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J3 Building Solutions and note 18

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In an over-regulated world, it is frustrating to realise that legislation to which one paid attention, and which appeared to restrict a possible tax benefit, might actually have had no function whatsoever. I floated the idea (in February 2015) that the Upper Tribunal decision in Astral Construction Ltd [2015] UKUT 21 (TCC) had cast doubt on whether note 18 in VATA 1994 Sch 8 Group 5 could ever apply, given that all the apparent situations it might ‘catch’ would, notwithstanding, be relieved under note 16 of the same group. So, to borrow a question posed by the tribunal in J3 Building Solutions [2016] UKFTT 318 (TC), what does note 18 actually do?
Before giving the tribunal’s answer, I should attempt to explain what note 18 is, even though I recognise that I cannot pre-empt the answer about what it does.
Note 18 seeks to tell us when we can assume that an existing building is ‘removed’; and thus any residential replacement for it is deemed to be ‘new’ and thus zero rated. It tells us that a prior building must be demolished to ground level (bizarrely allowing the basements to remain in place without impugning the ‘newness’ of any replacement structure above ground), or else a façade or a double façade on a corner site can be retained, as long as planning consent requires retention. Taken on its own, note 18 has a function, even though it presents significant challenges to interpretation.
However, the tribunal’s question is based not on note 18 as such, but how it functions in tandem with note 16, to which it is essentially a rider. This is because note 16 permits a building to be regarded as ‘constructed’ if it is not the conversion, reconstruction, alteration, enlargement or extension of an ‘existing building’. Note 18 defines ‘existing building’ (as above). It seems therefore that a building can qualify as the relevant ‘construction of a building’, as long as it is subject to works which do not convert, reconstruct (and so on) the existing building. In that case, there is no need to ascertain what would constitute an existing building because the relief applies in any event.
This leads directly to the question of when the remains of a former building could be said to be converted, reconstructed (and so on) and thus fail to qualify as relevant construction. If one allows the premise of note 18 to colour the reading of note 16, then one concludes that the definitions in note 16 are essentially otiose. Why refer to ‘reconstruction’ etc., when note 18 tells us that incorporating a retained wall of the prior building (for example) means that the work does not qualify for zero rating? But note 16 requires us to consider such concepts, and note 18’s function is to help define the position in note 16, not to supplant it.
The J3 tribunal concluded no circumstances could be brought to mind (save one hypothetical and very unlikely case) where the demolition of an existing building, save for a wall or two which was then incorporated into a new structure, could be described validly as a ‘reconstruction’, an ‘enlargement’ or an ‘extension’ (and so on). These freestanding concepts would simply never arise at the threshold set by the test in note 18. Note 18 is therefore redundant.
To quote the tribunal: ‘It is never comfortable to find that a legal provision doesn’t work or has “missed fire” [but] …. the words simply cannot be read … as having the intended effect.’
It is no doubt common for old legislation to be effectively superseded by newer legislation without being formally withdrawn, thus forming the legislative equivalent of an ‘oxbow lake’; but in this case note 18 was introduced later, and with the intention of modifying the interpretation of note 16. Unfortunately, as drafted, it simply fails to achieve that. Its success has been that people thought that it did, and behaved as though it did, with the effect of applying too restricted an interpretation of note 16. But the tribunal in J3 now confirms what we suspected from Astral, that note 18 has a loud bark, but absolutely no bite.
Issue: 1314
Categories: In brief