VCONST14140 - Dwellings - an explanation of terms: what ‘designed as a dwelling or number of dwellings’ means: Note 2(c) - separate use or disposal

To qualify for the zero-rating on the sale of a building (whether a new build or qualifying conversion), or the provision of services of construction, the zero-rate will only be allowed if it meets the conditions of Note 2, which establish whether the building is to be treated as one that is “designed as a dwelling”. One of these conditions is Note 2(c) which requires that the “separate use, or disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision”.

If there is a clause that amounts to a prohibition, then that will have the effect of preventing the zero-rating of the construction or sale/disposal of the building.

For a condition to amount to a prohibition, it must be an imposition that is placed upon the developer by an appropriate body, such as a local planning authority; it does not apply to an arrangement entered into by two contracting parties for commercial purposes.

It has been claimed that ‘separate use or disposal’ means separate use or disposal from another dwelling. This isn’t accepted because the wording of the condition does not tie use or disposal of the dwelling to anything in particular. The decision in Paul Cussins (VTD 20541) supports the view that the condition does not limit separate use to a use separate to any other dwelling.

We maintain that separate use or disposal is not restricted and where use or disposal is tied to another building, structure or even land, the condition is not met. Accordingly, the condition excludes ‘granny’ annexes constructed in the grounds of a main house; and where a dwelling can not be used or sold separately from other premises, such as a caretaker’s house at a school or assisted living units within the grounds of care or nursing homes.

Disposal is not restricted to a freehold disposal. It applies to leasehold interests and, pragmatically, we have settled for that occurring when a long lease is granted. By long lease, what is meant is a lease of the duration of a major interest grant (21 years or more or, in Scotland, for a period of not less than 20 years).

If there is a prohibition on separate disposal of the freehold and the same prohibition on granting a long lease, there is a prohibition on separate disposal. Conversely, if there is a prohibition only on granting a short lease, then there is no prohibition on separate disposal.

Occupancy restrictions do not necessarily prevent the separate use or disposal of a dwelling (but see the case of Roy Shields referred to below). They are, therefore, not Note 2(c) prohibitions. Examples include restrictions that limit occupancy to people:

• working, or last working, in the locality in agriculture or in forestry, or a widow or widower of such a person, and to any resident dependents
• over a certain age.

Note: Where the restriction goes beyond identifying a particular class of person and ties use of a dwelling to, say, a commercial activity being carried on in another building, this is a prohibition on separate use or disposal of the dwelling.

A list of cases with examples of conditions considered is provided at VCONST14170.

The issue of Note 2(c) prohibitions has been the subject of litigation that has reached the Upper Tribunal (“UT”) in three of the more recent cases.

In Roy Shields [2014] UKUT 0453 (TCC) the UT considered whether an equestrian facilities manager’s residence had been designed as a dwelling in the light of a condition which stated that:

“The occupation of the dwelling shall be limited to a person solely employed by the equestrian business at 274 Bangor Road, Newtownards, and any resident dependants.”

The UT held that, while the description of equestrian facilities manager’s residence in the planning permission did not amount to a prohibition, the planning condition that restricted occupation of the building was a prohibition on its separate use. The UT expressed its view that the “issue of whether Note 2(c) applies should be determined in the light of the precise wording of the condition and the factual context in which it applies.”

Comment: Although the condition is an occupancy restriction it is expressed in terms that constitute a Note 2(c) prohibition.

In Anthony Barkas [2014} UKUT 0558 (TCC) the UT considered whether the planning permission description of development as live/work unit and/or condition that a workshop/office was only to be used/operated by occupiers of a dwelling prohibited separate use or disposal of dwelling. The relevant condition of the planning consent stated that:

“The workshop/office within the application site shall only be used/operated by the occupiers of the dwelling hereby granted permission.”

The UT held that while the effect of the condition made it unlikely that the owner of the building should ever wish to dispose of the dwelling separately from the commercial unit it did not amount to a prohibition within Note 2(c). The UT also rejected HMRC’s argument that the description of the permitted development within the planning permission precluded the use of the separate use of the other building. The UT declared that “on its own, the term ‘live/work unit’ as it is used in the planning application or in the planning permission does not clearly indicate that it is intended that the two buildings could not be used separately.” It also held that it did not mount to a prohibition on disposal.

Comment: While there were indicators that the effect of the planning documents, when taken together, amounted to a restriction on separate use, it is apparent that the actual use of the building would not amount to a prohibition within the planning permission. Other documents may assist in establishing the presence of a prohibition, but it seems that for a Tribunal to be satisfied that there is a prohibition in place, there should be sufficient clarity on this point.

In Richard Burton [2016] UKUT 0020 (TCC) HMRC appealed an earlier First-tier Tribunal decision that a condition was not a Note 2(c) prohibition. The terms of the planning consent included a clause which stated that:

“the occupation of the dwelling shall be limited to a person solely or mainly employed or last employed in Park Hall Lake Fishery or a widow or widower of such a person, or any resident dependants.”

The UT held that the approach followed in some other earlier cases [including that of M E Wendels TC00737)], which decided that the building required to be occupied by a person working in a cattery had been wrongly decided. In its view the condition was a prohibition on separate use even though it was not expressly stated as such. It preferred to follow the approach adopted in the UT case of Lunn [2010] UKFTT 476 (TC).

Comment: While the UT in Barkas looks for a condition to be stated with sufficient clarity in order for it to be a prohibition, in Burton it considered that as long as it was clear that was its effect that would suffice.