I have previously commented on the Yeshivas Lubavitch Manchester tribunal case in the context of whether a proposed use of a building is a ‘relevant charitable purpose’. However, the case also concerned whether the works in question created an ‘annexe’ as distinct from an ‘extension’ to an existing structure. For the zero rate to apply to the works, this condition also needed to be met. The First tier Tribunal decided that it had been, contrary to HMRC’s views. The case therefore provides interesting insight into HMRC’s attitude to various aspects of such cases.

The existing structure was an old house, but which had not been used either as a dwelling or for the education work of the charity. For it to come into service, the charity decided that an annexe needed to be added. This is because it would be used as part of a nursery school, and one cannot admit pupils if one does not have all the necessary facilities for such a school.  So the starting point is unusual. A charity annexe is usually built alongside an existing operating building, whereas in this case there was no such operation in existence.

The existing structure also had a later extension, which the charity chose to demolish.  It would build the annexe over the footprint of the old extension. However, the original back wall of the old house would remain wholly intact. So, had the extension never been built, this aspect would have been irrelevant. Indeed, perhaps surprisingly, it appeared not to be regarded as a key point in the arguments on HMRC’s side.

The existing structure included a basement. The works involved blocking access between the storeys above ground and the basement, and creating access from the new structure to that basement. The basement would also house a dedicated heating plant for the new structure. So, the assumed annexe included fabric from the old building.

There would be no access whatever between the old building (except for its former basement) and the new structure. Each would have their separate entrance, and anyone wishing to move from one unit to the other would have to walk outside to do so.

It is worth noting at this point that the mere fact that a new structure uses an existing wall to make it whole, does not preclude the view that it is a new building (which is to say, not even an annexe let alone not an extension). This is common in the case of infill new terrace houses.  Such structures are viewed as ‘new’ despite relying on old walls.  Furthermore, the legislation (somewhat oddly) states that a new building can arise even if it incorporates an old basement, since all that is relevant is that all the fabric above the ground is new. However, whether the building is really a new building, or is, instead, a new annexe, is not a critical distinction here, as both can be zero rated.

HMRC was unhappy for the following reasons:

• As the old building had not been used for charitable purposes, one could not view the additional structure as being an annexe, since there was no ongoing operational building to which it can be said to be an annexe addition.
• The works to convert the old house for the charitable use was under the same contract, with the same contractor, at the same time, as the annexe construction, so one should look at the building project as a whole, and not apportion it between different parts.
• In any case, there was no evidence that the new part would be used separately from the old one. Both would be components of a nursery school, so there was no separate functionality.
• The heating plant would be in the existing basement, and this was therefore not in the new fabric.

The tribunal reviewed the usual tests about difference of appearance, and distinctiveness of facilities (in this case, the sizes of the rooms between the structures was different), and noted the considerable lack of access between the two units, and these were considered sufficient for annexe treatment.  But it still needed to consider HMRC’s points.

The tribunal did not accept that the law required an annexe to add to an already operating structure.  It could be an annexe to an old building, even though the latter had to be converted to be used for the intended charitable use.

The fact that some works (which were accepted as being standard rated) were included in the same contract as the potentially zero rated works did not snuff out the relief.  Indeed, it would be very odd if that were the case, as the legislation makes clear that an apportionment between relieved works and un-relieved works is to be made (and, though HMRC might have thought the annexe rule was an exception, there can be no good policy reason for that difference).

The tribunal did not think that the use of the two structures towards the same general objective (as a nursery school) precluded separation of functions, in the sense of one being the annexe of another.  That required an objective appraisal of the uses that each part would fulfil.  This will be very concerning to HMRC, since it tends to view any annexe in a school as being non-qualifying on this basis alone.

The tribunal was satisfied that the basement was now part of the new structure, so the boiler was in the new structure, which therefore did not rely on the old one.  It is unfortunate that there was no need to decide, therefore, that mere sharing of heating plants is insufficient to show that a structure does not operate as an annexe.  This view about separate heating plants is contrary to the intention of allowing relief for a true annexe, since how you heat (or air condition) a structure is somewhat removed from its operational characteristics.  However, HMRC still did not achieve its objective here.

But, the issue about the basement being part of the old fabric and thus creating an implicit extension link with the new unit seems not to have been dealt with entirely clearly, along with the omission of analysis regarding the demolition of the former extension.  Having said that, HMRC failed to make such points in the Roman Catholic Diocese of Westminster tribunal case on which I commented at the time of its release.

The outcome passes the test of ‘common sense’.  This was clearly a very new and different structure. It has the feeling of being a new building and not even an ‘annexe’.  HMRC’s arguments, based on the single building contract, and on the heating plant, seem very strange and questionable.  But there are certainly some interesting issues around separate usability, and the lack of a pre-existing charitable use of the old building, to which HMRC may return at some point.

Graham Elliott is Technical Adviser to the Charity Tax Group and Director of City & Cambridge Consultancy