Commissioners of HM Revenue and Customs v Wetheralds Construction Ltd

VAT – Energy-saving materials – Insulation – Reduced rate of VAT – Respondent manufacturing and installing “solid roof system” for conservatory roofs – Appellant commissioners rejecting respondent’s claim for reduced 5% rate of VAT as “energy-saving materials” within Group 2 of Schedule 7A to Value Added Tax Act 1994 – FTT finding that system qualifying as energy-saving materials since falling within description of ”insulation for… roofs” within note 1(a) to Group 2 – Whether FTT erring in law – Appeal allowed The appellant supplied a “Solid Roof System” which provided a roofing assembly for a conservatory to improve the thermal insulation of the conservatory and a conservatory roof conversion kit for mounting to an existing conservatory glazing bar framework, without the need for the complete dismantling of an existing conservatory roof. The appellant commissioners decided that the system did not qualify as “energy-saving materials” within Group 2 of Schedule 7A to the Value Added Tax Act 1994 and therefore did not benefit from the reduced rate of 5% VAT applicable to supplies consisting of the installation of such materials. The first-tier tribunal (FTT) allowed the respondent’s appeal against that decision: [2016] UKFTT 827. The appellants appealed contending that the FTT had erred: (i) in its application of the decision of the Upper Tribunal in Commissioners of HM Revenue and Customs v Pinevale Ltd [2014] UKUT 202, [2014] PLSCS 192; and (ii) in its application of the relevant principles in determining whether the supply in question was a single supply and, if so, the nature of the supply. They argued that the FTT should have adopted the reasoning in Pinevale and concluded that the supplies in issue were not merely supplies of insulating materials applied to a pre-existing roof; and should have concluded that the various elements of the supply by the respondent formed a single indivisible supply of a roof, not merely of “insulation for…roofs”, which fell to be taxed at the standard rate. Held: The appeal was allowed. (1) The question of law which fell to be determined by the FTT was not whether the supply by the respondent was a single supply and, if so, its nature but whether that supply was “insulation for…roofs” within the meaning of Note 1(a) of Group 2 to Schedule 7A of the 1994 Act. The decision of the Upper Tribunal in Pinevale was authority, binding on the FTT, on that question of statutory interpretation. The correct approach should therefore have been to begin by considering the application of Pinevale to the facts of the case, and not by considering whether there was a single supply and its characterisation. The FTT had erred in law in its approach and it was necessary to consider whether Pinevale should be followed, and whether the FTT’s decision would have been different if it had approached the question by considering the application of Pinevale. While the decision was not strictly binding on it, the Upper Tribunal would follow Pinevale unless it was obviously wrong. While the decision resulted in a strict approach to the language of Group 2, which could in some situations result in fine distinctions, it did so on a logical and reasoned basis, and should be followed. The FTT had erred by considering the application of Pinevale to the facts only after determining that the supply was a single supply of insulation. Such an approach begged the very question which had to be determined, namely whether the supply was of “insulation for roofs”. Although it was not entirely clear, the FTT appeared to have first determined that the supply was “insulation”, and then that because of its place of installation it had to be “for roofs”. However, in interpreting the statutory language the critical question was whether the supply of energy-saving materials was “for” a wall, floor, ceiling etc, or was a more extensive supply, such as the wall, floor, ceiling etc itself. That was the question on which the FTT should have focussed. On the facts found by the FTT, the supply by the respondent was effectively of all the elements comprised in a roof save for the original glazing bars. The old roof covering was removed, and a new roof covering (tiling) was added, as well as a new plasterboard ceiling, soffits and rainwater goods. However one defined “roof”, there was no reasoned basis on which that supply was no more than insulation. The scope of the reduced rate for supplies within note 1(a) was not determined by whether or not the materials were “attached or applied”, but by whether what was supplied was confined to insulation or extended further than that, to a roof or a replacement roof itself. The FTT also failed to give sufficient weight to the extensive findings of fact regarding the respondent’s own presentation of the Solid Roof System and the expectations of the customer. If those facts had been given proper weight, they would have led to the conclusion that what was supplied was not merely insulation. Accordingly, the FTT’s decision would be set aside the appellants’ decision to apply the standard rate of VAT to supplies of the Solid Roof System would be restored. (2) Had it been necessary to decide the point, the FTT’s approach to determining the nature of the supply by the respondent was wrong in law. The FTT was wrong to regard the approaches in Card Protection Plan Ltd v Customs and Excise Commissioners (Case C-349/96) [1999] STC 270 and Levob Verzekeringen v Staatssecretaris van Financien (Case C-41/04) [2006] STC 766 as mutually exclusive. Whichever test or tests was applied, the process should not involve eliminating from consideration of the characterisation elements which were “ancillary”, and then making a binary choice between the remaining elements in order to characterise the supply. The characterisation of a supply should take account of all elements of the supply, while avoiding an unduly detailed dissection of the elements comprised in the supply. A typical consumer of the Solid Roof System would have described the supply as a thermally efficient replacement roof, and not merely as the insulation included within the system. Hui Ling McCarthy QC (instructed by the General Counsel and Solicitor to HM Revenue and Customs) appeared for the appellants; Tim Brown (instructed by Hallmark Solicitors) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Commissioners of HM Revenue and Customs v Wetheralds Construction Ltd