Neither side dissented from the proposition that “alteration” is a word capable of a wide meaning… the respondent accepted that those three words (conversion, reconstruction and alteration) taken together would cover the entire field of works that might be done…’. The UT then agreed with that.
But, assuming this is the correct interpretation, why doesn’t note 16 simply refer to all works to an existing building, and not present us with a list of words each of which is to be defined? Is this merely ‘superfluous’ law? It may be that this is explained by the history of note 16, and its later refinement by note 18, but in that case the draftsman did indeed ‘mis-fire’, because he ought to have changed note 16 when drafting note 18.
So, I conclude that note 16 has missed fire. But meanwhile, a judge who decides that he ought to try to interpret the words in the legislation, such that they are not simply superfluous, seems to me to have done the right thing. I do not agree with the criticism of Judge Thomas.
Home >Articles > J3 Building Solutions: interpreting note 16
J3 Building Solutions: interpreting note 16
The Upper Tribunal’s criticism of Judge Thomas seems harsh.
Around a year ago, in Tax Journal (24 June 2016), I commented on Judge Thomas’s analysis of VATA 1994 Sch 8 Group 5 note 18 in a case where a house was almost demolished and then ‘re-built’ to create one made overwhelmingly of new fabric (J3 Building Solutions [2016] UKFTT 318). The judge considered that note 18 had ‘missed fire’, owing to the difficulty in imagining cases where the boundary line it set would change the conclusions that should be drawn from Group 5 note 16.
It seems, now, that I may have been wrong to draw attention to this, since the Upper Tribunal decision on HMRC’s appeal of this case has roundly disagreed with Judge Thomas (see [2017] UKUT 253 (TCC), reported in Tax Journal, 14 July 2017). And I accept the views of Justice Mann and Judge Bishopp of the Upper Tribunal, but in the process I think they have been unfair on Judge Thomas.
Note 18 defines when we can assume a building no longer exists. Note 16 tells us which works that are performed on an existing building can be standard rated (and it proceeds on the basis that anything ‘left over’ from the works mentioned would be zero rated). Note 16 therefore is not in point if the note 18 test tells us that the building no longer exists. You look at note 18 before turning to note 16.
Note 16 was drafted earlier than note 18, which was inserted to help refine the definition in note 16 of an ‘existing building’. Note 16 was not, otherwise, changed.
The Upper Tribunal says that Judge Thomas ‘considered Note 16 without reference to Note 18, only then turning to the latter’. But that is not correct. Paragraph 35 of the FTT judgment says: ‘we turn to the group and in particular Notes 16 and 18…’ This statement is under a section heading of ‘Note 16’. Judge Thomas clearly recognises that one cannot take Note 16 separately from the potential effect of note 18. In para 54, he says: ‘all of these [previously mentioned] appeals related to periods before Note 18 was added to the group… They were therefore construing “reconstruction” of an “existing building” without any legislative gloss on the latter term.’ How does that statement sit with the Upper Tribunal’s criticism concerning ‘the FTT’s … reliance on old authority which preceded that paragraph’?
The whole point about note 16 is that it is only engaged where note 18 is not. Judge Thomas accepted that note 18 was not engaged, and he then construed note 16. He happened to make further comments about note 18 and its apparent inadequacies, but he did not decide the case on that basis. So, what impact could note 18 have on construing note 16, save in the broadest contextual sense? Once note 18 is out of the picture, surely note 16 stands alone.
And note 16 requires that, for works to be standard rated, they must be a conversion, or reconstruction, or alteration (or enlargement/extension, which were not relevant) of the existing building. So, what is meant by these words, and how do any of them delimit the category that might have arisen if, say, one phrase was substituted for them, such as ‘any works on…’?
Turning back to the UT, it quotes one of the pre-note 18 cases, Marchday [1997] STC 272, saying: ‘the scale of “alteration” may be almost infinite. At one end … to change a door handle. At the other there may be virtually nothing left of the original building.’ The UT then says: ‘Neither side dissented from the proposition that “alteration” is a word capable of a wide meaning… the respondent accepted that those three words (conversion, reconstruction and alteration) taken together would cover the entire field of works that might be done…’. The UT then agreed with that.
But, assuming this is the correct interpretation, why doesn’t note 16 simply refer to all works to an existing building, and not present us with a list of words each of which is to be defined? Is this merely ‘superfluous’ law? It may be that this is explained by the history of note 16, and its later refinement by note 18, but in that case the draftsman did indeed ‘mis-fire’, because he ought to have changed note 16 when drafting note 18.
So, I conclude that note 16 has missed fire. But meanwhile, a judge who decides that he ought to try to interpret the words in the legislation, such that they are not simply superfluous, seems to me to have done the right thing. I do not agree with the criticism of Judge Thomas.
