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Cite as: [2009] UKFTT 179 (TC)

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Plymouth Marine Laboratory v Revenue & Customs [2009] UKFTT 179 (TC) (29 April 2009)
VAT - ZERO-RATING
Transport

[2009] UKFTT 179 (TC)

TC00134

Appeal number: LON/2008/0210

Value Added Tax - whether services rendered to the Appellant by a company to which the Appellant had out-sourced the operation of its ships and certain services were zero-rated under Item 1 of Group 8 in Schedule 8 to VAT Act 1994 - proper interpretation of the contract - consideration of what was actually done - Appeal dismissed

FIRST-TIER TRIBUNAL

TAX

PLYMOUTH MARINE LABORATORY Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

(Value Added Tax)

Tribunal: HOWARD M NOWLAN (Judge)

ALEX McLOUGHLIN

Sitting in public in London on 2 April 2009

Leslie Allen of DLA Piper UK LLP, for the Appellant

Jessica Simor, counsel, on behalf of the General Counsel and Solicitor to HMRC, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

This case raised the issue of whether certain services rendered by a company called Serco Denholm Limited ("Serco") to the Appellant were zero-rated. The Appellant was a charity that conducted scientific studies of the condition of sea water and all forms of marine life in the river estuary, and the sea surrounding Plymouth. The basic purpose of the research was to detect variations in temperatures and the condition of water in various fixed locations, and to examine and compare the health and condition of marine life, all with a view to detecting the consequences of global warming. The Department of Trade and Industry made large donations to fund the research, such that, although the Appellant was not state-owned, it was substantially state-funded.

Before the period covered by the Appeal, the Appellant itself had utilised three modest-sized boats, one of which it owned, and the other two of which appeared to have been made available to it by equivalent organisations with similar objectives, seemingly without payment. The Appellant then arranged for the three boats to be crewed by crews who were capable not only of navigating the vessels, but of collecting sea-water samples, obtaining fish specimens and preserving them in on-board tanks, and familiar also with the methods of deploying and then recovering various items of scientific equipment that might be dragged by the boats or sunk to certain depths. The crews were not scientists and they did not undertake research with the water, marine life specimens, and data that they collected. Scientists performed these tasks either on land, or when joining the crews on board. Estimates of the percentage of time that scientists actually joined the crews to perform laboratory work on board varied from 25% to 75% of the sailing time, at different times and according to different accounts.

The VAT issue arose when the Appellant decided to out-source the operation of the three boats to Serco. The Appellant and the owner of the other boats all granted bareboat charters for a nominal £1 to Serco. The employment of the crews was passed over by the Appellant to Serco and then Serco entered into a long and detailed contract with the Appellant, effectively to render services to the Appellant in operating the boats and performing the functions that the crews had rendered prior to the out-sourcing transaction.

For VAT purposes, the combined wording of Item 1, and Note 1 to Group 8 of Schedule 8 VAT Act 1994 provide that:

"The supply of services under a charter of a qualifying ship[ is zero-rated] except where the services supplied under such a charter consist wholly of any one or more of the following:-

(a) transport of passengers;

(b) accommodation;

(c) entertainment;

(d) education

being services wholly performed in the United Kingdom."

Ignoring at this stage an unimportant detail, it was basically agreed between the parties that the boats were "qualifying ships". It was also virtually common ground that whatever the services were that Serco was to provide under the contract with the Appellant, they were not amongst the four categories that were excluded from ranking as zero-rated services by the four items just quoted. Everything thus turned on the simple question of whether Serco was "rendering services to the Appellant under a charter".

We will consider below various arguments that were advanced in relation to whether Serco should be regarded as rendering two services of first navigating the boats, and secondly of undertaking tasks in collecting samples etc, with the former being zero-rated and the latter being standard-rated. We actually consider all those points to be irrelevant, and consider that this case must be resolved by deciding which of two candidate roles Serco was in fact performing under the contract with the Appellant. The first possible rationalisation is that, having taken the boats on nominal bareboat charter, the boats were the subject of a time charter back, with Serco providing the crews under the time charter, such that the Appellant and its scientists could use the boats for their purpose. On this approach Serco would additionally be contracting that its crews would be performing some of the sample-collection services for the Appellant, but these services would be rendered under the charter back, and would thus appear, like the basic service under the charter back of crewing, operating and maintaining the boats, to be "services rendered under a charter". Accordingly all the services would appear to be zero-rated. The alternative analysis is that there was no charter back at all. Instead, Serco itself used the boats that it had taken on bareboat charter in its own trade, and the essence of that trade, and the services that Serco contracted to perform with boats that were available to it (rather than chartered back to the Appellant), would be the various itemised services of collecting water and marine life samples and specimens, and collecting data. On this approach, Serco would of course be required to provide accommodation for the Appellant's scientists when they required to be on board, but this would still be viewed as being incidental to the main services that Serco itself was required to perform under the contract. On this approach the services would not be zero-rated.

Our decision is that the second of those two constructions is the correct construction of the key contract in this case. There was accordingly no charter back at all, and the services provided were services provided by Serco which Serco provided because it had the use of the boats required, and the crew required, to enable it directly to perform the numerous itemised tests and routines that the contract required. This role and these services are not within the definition of Item 1 of Group 8, and so these services are not zero-rated. In our view, had the contract been approached and drafted in a different manner, the VAT result might have been that the first analysis prevailed. However, because it seems that the dominant concern, in drafting the contract, was to identify precisely what it was that Serco was required to deliver under the contract, and since achieving any particular VAT result was doubtless not the draftsman's priority, we consider that the attention to the various services that Serco was required to give to the Appellant under the contract makes it unrealistic to say that Serco had just chartered the boats and crews back to the Appellant. Serco had directly assumed the obligations to perform numerous itemised services and we consider that this sustained the second analysis as the realistic description of the relationship between the parties.

The history of the dispute

There is little continuing relevance to the various stages in this dispute, but it is worth mentioning them shortly.

When the Appellant directly conducted all of the activities relating to the research and the gathering of samples and data, and it directly employed all the crew, there was naturally no VAT charge.

When the crews and functions were first transferred to Serco, 2 of the 3 boats being used were of less than 15 tons, and since one of the requirements to show that a vessel was a qualifying ship was that it was of 15 tons or more, it was evident that the services (whatever they were) conducted with the 2 small boats would not rank as zero-rated services. It was accepted however that 60% of the services were undertaken by the boat that was of more than 15 tons, and so ranked as a qualifying ship, and HM Customs & Excise accepted that 60% of the services were zero-rated, and 40% standard-rated.

When the 2 smaller boats were replaced by another that, like the third, was of more than 15 tons, Serco asked HM Customs & Excise to confirm that the entire services would then be zero-rated. This led to internal reviews, and to a ruling that none of the services were zero-rated, because although the vessels were now all qualifying ships, the nature of the services performed fell outside either of the Items of Group 8 of Schedule 8 to the VAT Act 1994 which it was claimed by Serco were in point.

There was then some confusion in that, notwithstanding the HM Customs & Excise ruling, Serco continued to treat 60% of the services as zero-rated. When Serco eventually accepted that the services were all standard-rated, it did not appeal. There was then a considerable delay in Serco rendering an additional charge to the Appellant, as it was entitled to do under the contract, in respect of the VAT that was chargeable. At that stage, the Appellant claimed that it was entitled to appeal, notwithstanding that the supplier of the services was Serco.

HMRC accepted that the Appellant had a sufficient interest in the VAT status of the services to be entitled to bring an appeal, but they contended that the Appeal was out of time, and that only the Tribunal had power to allow the Appeal to proceed when brought out of time.

At the commencement of the Appeal we were told that HMRC had no objection to the Appeal being brought out of time, and we accordingly granted leave for the Appeal to proceed.

We were told that prior to the hearing, the arrangements between the Appellant and Serco had been terminated, and that the crews had been transferred back to direct employment by the Appellant, such that the direct method of operation mentioned in paragraph 8 recommenced.

The evidence

Evidence was given before us by David Smith, an experienced Master Mariner who had been involved with the services when employed by Serco in the period when Serco was rendering the services under the out-sourcing arrangement. He had worked for the Appellant from the date when the out-sourcing arrangement was terminated. We accepted all David Smith's evidence, and will summarise it, along with our general understanding of the facts, below.

The steps involved in reaching our decision

We will first summarise our understanding of the legal issues that are relevant in this case. This will involve the definition of the services that are zero-rated, and the general law in relation to whether the authorities indicate that we should treat there as being just one service, or whether we should treat there as being two separate services for VAT purposes.

We will then describe the generality of the duties performed by Serco and its employees under the contract. This will largely focus on whether the predominant responsibilities of the crew were to navigate vessels, or whether they were principally involved with work related to the conduct of the scientific tests. This consideration will largely reflect the evidence given by David Smith.

Finally, and of greatest significance, we will consider the terms of the contract, to judge what the respective roles of the Appellant and Serco were stated to be under that contract. We will also consider whether the reality of the services provided so differed from the impression created by the contract as to the service that Serco was required to perform, that we should determine the VAT result by reference to what actually happened, rather than by reference to the service that the contract indicated was to be provided. Since we consider this analysis of the contract to be so central to the decision, we will consider the contract in the context of giving and explaining our decision, and following a short summary of the parties' contentions.

The law

At times the case was broadly advanced on the basis that, if the services rendered by Serco were basically maritime services and that Serco's role in relation to the scientific research was negligible, the decision should be to allow the Appeal. In this regard we agree with the Respondents to the effect that the Appellant must simply show that the services fell within one or other of those defined services that rank as zero-rated services. If they do not, then the Appeal fails, and it is irrelevant to consider the description of the services.

We have quoted in paragraph 4 above the relevant excerpts from Item 1 of Group 8 to Schedule 8, VAT Act 1994. We consider that this Item requires us to consider three matters:-

Granted that there was initially a bareboat charter of three vessels by the Appellant and others to Serco, was there a time charter back to the Appellant of fully crewed and maintained vessels?

If there was such a time charter back, were the services that Serco was required to deliver under the contract, "services under a charter"?

If so, were the services within any of the four categories of service that are excluded from zero-rated treatment, as quoted in paragraph 4 above?

The next question is whether Serco's services might be zero-rated under Item 6 of Group 8. Insofar as it is material, Item 6 refers to "any services provided for (a) the handling of ships or aircraft in a port, customs and excise airport or outside the United Kingdom". Little reliance was in fact placed on Item 6, and we agree that, because the boats had all been the subject of bareboat charters to Serco, Serco's services were not simply confined to "handling services". The relevant notion in Item 6 is that the handling services are rendered to a third party who has control or use of the vessel or aircraft, in relation to which the handling services are being rendered. Since Serco had bareboat charters of the vessels and was, in our view, using and handling boats that were effectively its own boats for this purpose, the required notion of providing handling services to another party who had control and use of the boats was plainly absent.

Considerable attention was given on behalf of the Appellant to the issue of whether we should split the services rendered by Serco into maritime services that it was asserted would be zero-rated and to "scientific services" (or rather just "other services") that were not zero-rated. In this context our attention was drawn to the two decisions of the European Court of Justice in Talacre Beach Caravan Sales Ltd v. Commissioners of C&E C 252/05 and Navicom SA v. Administracion del Estado Case C-97/06.

We consider that the correct reading of the law, and of these two cases, is as follows. As a general matter, VAT should be applied by reference to the dominant service, and services should not be split artificially. As Card Protection Plan Ltd v. C&E Commissioners Case C-349/96 illustrates, if the dominant service is exempt, then other ancillary services that just contribute to the better enjoyment of that basic insurance service should also be treated as having the same nature as the dominant service. Where, however, a dispensation is given by the European Directives for member states to continue the zero-rated categorisation of services that were zero-rated on some particular stated date, since this treatment is not basically consistent with the principles of VAT, the dispensation should be viewed and interpreted strictly. Accordingly, because the supply of caravans remained a zero-rated service in the UK under this dispensation in the Talacre case, that dispensation should not be extended to include other things, particularly where UK law expressly stated that moveable fittings within caravans were not intended to be zero-rated. Thus, notwithstanding that on ordinary principles the right description of the service of supplying a caravan would be treated as including those contents, the strict application of the dispensation should be applied so as to treat the supply of the excluded items as standard-rated.

The ruling in the Navicom case merely decided that a charter of a ship could include a charter of part of a ship. The ruling did not specifically address the further question, which was for the local court to determine, of whether a transaction that might be regarded as the charter of part of a ship was indeed rightly defined as "a charter of a ship", or rather as "transport services".

We do not regard either of these authorities as being particularly material in this case. We accept that the zero-rated category of services with which we are concerned here is, as were the supplies of caravans in the Talacre case, the result of a similar "dispensation", such that if we decided that there was a charter of a qualifying ship by Serco to the Appellant, we would have to treat that dispensation, and the zero-rated category in question, strictly. Whether that would require us just (as in Talacre) to pay regard to specific exclusions from the zero-rated category spelt out in the UK definition of the relevant category, or whether it would extend to requiring us to analyse whether there were other services than the zero-rated ones that we should distinguish, and exclude from the zero-rated treatment, is not presently material. That is because, in the present case, we consider that the fundamental question for us is really the first of the three points indicated in paragraph 20 above, namely "Was there a time charter back from Serco to the Appellant" at all?

We consider that the terms of Item 1 above are significant in that they appear to encompass "any provision of services" if that provision is "under a charter", and the services are not in one of the four categories that are expressly excluded. Since three of the four excluded categories, namely services of education, accommodation and entertainment are not services that one would ordinarily expect to find under a charter, we consider that the Appellant is right to contend that a fairly broad construction should be given to the notion of the type of services provided, once the conclusion is reached that those services are "rendered under a charter".

It accordingly appears to us that virtually everything hinges in this case on whether indeed there was a time charter from Serco to the Appellant of crewed vessels. If there was, then, since other services were to be provided under the contract which on this analysis would be a charter, those services would be provided "under the charter", and unless at least the service of periodically accommodating the Appellant's scientists on board was to be regarded as the service of providing for the transport of passengers (the fourth excluded service), the Appellant should win this Appeal. On either legal approach we should not sub-divide the services. Either we should respect the basic VAT approach of not artificially splitting a single supply into distinct separate supplies or if we applied Talacre we would have to note that UK law expressly included all services under a charter, other than the four specifically excluded ones, as zero-rated. Unless thus we concluded that the services included the transport of passengers, we should conclude that there was no other Talacre- like carve-out from the definition of the zero-rated services, and that should conclude the case in the Appellant's favour. In that context we also note that the exclusions only apply where the services are wholly within the excluded categories, and that was plainly not so here.

It nevertheless follows, however, that if there was no charter back by Serco of the qualifying ships to the Appellant, then the services cannot have been rendered "under a charter". The conclusion would then be that Serco was required to use vessels that were available to it to render various itemised services to the Appellant, and because those services would not fall within either of Item 1 or 6 of Group 8, the Appeal would have to be dismissed.

The facts

Ignoring the terms of the critical contract between the Appellant and Serco, we can say immediately that we accept that the functions that the members of the crew, engaged by Serco, performed were essentially navigation services. The crew had to understand how to operate some of the items of equipment that were to be used in collecting data and samples. They had to collect water and marine life samples and specimens, and they had to navigate the boats to particular exact locations so that samples could be taken regularly from identical locations, for accurate comparison purposes. Whilst thus there were some special tasks that the crew were required to perform, they were clearly not scientists and they were not analysing any of the data. There were varying estimates, between 25% and 75% for the percentage of time that scientists actually joined the boats and conducted experiments in the on-board small laboratories, but these scientists were always employed by the Appellant, and we accept that the Serco employees were never involved in conducting scientific work. In substance they were mariners who operated the boats, just as if they had been fishing boats. They also knew enough to perform the various required tasks, but we accept that these tasks were fairly simple, and were nothing that any mariner would have found too demanding. We can accordingly state at this stage that if the question for us was whether the Serco employees were basically performing the services of manning and navigating vessels, or rendering scientific services, then the vast majority of their time and skill was dedicated to manning and navigating vessels.

The contentions on behalf of the Appellant

It was contended on behalf of the Appellant that Serco's services were zero-rated under Item 1 of Group 8. It was contended that there was a charter, and that the services rendered were not within the four categories specifically excluded from zero-rated treatment. In the alternative it was contended that should the services be split, then the vast majority would consist of maritime, rather than scientific services, and that the majority would be zero-rated on this basis. Little attention was given to the possible contention under Item 6 of Group 8, in other words to the provision of "handling services".

The contentions on behalf of the Respondents

It was contended on behalf of the Respondents that there was no charter, and that the services were the broader service of performing various tasks, such as collecting water, collecting marine life samples and generally operating (in the sense of deploying, towing and recovering) scientific data-collection equipment. Insofar as the contract imposed obligations in relation to the maintenance of the vessels, this was simply because the Appellant required its sub-contractor to maintain the vessels in good order, and not because Serco's basic obligation was to provide a maintained and crewed vessel on charter. Accordingly, because there was in fact no charter, and because the services required to be performed under the contract were the wider services of using the vessels to provide data and samples for the Appellant, the services fell outside both Item 1, and certainly Item 6 of Group 8, and were accordingly not zero-rated.

Our decision and the preferred construction of the contract

Our decision is that the contract did provide for the wider services, as the Respondents contended, and that it did not simply grant a time charter of the vessels back to the Appellant. Accordingly because the services rendered were not rendered "under a charter", and were indeed ones that required Serco actually itself to use the vessels that had been bareboat chartered to it in the first place in its broader sub-contract role, the services performed by Serco were not zero-rated under Group 8 and the Appeal is dismissed.

We consider that everything in this case revolves around a proper interpretation of the contract. The case is not one where the actual services provided actually differed from those implied by the contract so that we should disregard the contract. It is the contract that required the vessels to be used to perform various itemised roles in providing samples and data, and because these obligations were plainly real obligations, we cannot disregard these obligations and say that because most of the time spent by the crews was dedicated to manning and navigating vessels, we should say that that was the service rendered.

We do however observe that had the contract been drafted in a different manner, the outcome of this Appeal would have been different. This observation is not meant to be critical of the drafting of the contract, since the actual form of the contract doubtless reflects the dominant concern that Serco should indeed render numerous tightly-defined services, using vessels that were available to it. The dominant concern was doubtless not just to achieve any particular VAT objective. However, just as a ship owner or a company that had taken a ship on bareboat charter could crew and maintain the vessel and make it available on time charter, the contract in this case could have simply chartered the vessels back to the Appellant. The charter could then have provided that the vessels and the crews should operate, as directed from time to time by the Appellant, carrying the Appellant's scientists and performing other simple tasks, as directed and instructed from time to time, and since these duties would have been performed under a time charter, the services would have been zero-rated unless the carriage of the scientists amounted to the carrying of passengers, and the service consisted "wholly" of that. The Respondents had contended that one of the features that indicated that the vessels were not chartered back to the Appellant, was the point that the cost schedule that itemised Serco's costs and percentage mark-ups under the contract demonstrated that the costs were so much greater than the £1 nominal bareboat charter granted to Serco in the first place that the return service could not possibly be a time charter. We disagree with that altogether. Indeed, since the costs schedule indicates that virtually all of the costs related to the cost of crewing and maintaining the vessels, it seems to us that these costs would be entirely consistent with the costs that anyone would expect to be added in contrasting a bareboat charter with a time charter of a fully crewed and maintained vessel.

The contract in this case also contained some definitions and obligations that can be quoted to support the contention that the contract provided for the wider services that Serco, with full control of its retained vessels, should perform for the Appellant, and it contained other references that can be quoted to support the notion that there were simply time charters of the vessels back to the Appellant

It is worth just illustrating some of the isolated expressions and terms that point in the different directions mentioned in the previous paragraph. In support of the wider service role, the contract is actually headed "CONTRACT FOR RESEARCH VESSEL SERVICES". Consistently Serco, defined as "the Contractor", is required to "execute the [Appellant's] work programme in accordance with the terms and conditions of the contract; [to] arrange for the proper transportation of live specimens and other materials from the vessels to the [Appellant's] Plymouth laboratories; [to] provide live animals with due regard to animal welfare; [and to] provide a body of professional expertise to ensure that the [Appellant] is effectively advised and assisted in all matters of marine Research Vessels and relevant supporting services".

In the reverse direction, one of the bases of calculating Serco's charging rate refers to a "daily charter rate". More significantly still however, in the Conditions section of the contract, to which little attention was given at the hearing before us, the following clause would have been entirely consistent with a time charter of the vessels:-

"2.1 Vessel(s)

The contractor shall provide:-

2.1.1. vessel(s) at predetermined locations from which [Appellant] staff and equipment can be deployed to undertake a variety of monitoring during the Contract Period

2.1.2. day to day management services relating to the operation and supervision of the vessels and their Crew

2.1.3. arrangements for and supervision of the maintenance and repair of the vessels and supervision of any related contracts."

Whilst thus we accept that there are pointers in both directions in this contract, we consider that we must interpret the contract as a whole, and decide whether there is in reality a time charter back of the vessels to the Appellant, or whether Serco was itself responsible for operating vessels that were available to it under the bareboat charters, in order to deliver the wider services. In this regard we consider that it is much more realistic to conclude that Serco's role was to perform a work programme with the vessels. Consistently it had to maintain the vessels to a required standard and ensure that all health and safety and other regulatory requirements were met, but still its basic obligation was to undertake the work programme. In this regard, Appendix 1 outlined the tasks that were to be undertaken in the Indicative Core Research Programme for 2000/01. These tasks included:

• "40 days for the collection and delivery to the laboratory of large cephalopods, and other animals as required, from offshore waters (approx 3-10 miles from shore), distributed between August and April. Animals are required alive and in good physical condition.

• 50 days for the collection and delivery of small cephalopods and other animals as required, from inshore waters (approx 1-3 miles from shore), distributed between April and November. The animals are required alive and in good physical condition.

• 20 days for the collection and delivery of large quantities (approx 8-16 tonnes) of high quality seawater from offshore, distributed throughout the year

etc."

The list just quoted allocated not just the three quoted tasks but eleven different tasks, for which the number of days involved in performing those tasks totalled 300 days. There was then an "Additional Programme" estimated to take 50 days in the year, such that in total more than eleven different tasks were assigned to Serco to be performed throughout 350 days of the year. And it is this notion, of defined services being accurately described and required of Serco that pervades the whole contract. This is why we consider that the realistic analysis is that Serco was performing all these wider services, using vessels itself that had been bareboat chartered to it, and that it is unrealistic just to regard there as being a time charter back to the Appellant.

We accordingly decide that the vessels were not chartered back to the Appellant; that Serco's services were not "rendered under a charter", and that in fact Serco's services were ones of performing a number of itemised, and carefully defined, services for the Appellant, for which service role Serco plainly needed to use the vessels that had been the subject of bareboat charters in its favour. These services were not amongst those included in Group 8 of Schedule 8.

This Appeal is accordingly dismissed.

HOWARD M NOWLAN

Tribunal judge

RELEASED:29 April 2009