Separate dwelling an annexe for VAT purposes

In Stephen Colchester v HMRC [2014] UKUT 0083 (TCC), the Upper Tier Tax Tribunal (UTT) held that a new building constructed in the grounds of a cottage was its annexe and so chargeable to VAT at the standard rate, rather than at the zero rate.

Constructions of new dwellings are zero rated for VAT purposes, unless they are annexes to existing dwellings, in which case they are standard rated (see notes (2) and (16)(c) to Group 5 of Sch 8, VATA 1994).

• Mr Colchester lived in a cottage and applied for planning permission to construct another building in its grounds, described as “a replacement garage/guest annex” in the planning application.
• The cottage was considered inadequate because of temperature loss, the lack of storage and a utility room, and inadequate guest accommodation. The new building was to “provide a practical solution to the house’s current shortcomings in a sympathetic manner which will enhance the character of the house and its surroundings”.
• The new building was not attached to the cottage and had a garage, with a workshop and store room, with the first floor being self-contained guest accommodation.
• Planning authority was given, which did not prohibit the separate disposal of the new building. 

Mr Colchester believed that his new building was not an annexe and therefore the work carried out by his builder should be zero rated.

HMRC disagreed, as did the First Tier Tax Tribunal and on appeal, the Upper Tribunal.

It held that the test it should apply is a two-fold one, requiring:

• an examination and comparison of the physical characteristics of the building before the works were carried out, and then,
• a consideration of whether the completed works were an enlargement, or the construction, of an extension or annexe to the original building.

Subjective opinions about future use and the terms of the planning permission are irrelevant, unless they “throw light upon the potential use and functioning of the buildings”.

The tribunal stated that an annexe may be a separate building and held that the new building was specifically designed to be in keeping with the main dwelling, enhancing not only its amenities but also its character. There was a clear functional connection between the new and original buildings, with the new one designed to remedy the deficiencies of the old one.

Comment

The outcome was that the builder was required to charge Mr Colchester VAT at standard rate on the construction of the annex.

Much of Mr Colchester’s confusion was because he had two buildings that were both dwellings and physically separate. He was not assisted by the fact that in HMRC guidance Notice 708 Buildings and Construction (October 2013), section 3.2.6 states:

“An annexe can be either a structure attached to an existing building or a structure detached from it. A detached structure is treated for VAT purposes as a separate building. The comments in this section only apply to attached structures..."

“There is no legal definition of ‘annexe’. In order to be considered an annexe, a structure must be attached to an existing building but not in such a way so as to be considered an enlargement or extension of that building.”

The tribunal was not too polite to point out that the second paragraph is completely misleading. A separate dwelling can be an annexe to another building; attachment is simply not the whole of the story.

Links:

Stephen Colchester v HMRC [2014] UKUT 0083 (TCC)