20800

Value Added Tax – Supply of building materials under Item 4 of Group 5 of Schedule 8 to VATAct 1994, and the definition of “building materials” in paragraph 22 – Supply of retractable insulated covers for indoor swimming pools – Supply of moveable floors for indoor swimming pools – Appeal allowed as regards the covers and dismissed as regards the moveable floors

LONDON TRIBUNAL CENTRE

	RAINBOW POOLS LONDON LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	HOWARD M NOWLAN (Chairman)
						TYM MARSH

Sitting in public in London on 18 August 2008

Stuart Dickson, Finance Director of Rainbow Pools London Limited, for the Appellant

Christian Zwart, counsel, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

1.     This case was effectively two separate appeals, though each related to whether the supply of particular materials in the course of the Appellant’s work in constructing indoor swimming pools in new dwelling houses was zero-rated under Item 4 of Group 5 of Schedule 8 to the VAT Act 1994.     

2.     The materials involved in the first part of the appeal were those required for the relatively common-place provision of electrically-powered, fully-retractable and insulated swimming pool covers, that retract into a concealed cavity below the pool floor, so leaving the cover hidden when retracted.  This appeal raised some interesting legal questions on the proper interpretation of the definition of “building materials” in Note (22) of Group 5, and we allow this appeal.  

3.     The second part of the appeal related to something relatively novel and, in an engineering sense, very interesting. This was a moveable tiled floor to an indoor swimming pool that could be locked in its “high” position, so that the swimming pool completely disappeared and the floor became part of the tiled floor in the house in question (the hall, in the case of the particular moving floor in contention), and could also be set at various “low” positions, so that the floor became the floor of the pool, at varying depths to suit toddlers, children and adults. Whilst fascinated by the engineering expertise involved in the moving floor concept, we have, somewhat reluctantly, had to dismiss this part of the appeal. 

The description of the retractable covers

4.     These covers are quite common, and we were indeed told that they are installed today in 90 to 95 per cent of newly created indoor pools. They are fundamentally similar to the roller-drums often used to enable a plastic bubble-cover to be drawn over the surface of a pool to conserve heat, and then to be retracted by turning a wheel on the drum. The concealed covers all require the sprayed gunnite shell of the pool to be built so that, right across the shallow-end of the pool, there is a cavity of approximately 2 feet square to the outside of the pool, and beneath the paving around the pool, into which the plastic cover can retract onto the drum in the cavity, through a 2-inch gap below the water level of the pool. Modern covers are generally made of rigid plastic sections that almost span the width of the pool, each 4- or 6-inch section hinging to the adjacent section so that they can lie flat on the pool surface or be wound around the drum when retracted. Modern covers often slide in rails along each of the long sides of the pool, one advantage of this system being that the rails prevent the cover from being forced below water level should pets or children, and even in some cases adults, fall on the cover when drawn across the pool surface.  Modern covers extend and retract electrically and in, sophisticated systems, air-conditioning in the poolroom will be adjusted according to whether the cover is extended or retracted. 

5.     The purpose of the covers is of course to conserve heat in the water and prevent evaporation. The dual benefit of this is not only that it greatly reduces the cost of gas, oil or electricity in heating the water, but also that it reduces humidity in the pool building, and thus reduces the damage that high humidity causes to many building materials. A further benefit is the safety feature just mentioned, in that modern covers can prevent accidental drowning.    Whilst it was not mentioned in argument or evidence in our hearing, we note from the decision of Mr Colin Bishopp in the case of Leisure Contracts Limited v. Revenue and Customs Commissioners, (2005) VAT Decision No 19392, that local authorities often actually require retractable pool covers to be installed in new indoor swimming pools, as a requirement under the building regulations.    We were told that the retractable covers added about 10 % to the cost of an indoor pool, so that a pool costing from say £120,000 to £150,000 would include about £12,000 to £15,000 on the extra works and materials for the retractable cover.  

6.     We accept all the evidence summarised above, and we entirely accept that retractable covers are now regarded as a virtual necessity in a newly-created indoor pool. We can imagine that an inferior alternative might be a hand-operated bubble cover wound on to a moveable roller that can be rolled to and back from the edge of the pool, but readily understand that the convenience of the electrically-operated, fully-retractable cover, and the avoidance of the cumbersome drum make the type of covers described above the near inevitable choice of anyone building a domestic indoor pool. 

The description of the moveable swimming pool floors

7.     The moveable swimming pool floors were an altogether different product, in that they are a relatively new innovation, they are rare and are certainly not specified in the vast majority of new indoor pools, and they are very much more expensive to install. As an engineering innovation, they are fascinating. 

8.     The installation of a moveable floor first requires the base of the pool to be strengthened, the base to have a constant depth, and the pool sides to be constructed to exacting standards so that the sides are perfectly vertical, and the distances from one side to the other, and end to end, do not vary by more than a couple of millimetres.  The moveable floor then consists of a stainless steel ladder frame, about 9 inches deep that covers the entire pool surface except for a 4-millimetre gap at the edges.  The ladder frame is then covered with a stainless steel top skin, which is tiled in a style of tiling that matches the tiling surrounding the pool, and the ladder frame is then filled with tough buoyancy boxes, so that in its natural state the frame, boxes and tiled surface float on the water, once the pool is filled. There are then four or more cables attached to the bottom of the frame, that pass round wheels on the base concrete floor of the pool, and then pass into a machinery room where electrically-operated rams can retract or play out the cables, either pulling the moveable floor down (against the force of its own buoyancy) or releasing it so that its buoyancy will raise it. The floor must move very slowly, so generally taking 15 minutes to be fully raised or lowered, in order that, as it moves, the water can flow through the 4-millimetre gaps at the edges. The gaps can be no greater in order to eliminate the risk of people’s fingers being trapped, and in order to enable the floor, in its raised position, to form an integral part of the overall tiled area of the room in which the pool is located.  There are sprung rollers around the edges of the frame which ensure that the steel does not touch, or scratch the tiling on the sides of the pool when the floor moves up and down, and there are bolts that lock the floor securely to the surrounding surface when the pool is in its up position. 

9.      Having described that rather extraordinary structure, we must now mention the different advantages that a floor of this type can have in both private and public pool installations.  

10.    Whilst we did not undertake a site visit, one had been planned to show us a moveable floor installed in a private house that had cost about £11 million. In that case the swimming pool was actually installed in the hall of the house.  In this installation therefore, the owner could either use the large hall as an entertainment area, without people even being aware that they were standing on a pool; or a pool could be created at varying depths to be suitable for infants, children or adults; or the floor could be held about 6 inches below the surrounding surface so that people could walk around the hall and admire the very shallow shimmering pool. An incidental benefit of the floor naturally was that, in its fully-raised position, it greatly reduced heat loss and condensation, and it did virtually the same when only 6 inches of water were visible above the floor.

11.     We were told that moveable floors were now often installed in new public swimming pools and we were even told that it was a condition for obtaining a Lottery grant for a public pool that such a floor be installed. The purpose of the moving floor in a public pool is to enable the pool to be used by different categories of users at different times, say by infants, children, the disabled, and adults in general, with the result that a local authority could meet all the various needs of its different customers with just one pool with a moving floor, whereas in the past the pool complex might have required three or four different pools.   Contrary to initial expectations therefore, in the case of public pools, moveable floors can be regarded as an economy measure. 

12.     We were only concerned in this hearing of course with moveable floors being installed in newly-constructed dwelling houses. We were told that the Appellant’s sub-contractor that supplied the steelwork and machinery in issue in the Appeal had so far provided the equipment for four new-build houses, but this particular supplier was not the only United Kingdom supplier. The particular supplier currently had enquiries for about 100 moveable floors in private pools worldwide, and it considered its systems to be superior to other American systems.  It believed that the use of such floors would increase. 

The relevant law

13.    It was common ground that the Appellant was rendering zero-rated construction services under Item 2 of Group 5 of Schedule 8 to the VAT Act 1994 when building indoor swimming pools in new houses.  The relevant wording of Item 2 is as follows:

“The supply in the course of the construction of-

(a)	a building designed as a dwelling or number of dwellings …
(b)	…

of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.”

Item 4 of Group 5 then deals with the provision of building material by a person who is already rendering construction services under Item 2, or the presently irrelevant Item 3.  It thus identifies:

“The supply of building materials to a person to whom the supplier is supplying services within item 2 or 3 of this Group which include the incorporation of the materials into the building (or its site) in question.”

The only other relevant provision is Note (22), which defines “building materials”.  It provides as follows:-

“(22) ‘Building materials’, in relation to any description of building, means goods of a description ordinarily incorporated by builders in a building of that description, (or its site) but does not include –

(a)	finished or prefabricated furniture, other than furniture designed to be fitted in kitchens,
(b)	materials for the construction of fitted furniture, other than kitchen furniture;
(c)	electrical or gas appliances, unless the appliance is an appliance which is– 

(i)	designed to heat space or water (or both) or to provide ventilation, air cooling, air purification, or dust extraction; or
(ii)	intended for use in a building designed as a number of dwellings and is a door-entry system, a waste disposal unit or a machine for compacting waste; or
(iii)	a burglar alarm, a fire alarm, or fire safety equipment or designed solely for the purpose of enabling aid to be summoned in an emergency; or
(iv)	a lift or hoist;

(d)	carpets or carpeting material.”

14.     Although the HMRC Public Notices are not law, we should quote two extracts from Public Notice 708, section 13 which deals with the VAT meaning of “building materials”.

15.        Section 13.3 describes when materials are “incorporated” in a building and inter alia states that they are incorporated when fixed in such a way that the fixing or removal would require the use of tools. Section 13.4 describes what “ordinarily” means, in the phrase referring to “goods of a description ordinarily incorporated by builders in a building”.  It reads as follows:-

“An article is ‘ordinarily’ incorporated in a building (or its site) when, in the ordinary course of events, it would normally be incorporated in a building of that generic type, such as a dwelling, church, or school.   Generic types of building are not split into sub-categories.  So, no distinction is drawn between large detached houses and small terraced houses. 
The same approach is taken when determining if the goods themselves are the norm for that type of building.  For example, a tap would be regarded as being ‘ordinarily’ incorporated whether it is chromium or gold-plated. 
Examples of articles ‘ordinarily’ incorporated in different types of building can be found at paragraph 13.8.
The range of items ‘ordinarily’ incorporated in a building is likely to change over time in line with trends and consumer expectations.”   

16.     Section 13.8 of the same Public Notice then gives “examples” of “articles “ordinarily” incorporated in various buildings. It lists the articles under the headings of “Dwellings”, “Relevant Residential Purposes”, “Buildings used for charitable purposes”, “Schools” and “Churches”.  The list of articles ordinarily incorporated in “Dwellings” contains 37 items.   The only ones that we need to refer to are:-

•	“Air Conditioning”
•	“Saunas”
•	“Lifts and hoists”
•	“Swimming pools inside the house, including water heaters and filters but not diving boards and other specialist equipment.”

The contentions on behalf of the Appellant

17.     Following the provision of very clear information by the Appellant in relation to the retractable covers, and by the only witness, namely Keith Austin, of ADM Limited, the suppliers of the moving floor, in relation to the nature and function of the moveable floor, it was contended as regards the retractable covers that:-

•	the covers were built into the pool structure; and
•	were building materials ordinarily incorporated within new indoor swimming pools.

As regards the moveable floors it was contended that:-

•	the moving floors were an integral part of the swimming pool structure controlled by a system of cables and pulleys permanently attached to the structural base; 
•	the installation was permanent and could not be removed to operate the pool without the moving floor; 
•	the pool was specifically designed to incorporate a moving floor; and
•	the floor was finished in stone work and mosaic to form part of the central hallway of the new-build dwelling.

The contentions on behalf of the Respondents

18.      It was contended on behalf of the Respondents that:-

•	the test as to whether any particular building materials were “ordinarily incorporated” in a building had to be applied to the categories of building identified by the Items of Group 5, in other words dwelling houses, churches and schools and not to sub-categories such as luxury dwelling houses;
•	whilst an indoor swimming pool might, as a luxury item, seem an unlikely inclusion under the term “ordinarily incorporated” into a dwelling house, it is not,  per se, a single unit that can be distinguished as a building material but rather, it shares the materials (bricks, mortar, tiles etc) that would be used for constructing the dwelling.    The swimming pool itself is contained within the fabric and structure of the building and these materials will broadly be required regardless of the existence or otherwise of the swimming pool:
•	moving floors and swimming pool covers do not form part of the fabric of the building and are quite distinct items;
•	the test of what is “ordinarily incorporated in buildings” must address, on the authority of Mr. Justice Glidewell’s decision in Customs and Excise Commissioners v. Smitmit Design Centre Ltd and Customs and Excise Commissioners v. Sharp’s Bedroom Design Ltd [1982] STC 52, whether the particular materials are ordinarily or usually incorporated into buildings, and not whether, albeit highly unusual, nevertheless something that if incorporated in a building, would ordinarily be incorporated by the builders rather than by any other trader;
•	moving floors and swimming pool covers are not “ordinarily incorporated” into a dwelling house;
•	moving floors, (and retractable covers as well on the authority of Mr Bishopp’s decision in Leisure Contracts) are powered by electricity and may in the alternative be excluded from ranking as “building materials” by virtue of being “electrical appliances”;
•	following the ruling of the European Court of Justice in the case of Talacre Beach Caravan Sales Ltd v. Customs and Excise Commissioners, (Case C-251/05) [2006] STC 1671, where there is one overall supply of a swimming pool for instance, and that supply is zero rated, it is nevertheless permissible for the local law to dis-aggregate items within that one supply and provide for some items within the overall supply to be taxed at the standard rate.

Our decision in relation to the retractable covers

19.     We should refer first to the decision in Leisure Contracts since this recent case dealt with retractable covers of precisely the description involved in this case. In that case, Mr Bishopp first recorded that “the Commissioners accept that swimming pools are “ordinarily incorporated in large expensive houses and take no issue with the zero-rating of the materials used in the construction of the pool itself”. He then concluded on the evidence that retractable covers were almost invariably specified with indoor pools in dwelling houses, and that they were incorporated in the pools as an installation. He then concluded that if the cover had to attract the treatment of the pool itself, it would be zero-rated, whilst it would be standard-rated as an excluded item, by virtue of being an “electrical appliance”, were it possible to dis-aggregate items within a single supply.    He thus effectively adjourned the case to await the direction of the ECJ in the Talacre Beach Caravan Sales case, on the reasoning that the decision in that case would govern the outcome in the Leisure Contracts case.  Accordingly, because the ECJ direction sanctioned such dis-aggregation, the decision in the Leisure Contracts case was that the moveable covers were standard-rated as being “electrical appliances”, and the Appellant chose not to advance any further arguments. 

20.    The first issue that we must address is whether we apply the test that “ “Building materials”, in relation to any description of building, means goods of a description ordinarily incorporated by builders in a building of that description” by reference just to “dwelling houses” as the respondents contend and as the Public Notice suggests, or whether,  as was implicitly conceded in the Leisure Contracts case, we can apply the test to sub-categories of dwellings such as high-rise flats and luxury houses. 

21.     Our decision on this issue is that “any description of building” means “any description of building”, including for instance “a luxury dwelling house”. There is, we accept, no purpose in reaching the conclusion that building materials might be ordinarily incorporated in a shop or an office because those descriptions of building will not fall within the types of general building for which construction services are zero-rated. If, however, one is addressing what is ordinarily incorporated in high-rise flats or luxury dwelling houses, it seems to us that those categories of buildings are “buildings of a description” and they both fall within the overall category of “dwelling houses”. Furthermore, the list of 37 items that HMRC give in their Public Notice referred to above only makes sense if one adopts this approach.    Hoists, lifts and air conditioning are not ordinarily incorporated in dwelling houses in general, though they are ordinarily incorporated in high-rise flats, and air conditioning is also ordinarily incorporated in luxury dwelling houses. Saunas and swimming pools are ordinarily incorporated in luxury dwelling houses, rather than in dwelling houses in general. If Note (22) had meant to refer to what was ordinarily incorporated into the various generic categories of building referred to in the Items of Group 5, it could have said precisely that, rather than refer to “buildings of any description”.

22.     We consider that the Respondents’ suggestion that swimming pools are amongst the 37 categories of building materials because swimming pools are made of bricks, mortar and tiles (which basically they are not) is an unsuccessful effort to explain why swimming pools are on the list if the list is meant to refer just to items “ordinarily incorporated in dwelling houses” in general.   “Saunas” are on the list as well, and is this also a slight error because the reference in the list of materials should be to “timber and an electrical appliance that heats water and increases humidity”?  Once swimming pools, saunas, air conditioning, lifts and hoists are on the list it is unrealistic to try to explain them away by referring to the materials of which they are made (wrongly we repeat in the case of swimming pools which are unlikely to have a single brick or any conventional mortar in them).  Swimming pool filters incidentally, which the Respondents, and the HMRC list, both treat separately from the swimming pools themselves are usually made of thick fibreglass. Filters are bound to be installed, with all pools, but they are still only “incorporated generally” in large houses.  To say that filters, or the thick fibreglass from which they are made, are ordinarily installed in dwelling-houses generally would appear to be wrong on either approach. All these items nevertheless make excellent sense but only in the context that Note (22) applies the “ordinarily incorporated” test to sub-categories of dwelling houses. As already noted, this approach appears to have been conceded in the Leisure Contracts case, and appears to us to be entirely consistent with the more natural reading of the reference to “buildings of any description” in Note (22).  

23.    Were the approach that we have adopted in paragraphs 21 and 22 above wrong, we consider that in the alternative, the expression “ordinarily incorporated” addresses the incorporation of something that is “not exceptional”.  To anticipate our decision in relation to moving-floors, we have to conclude that moving-floors in the swimming pools of dwelling houses, or indeed luxury houses, are “exceptional”.  We have never even heard of them before this hearing, and it sounds as if the total number so far installed in the United Kingdom could be counted on the fingers of one hand, or at most of both hands.  Everybody knows, by contrast, that indoor swimming pools are sometimes included in dwelling houses, so that even applying the test by reference to “dwelling houses” in general, we still conclude that they are not exceptional. In other words their installation would not be said to be “out of the ordinary”.   
   
24.     Our next conclusion is that, just as the list in the public notice separately addresses “swimming pools, boilers and filtration equipment”, we consider that the retractable insulated covers are something slightly distinct from the pool. This means that electrically-powered retractable covers must be subjected to the test of whether they are “ordinarily incorporated” in houses, rather than treating that test as automatically satisfied simply because it is already accepted that swimming pools are ordinarily incorporated.   

25.     We accept on the evidence that retractable covers are “incorporated” in the structure of the pools to which they are attached because they are affixed, and would have to be removed by the use of tools.  The covers and drum are all part of a unit and the drum is clearly affixed firmly to the pool structure. 

26.    We also accept, as Mr Bishopp did, that retractable covers are also “ordinarily incorporated” in indoor pools. The evidence established that they were included in 90 to 95% of new indoor pools, and applying the approach to the “ordinarily incorporated” test that we have advanced either in paragraphs 21 and 22 above or in paragraph 23 above, that means that the retractable covers are “building materials”, unless they are excluded as “electrical installations”.

27.     We note with interest that counsel for the Respondents advanced the alternative suggestion that the moveable floors and retractable covers might rank as “electrical appliances” with some hesitation because it was only suggested that “they may rank as electrical appliances”.  We agree with the hesitation and consider that the retractable covers (and for that matter, the moveable floors) are not electrical appliances. Our decision is far easier in relation to the covers because we consider that they are self-evidently insulated covers that can be drawn across the pool or retracted, and that it is purely incidental to their description that they are electrically powered. Out of the £12,000 to £15,000 cost it was suggested that the electric motor might cost about £100; many old bubble covers were manually pulled over the pool and retracted by winding on a handle, and it would be a matter of total simplicity and a couple of gears to operate a fully-retractable hidden cover of the type we are considering by inserting a crank into a slot in the pool surface, and by winding the crank for less than a minute. 

28.     In support of the conclusion in paragraph 27, we suggest that large exterior sun and rain blinds over the outside seating in a restaurant are “blinds”, regardless of whether they are operated by a crank or by an electric motor.  “Curtains” are “curtains” even though some in offices and luxury houses may be drawn electrically. And nearer to points already conceded in this case, pool filters are not regarded as “electrical installations”.  Filters do not however heat air or water or perform any of the functions where electrical installations are not excluded from ranking as building materials, so that their specific inclusion must be a good illustration of an item that takes its fundamental nature from its non-electrical function, and not from the incidental fact that it happens to operate only if an electric pump operates for several hours a day.  Comparing the crucial requirement for electrical power, it is obvious that a pool filter simply could not operate at all without the electric pump that circulates the pool water.  A retractable cover could however operate with ease without an electric motor, and this seems to us to confirm that the essential nature of the insulated retractable cover is not as “an electrical appliance”.

29.      Our conclusion thus is that electrically-powered, fully-retractable insulated swimming pool covers do rank as building materials, by virtue of being firmly incorporated into the pools; by virtue of being specified invariable with all indoor pools, and by virtue of their essential nature not being as “an electrical appliance”, and so not excluded. 

Our decision in relation to moveable swimming-pool floors

30.     Our first conclusion in relation to the status of the moveable floors, which we imagine is not contentious is that they are manifestly attached and affixed to the pools even though they move, so that they pass the test of being “incorporated” into the building. 

31.     The next question is whether they are “ordinarily incorporated” in buildings of any description.  Even if the approach that we have adopted in paragraphs 21 and 22 above is correct, and we can apply this test by reference to luxury houses, we have to conclude that if the notion of “ordinary incorporation” refers to something that is either common, or at least “not exceptional”, then the moveable floors would still fail this test.  At present they must be exceptional. 

32.      That however is not quite the end of the matter because the Appellant could still win this appeal in relation to the moveable floors if either of the following two approaches is correct. 

33.     The first argument puts a quite different construction on the notion of “ordinarily incorporated by builders”, in that instead or concentrating on whether the item is common or ordinary or exceptional, attention is instead given to whether the item, however usual, would ordinarily be incorporated by builders. In other words, if builders would inevitably be the craftsmen who would affix some particular item, however extraordinary and novel, then the test should be satisfied.  There seems to be some sense in interpreting the test in this manner because the endeavour is after all basically to distinguish “construction services” from other services, and the provision of other goods within houses.  We conclude however that on the more natural interpretation of the phrase, and on the authority of the Smitmit and Sharp’s Bedroom Design cases referred to above, the test does address what is common or non-exceptional.  Accordingly, the fact that we accept that the moveable floor would be made by, and installed by people fairly described as builders, and that it would be unthinkable for anyone else to attempt to install it, is not the issue. The issue is whether it is common or exceptional, and it is exceptional. 

34.     The only other approach that would appear to enable the Appellant to prevail in this case in relation to the provision of the moving floor is the contention that we do not have to look at the issue of whether the moving floor is common because it is just part of the swimming pool and swimming pools are, and are conceded to be, common. Whilst there appears to be no guidance as to how we should classify the moving floor in this manner, we decide that common sense requires that we do treat the moving floor as something distinct from the pool. The pool after all has an actual bottom.  It may not be tiled and it may have vast wheels and pulleys attached to it, but it is the bottom or floor of the pool that keeps the water in. The moving floor is something very fundamental and distinct, and we cannot adopt the notion that it is just an incidental part of the swimming pool.  And once we concede that it seems unrealistic to treat it as “just a part of the swimming pool”, and have to subject it to the “ordinary installation” test, it fails that test. 

35.     Had it been relevant to consider whether the moveable floor was an electrical installation we would have said that it was not, albeit that it is inconceivable that the floor could be drawn down, and held down, against the force of its own buoyancy, without some form of power, such as electrically-operated rams.  Nevertheless we would still have said that the whole installation was not an electrical appliance, which seems to us to confirm our decision on that point in relation to the retractable covers where electric power could with ease be replaced by a hand-operated crank.

Conclusion 

36.      We accordingly allow this appeal in relation to the retractable covers and dismiss it as regards the moving floors. Particularly as the appeal in relation to the covers was brought as a test appeal in relation to the status of the covers generally, we assume that it is unnecessary to expand on the general conclusion and indicate the way in which the various assessments are adjusted as a result of this decision. 

HOWARD M NOWLAN
CHAIRMAN

RELEASED: 11 September 2008
LON 2006/1343