Nellstar Properties Ltd v The Commissioners for HMRC

The form of the hearing was V (video). Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.

The documents provided to the Tribunal before the hearing were as follows:

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The Appellant appeals against four VAT assessments made on 5 September 2024 as follows:

Period start date	Period end date	VAT charged
15 September 2016	31 December 2016	£64,688.00
1 January 2017	30 April 2017	£61,932.00
1 November 2017	31 January 2018	£1,636.00
1 May 2018	31 July 2018	£3,355.00
Total	£131,611.00

The assessments were made under the provisions of the Value Added Tax Act 1994 (“VATA”), section 73(1) and relate to construction services provided by the Appellant. Those construction services were carried out in the grounds of a hotel/pub known as The Hobbit, Sowerby Bridge near Halifax (“the property”).

HMRC concluded that those services were subject to the standard rate of VAT, whereas the Appellant had treated them as qualifying for zero-rating.

In the Appellant’s grounds of appeal (drafted by Mr Ahmed), as submitted when the Appellant appealed against the assessments to the Tribunal, the Appellant challenged the assessments on three bases:

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In his skeleton argument prepared for this hearing, Mr Ahmed effectively conceded the first and third of those arguments. As the skeleton argument states:

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At the beginning of the hearing, Mr Ahmed repeated that his only live ground of appeal was the question of deliberate conduct.

For the following reasons, we dismiss the appeal and uphold the assessments.

The ability to zero-rate construction services arises under VATA, Schedule 8, Group 5, item 2:

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The relevant provisions governing assessments are found in VATA, sections 73 and 77. Those sections provide (so far as is relevant):

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The meaning of bringing about a loss of tax deliberately was considered by the Upper Tribunal in Delphi Derivatives Ltd (in Members’ Voluntary Liquidation) v HMRC [2026] UKUT 21 (TCC) at [167] to [175].

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The test in section 73(6)(b) was the focus of the appeal before the Upper Tribunal in Nottingham Forest Football Club Ltd v HMRC [2024] UKUT 145 (TCC) and the principles were discussed between [15] and [24].

At [15], the Upper Tribunal noted that “the relevant guidance on how to construe and apply section 73(6)(b) VATA was set out by Dyson J (as he then was) in six propositions in Pegasus Birds Ltd v C & E Commissioners [1999] STC 95 (‘Pegasus Birds’) at page 101”. It then recited those six propositions thus:

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At [17], the Upper Tribunal noted that Dyson J’s approach was approved by Aldous LJ in Pegasus Birds in the Court of Appeal, [2000] STC 91, at paragraphs 11 and 15:

At [24], the Upper Tribunal concluded its analysis thus:

One of the issues that the Upper Tribunal had to determine in the Nottingham Forest case was whether the sixth proposition (that the burden of proof fell on the taxpayer) was correct. As the Upper Tribunal observed at [41]:

However, it went on to conclude at [46] that discussions as to where the burden lay in the earlier case law “went beyond mere assumption” and that there was binding Court of Appeal authority to the effect that the burden lay on the taxpayer to show that the time limit in section 73(6)(b) had been breached. We are bound by the Upper Tribunal’s decision on that point.

We had witness statements from:

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Mr Simms was undoubtedly a credible witness.

It was the credibility of Mr Smith’s evidence, however, on which the case was ultimately going to turn. This is because:

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We consider that the assessment of Mr Smith’s credibility can be carried out only once we have ascertained as many facts as we can from the contemporaneous documentation and made other findings of fact in relation to undisputed matters.

Accordingly, we first set out our finding of facts based on the documents before us.

The property was acquired at an auction by a Mr Roper in 2010.

The previous hotel business on the site had gone into administration.

Mr Roper initially had no intention of reopening the hotel but proposed to develop the site (either for housing or the conversion of the hotel into a nursing home).

In addition, it was initially his plan to build a further six cottages on the site in what was used as the hotel car park.

Because the site was within the Green Belt, it was Mr Roper’s understanding that any new buildings had to be physically connected to the existing hotel building.

He therefore had in mind the idea that planning permission would be undertaken on the basis that the cottages would be a part of the hotel but that there would subsequently be an application for the change of use of the property, so as to allow the cottages to be sold individually.

Mr Smith approached Mr Roper in early 2012 with plans to regenerate the hotel.

Mr Smith advised that the construction of the cottages would be adverse to the hotel business as it would remove too many car parking spaces.

As a result, Mr Roper’s proposals were put on hold.

In the meantime, a company, Smith Pubs Ltd (“SPL”), was incorporated in November 2012.

SPL operated the hotel/restaurant/public house business at the property. SPL was owned by Mr Smith who was the sole or principal director.

SPL occupied the property under a tenancy at will granted by Mr Roper.

In July 2016, Mr Roper sold his interest in the land to a company called Shepherd Cox Hotels (Halifax) Ltd (“Shepherd Cox”).

SPL stopped operating the business at the property at or around this time.

The Appellant was incorporated on 2 September 2015.

Mr Smith became the sole director of the Appellant on 8 September 2015.

Following their purchase of the property, Shepherd Cox contracted with the Appellant for the construction of a building in the car park of the hotel.

The present investigation was a spin-off from a previous investigation undertaken under the COP9 procedures involving the Appellant and Mr Smith. However, we accept that there was no adverse finding made against either Mr Smith or the Appellant in the course of that COP9 investigation. Our approach to this case has not in any way been coloured by the fact of there having previously been a COP9 investigation.

In late 2013, an application for planning permission was made for the construction of an extension of the hotel to comprise 12 additional bedrooms and a store. A location plan was received by the Calderdale Metropolitan Borough Council (“Calderdale”) on 23 October 2013 and plans and elevations were received by Calderdale on 18 November 2013.

Permission was granted by Calderdale on 31 January 2014. The notice of permission was addressed to Mr Roper but sent to his professional advisers.

On 9 June 2016, an application was made to vary the previously-approved plan. The amendment sought the removal of the balconies and an adjustment to the building line. Calderdale granted permission for this amended proposal on 13 July 2016. The notice of approval was addressed to Mr Smith care of a new set of professional advisers (Lucas Lee and Partners).

A further application was then made to Calderdale on 17 August 2016 for yet another amendment to the then existing planning application. The amendment was filed by Lucas Lee but was stated to be made on behalf of Mr Chris Smith of Nelstar [sic] Properties. The amendment to the previous plan amounted to the removal of an archway and of one door.

The accompanying plans (received by Calderdale on 12 September 2016) clearly showed that, in addition, the project would now involve the construction of a 15-bedroom extension.

Subsequently, on 16 November 2016, Calderdale granted approval to the revised proposals.

The building works undertaken by the Appellant had, however, by this time been largely completed.

A meeting took place via Teams between Mr Smith’s then adviser (a Mr Munir) and two HMRC officers on 23 March 2022. Mr Munir was asked why the Appellant was not declaring any output tax notwithstanding VAT reclaims totalling about £970,000.

The question was repeated in the follow-up letter (dated 6 April 2022) from one of the HMRC officers.

On 13 May 2022, Mr Munir sent HMRC a response by e-mail. One of the attachments to that e-mail was a letter signed by Mr Munir (but dated

26 May 2022).

In that letter, Mr Munir reported Mr Smith’s response and set those words out in quotation marks. We accordingly conclude that they represented what Mr Smith had told Mr Munir. Those words were:

Mr Munir’s response continued to note:

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Mr Munir’s response also included:

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Mr Munir also addressed an issue regarding invoices that the HMRC officers had raised at the 23 March 2022 meeting. Those invoices had been provided by Shepherd Cox showing Nellstar having charged VAT on the construction supplies made to it. The invoices had not been disclosed by HMRC at the meeting, and Mr Munir requested a copy of those invoices but added that Mr Smith assumed them to be fake. Mr Munir also reported that Mr Smith had noted difficulties he had experienced with Shepherd Cox and referred to ongoing criminal proceedings concerning the directors.

In a follow-up letter dated 23 June 2022 (which we infer was sent after HMRC supplied a copy of one invoice), Mr Munir identified a number of flaws with the invoice including the reference to an incorrect address for the Appellant and what appears to be a scanned signature superimposed on the image.

On 16 August 2022, HMRC wrote to Mr Munir summarising HMRC’s understanding of the position. The letter identified the potential VAT in issue. The figures in the letter correspond to the amounts actually assessed later, subject to rounding adjustments of less than £1. From HMRC’s perspective, the dispute concerned the contrast between Mr Smith’s assertions on the one hand (which was that residential accommodation was being constructed) and the clear wording of the planning applications which showed that an extension to the hotel was being constructed.

The 16 August 2022 letter noted that HMRC had been told that the Appellant had not issued invoices to Shepherd Cox (but had instead received payments without such formalities). The letter also confirmed that the assessable amounts had been calculated by reference to the details of the Appellant’s receipts as provided to HMRC by Mr Munir.

A meeting took place between HMRC and Mr Munir and Mr Smith on 19 October 2022. At the meeting, Mr Smith provided some architect’s plans from which he had been working. Mr Smith explained that, from the basis of those plans and the fact that the new building was not connected to the hotel, he believed that he was building residential properties for resale.

A telephone call took place on 2 February 2023 between Mr Munir and HMRC. In the call, the HMRC officer noted that:

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In a follow-up letter dated 23 February 2023, HMRC provided Mr Munir with the third page showing the floor plans of the building (showing the extension as comprising 15 new hotel bedrooms).

Mr Munir responded by letter dated 23 March 2023.

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A further meeting took place on 29 June 2023. Mr Simms was one of the HMRC officers present. Mr Munir and Mr Smith attended on behalf of the Appellant. Much of what was discussed repeated matters already covered in the correspondence.

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It appears that HMRC wrote to Mr Munir on 28 September 2023 but we have not seen that letter.

However, a response from Mr Munir was sent by e-mail on 31 October 2023. Attached to that e-mail were:

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It is clear that nothing provided by Mr Munir and Mr Smith persuaded HMRC because a pre-decision letter was issued on 16 May 2024.

Mr Munir then telephoned HMRC on 23 May 2024. However, the subject matter of the call was largely procedural and no new relevant facts were discussed.

However, on 28 June 2024, Mr Munir then provided the following further information:

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HMRC acknowledged the additional information by letter dated 31 July 2024. HMRC made the observations that:

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The assessments under appeal were then made on 5 September 2024.

We have no hesitation in concluding that what was built was an extension to the hotel comprising 15 additional rooms and a storeroom. This was in accordance with the amended planning permission granted by Calderdale in November 2016.

However, given the timing of the assessment, we have to consider whether Mr Smith knew that the construction was not of residential property when the Appellant submitted its VAT returns. That turns on the credibility of Mr Smith as a witness to which we now turn.

Mr Smith spoke with confidence and persuasively and was very easy to believe. However, there were aspects of his factual case which cast doubt on his actual reliability as a witness.

One of the difficulties we had with Mr Smith’s evidence is that he was very emphatic about certain factual points: for example, the difference between the planning permission granted in 2013 and the approval given by Calderdale in November 2016 for an amendment to the 2013 planning permission. Mr Smith was at pains to state that what was granted in November 2016 was not planning permission but merely an amendment. He made these points notwithstanding the November 2016 document being headed “Planning Permission”. Furthermore, he was emphatic that he had not seen the document (despite his company’s name (i.e. Nellstar

Properties) – albeit not his address – being shown as the person to whom permission was being given) and that the document post-dated the works that had actually been undertaken. Mr Smith’s argument was that he was merely a builder and therefore would not have seen the planning permission as that is a document that goes to the owner of the building.

Similarly, Mr Smith’s witness statement made the point that “Nellstar have only ever worked on residential properties”. He also made the point that, according to his interpretation of a Google Earth image, a trampoline could be seen in the gardens next to the building, indicating the later use of the site as residential properties.

In addition, Mr Smith explained how building plans frequently changed and that this was similarly the case with the works undertaken at the property.

In these respects, Mr Smith made his points clearly and eloquently. However, his emphatic evidence on points of marginal relevance gave rise to the sense that the Appellant doth protest too much.

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And, in relation to the change of plans, we were shown lots of different plans for the construction project being undertaken at the property, many of which were mutually incompatible. However, undermining Mr Smith’s credibility was the apparent selectivity with which Mr Smith and the Appellant disclosed information to HMRC in the course of their investigation. For example, the initial disclosure given to HMRC was limited to the diagrams showing the side elevations to the new building rather than the floorplans. It was only when HMRC obtained the planning permission submissions from the local authority that floorplans were obtained and these showed quite clearly that individual hotel rooms were being built rather than six independent cottages as insisted upon by Mr Smith.

We also note that Mr Booth had been identified as a person who could speak to HMRC. Although we do not go so far as to draw adverse inferences from the Appellant’s decision not to call him as a witness, we do note that the Appellant’s case might have been strengthened had it been possible to call Mr Booth as a witness of what was happening.

Furthermore, we considered two different sets of plans in some detail and, as did HMRC, we compared them with Google Streetview images that showed the construction works taking place (with the breeze blocks for much of the ground floor in place).

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From the limited information available to us it was certainly possible to say that the Google Streetview images could also be reconciled with the plans shown at page 213 of our hearing bundle. And Mr Smith, when asked whether he was building according to the plans at page 213, he replied “Absolutely”. It was not immediately clear to us why it was only so late on in the process that this set of plans first emerged.

Furthermore, when looking at these different sets of plans, Mr Smith emphasised that plans change and it can be seen that the plans at page 73 are “Revision C” whereas the version he was working to (at page 213) were “Revision E”. Whilst that undoubtedly makes sense, what was not clear to us was why Revision C was dated 25 August 2016 whereas the (presumably) later Revision E was dated 6 August 2016 (some 19 days earlier).

In addition, the point made in HMRC’s letter of 31 July 2024 identified one particularly odd aspect of the Appellant’s case: that there was never at any stage a written contract between the Appellant and Shepherd Cox. Either there was such a contract but the Appellant considered it would be unhelpful to its case or the relationship between the Appellant and Shepherd Cox was particularly informal, suggesting some greater co-operation between them which would likely lead to the conclusion that Mr Smith would have known the nature of the extension that Shepherd Cox wanted built to the hotel. Either way, the lack of evidence of a written contract for what was a major project is a factor that undermines Mr Smith’s credibility.

For similar reasons, the apparent absence of formal invoices from the Appellant to Shepherd Cox does not make sense. In this regard, we conclude that either invoices were not issued as they would highlight the fact that the Appellant was hoping to zero-rate the services or there were invoices issued and the Appellant has chosen not to disclose them as they would be unhelpful to its case.

We also observe that Mr Smith sought to emphasise the difficulties that the Appellant had in getting Shepherd Cox to pay the amounts due under the agreement between them. We were, however, shown no documentary evidence of any correspondence between the two companies which, if such difficulties were experienced, would be likely to make some reference to the nature of the works undertaken. Had any of this relatively contemporaneous documentation supported the Appellant’s case, we would have expected the Appellant to have exhibited it. However, as we do not know what steps were taken by the Appellant to enforce payment, we do not go so far as to draw any adverse inference from the lack of evidence in this regard.

On the other hand, many of the comments made by Mr Smith made good sense. He referred to the installation of six combi boilers into the new building and there were separate water, electricity and gas supplies, correlating to the six independent cottages he said he believed he was constructing. We also acknowledge that it was somewhat surprising that a hotel extension would be built, adjoining the original hotel building without there being an internal access between the two. Similarly, we accept that, from the perspective of a hotel’s housekeeping, it was somewhat surprising that the new rooms would have to be accessed via the carpark and, for the rooms on the upper storey, it would be necessary to use different flights of stairs. Mr Smith also made the point that a warranty had been acquired by the Appellant in relation to the construction of residential premises: there would be no point in that purchase had the building been commercial in nature. It is our conclusion, however, that these points can actually be explained.

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Finally, Mr Smith made the comment that there would be no obvious financial incentive for the Appellant to zero-rate the supplies given that Shepherd Cox ought to have been able to recover any VAT actually charged. We accept that we could not find any immediately explanation for that. However, when we stopped to look at the facts that we could objectively corroborate, we considered that common sense pointed to a picture that was less favourable to Mr Smith.

Therefore, bearing in mind that HMRC need to prove their case on the balance of probabilities, we consider that it is more likely than not that Mr Smith actually knew that what was being built was, at least in the short term, an extension to the hotel.

Although Mr Ahmed conceded the timing point, we indicated to the parties at the beginning of the hearing that we would still want some submissions on this point. In this regard, Ms Donovan submitted that the information provided on 28 June 2024 was significant in that it was that information that enabled HMRC to reach a conclusion as to the state of Mr Smith’s mind, in that he actually knew that the construction was of non-residential property. HMRC’s assessments were dated just over two months later on 5 September 2024.

Our concern about this aspect of the case was that HMRC’s letter of 16 August 2022 appears to form the basis of future assessments by HMRC. In particular:

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Looking at the first four of the Pegasus Birds principles, we conclude that by 16 August 2022, there was undoubtedly sufficient information to justify an HMRC officer:

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In other words, there would have been sufficient information back in August 2022 to justify the making of the assessments that were eventually made in September 2024. Furthermore, addressing the fifth of those principles, we would conclude that any view that HMRC did not have sufficient information at that stage to be capable of challenge under Wednesbury principles.

However, what HMRC did not know at the time was whether they could make any of those assessments at that time. This was because, as at 16 August 2022, the assessments would have required an extended time limit We accept Ms Donovan’s submission that a decision as to Mr Smith’s state of mind could rationally be made only after the receipt of the information sent on 28 June 2024. The assessments were made well within a year of that.

HMRC’s letter of 16 August 2022 was prompted by the provision of information by the Appellant in a letter dated 25 July 2022. Had that been received by HMRC before 1 August 2022, we would have concluded that HMRC should have assessed the Appellant for the 31 July 2018 period within the normal four-year assessment period. However, the burden of proof is on the Appellant to show that the one-year time limit is breached (Pegasus Birds proposition 6 as confirmed in Nottingham Forest). Given the lack of evidence of timing (or even the mode of transmission of the 25 July 2022 letter), we must conclude that that additional information reached HMRC only after 31 July 2022.

For these reasons, we agree that Mr Ahmed’s concession was rightly made.

Finally, we make the observation that HMRC’s Statement of Case made only a tangential reference to the need to focus on deliberate conduct (contrary to the position recently confirmed by the Upper Tribunal in New Claire Wine Ltd v HMRC [2026] UKUT 116 (TCC)).

However, this point was not taken by the professionally-represented Appellant. Furthermore, we consider that the Appellant cannot have been in any doubt as to the case it was required to respond to. In particular:

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Overall, we do not consider that the fairness of the proceedings has been compromised by HMRC’s failure to plead their case as clearly as they ought to.

In the circumstances of this case, we make the preceding observations for completeness and in the hope that HMRC will better comply with their obligations in future.

For the preceding reasons, we dismiss the appeal in relation to all four assessments.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.