First-tier Tribunal (Tax)

[2011] UKFTT 140 (TC)

TC01014

Appeal number: LON/2008/1986

VAT – private use of yacht – whether Lennartz principle was applied – yes – calculation of the cost of private use – whether private use charge can be zero-rated or outside the scope of VAT -- no

FIRST-TIER TRIBUNAL

TAX

KINGFISHER EVENTS LIMITED (IN LIQUIDATION) Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: JOHN F AVERY JONES CBE (TRIBUNAL JUDGE) CAROLINE DE ALBUQUERQUE

Sitting in public at 45 Bedford Square, London WC1 on 14 and 15 February 2011

David Moll, Roffe Swayne, Chartered Accountants, for the Appellant

James Rivett, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.       Kingfisher Events Limited (in liquidation) appeals against an assessment to VAT issued on 15 August 2008 for periods 07/05 to 10/07 in an amount subsequently reduced to £28,694.98 relating to private use of a yacht.  There is also an appeal against a misdeclaration penalty assessed on 25 September 2008 the figure for which has been subsequently reduced in line with the reduction to the assessment to tax, the figure of which will depend on the outcome of the main appeal but is otherwise not in dispute.  The Appellant was represented by Mr David Moll, and the Respondent (“HMRC”) by Mr James Rivett.

2.       The issue in this appeal relates to whether the Appellant adopted the Lennartz principle (Case C-97/90 [1995] STC 513) when it claimed full input tax deduction on the purchase of the yacht, and if so the method of calculation of the charge on the benefit of private use.

3.       We heard evidence from Mr John K Podbury, director of the Appellant, and officer Richard C Peachey.  We also had a bundle of documents.  We find the following facts:

(1)        Mr Podbury sold his computer company in 1996 when he was 49.  He had always been interested in sailing and had owned several yachts in succession in the past.  The yacht Crackerjack, a 53 feet Oyster 53, was acquired by the Appellant on 30 April 2004 (invoice date, delivery being later).  This was a replacement yacht for a former Crackerjack that Mr Podbury had owned personally that had developed a fault and was replaced without payment by Oyster Marine (we shall refer to Oyster Marine to include its associated companies such as the one that arranges charters), the only payments being the VAT (£119,357.35) on the contract price of £682,042, and for additional equipment for £12,214.67 plus VAT of £2,137.57.  References in this decision to Crackerjack are to this replacement yacht.  The Appellant’s accounts for the year ended 30 April 2005 show an acquisition cost for the yacht of £699,896 and a current account owing to Mr Podbury of £739,955.  We infer that Mr Podbury treated his ownership of the former yacht that was replaced free of charge by Crackerjack as the equivalent of a loan to the Appellant of the contract price of Crackerjack.  Crackerjack was fitted out in a way suitable for Caribbean and Mediterranean charters, for example with water maker enabling her to make longer journeys.

(2)        The Appellant’s shareholders are Mr Podbury and his wife (who is also company secretary), and the directors are Mr Podbury and his son.

(3)        The Appellant claimed full input tax deduction on the acquisition of Crackerjack.  Mr Podbury did not know about Lennartz.

(4)        Mr Podbury’s intention was to charter Crackerjack in the Caribbean between December and the end of April and in the Mediterranean in the summer.  Oyster Marine had advised that it could expect to have 9 charters during the first period in the Caribbean.

(5)        Accounting documents for 2005 and 2006 were lost in the post between the accountants and the Appellant.  Duplicate bank statements were obtained.

(6)        We had a spreadsheet prepared by Mr Moll from Crackerjack’s log showing days of chartering and private use from 1 August 2005 (which seems to omit the first period of the assessment of 07/05).  We did not see the yacht’s log although this had been produced to HMRC.  Other documents produced raised doubts about the accuracy of the spreadsheet.  These include that Mr Podbury wrote to HMRC on 11 November 2005 (stamped as received on 14 November 2005) when the spreadsheet shows him on the way to the Caribbean between 23 October 2005 and 16 December 2005 (this point was not put to him and we make no finding about which is correct); Mr Podbury’s letter of 16 August 2008 refers to charters of 7 days in February 2006 and two days in July 2006 none of which appears in the spreadsheet; of 2 days in August 2006, which seems to relate to 1 and 2 September 2006, and of one day in September 2006 (which may relate to 7 October 2006); of 9 days from 23 June 2007 to 1 July 2007 which are the dates on the invoice in the bundle, whereas the spreadsheet shows a charter of 15 days up to 7 July 2007; of 2 days on 3 and 4 July 2007 which are the dates on an invoice in the bundle (included in the spreadsheet within the dates of the previous charter); of 2 days in September 2007 (not on the spreadsheet, which shows it being moved to Malta from 2 September 2007 for winter berthing); one of the Oyster Marine documents produced on the second day of the hearing was an invoice from Oyster Marine for commission on a charter on 8 July 2006 which is not on the spreadsheet; and one of the invoices in the bundle of documents is for a charter on 3 and 4 August 2005 (the spreadsheet shows no charter on 3 August 2005 and a charter to a different person on 4 August 2005, although there is a charter on the spreadsheet on 3 and 4 August 2006 without the charterer being named and so the year may be wrong on the invoice).  The assessment is based on the spreadsheet.  The state of the evidence (and in particular the fact that the log book was not in evidence) is such that we cannot resolve these differences and as the burden of disproving the facts underlying the assessment is on the Appellant we proceed on the basis that the spreadsheet is correct but we have no confidence that it is correct.  If there are other issues being investigated by HMRC (Mr Rivett asked a question about assessment of private use for income tax that Mr Podbury seemed unclear about) we do not consider that HMRC should rely on the spreadsheet.

(7)        The method of calculating the assessment was to take the days during which Crackerjack was chartered as business use, and the days when personal use was declared as personal use and to leave out all other days.

(8)        The spreadsheet shows that between 1 August 2005 and 13 September 2005 (when she left the UK) Crackerjack was chartered for 4 days and used for personal use on 8 days all in the UK. She left the UK on 13 September 2005 and arrived in Cadiz on 22 September 2005, after which there were 5 days of personal use between 18 and 22 October 2005.  She left for the Caribbean on 23 October 2005 and arrived in Antigua on 16 December 2005.  Crackerjack joined the ARC Atlantic Rally for Cruisers (there is a separate race category) from Las Palmas to St Lucia with a start date of 20 November 2005 in which she was recorded as achieving the position of 39 (we do not know out of how many).  Mr Podbury considered (and we accept) that this was the safest way of crossing the Atlantic as assistance was available.  The alternative means of transport would have been to put Crackerjack on a ship, which would have cost about $50,000 to $60,000 according to Mr Podbury’s letter to HMRC of 16 April 2008, or have a professional crew sail her out, which Mr Podbury said in evidence would have cost about £5,000 (and he told HMRC in his letter of 16 April 2008 £10,000) plus the cost of airfares home for the crew.  We cannot resolve this discrepancy.  Mr Podbury estimated that the cost of the actual journey was £2,500 to £3,000.  Crackerjack is registered in category 2 by the YDSA authority which meant that she could be chartered only within 60 miles of a safe haven.  She could not therefore be chartered during the journey.  One of the points in dispute is the categorisation of this journey, the Appellant claiming that it was business use and HMRC claiming that it should be left out of account. 

(9)        A charter had been arranged from 16 December 2005 (we assume that 2006 in Mr Podbury’s witness statement is an error) which we understand did not materialise.  Mr Podbury used Crackerjack with his family between 22 December 2005 and 4 January 2006. 

(10)     We saw a charter agreement for the charter of Crackerjack from 18 to 25 March 2006 between Antigua and St Maarten that was arranged by Oyster Marine.  This shows Mr Podbury as the owner and is dated 20 December 2005 and the charterer’s signature is dated 3 January 2006.  Mr Podbury’s witness statements says: “I moved Crackerjack to the Caribbean where a charter had been arranged for March 2006” and “In March 2006 I performed the charter arranged before my departure from the UK.”  However, the charter had not been signed until after Crackerjack arrived in Antigua on 16 December 2005; it would been discussed before then but we have no evidence about when negotiations started.  Mr Podbury regarded the error that he, rather than the Appellant, made the charter as owner as a mere formality, although it could have had serious consequences with respect to his personal liability.  On the second day of the hearing two further charters of Crackerjack were produced both arranged by Oyster Marine also showing Mr Podbury as owner.

(11)     After the family use over Christmas and the New Year Crackerjack was used for what the spreadsheet calls “reconnaissance for arranged charter” between 20 January 2006 and the start of the charter on 19 March 2006 (according to the spreadsheet, or 18 March 2006 according to the charter).  Mr Podbury said that this was more cost effective as he did not have to pay mooring fees and he might attract some casual charters.  He carried out what the spreadsheet calls “reconnaissance for future charters” between 20 April 2006 and 8 May 2006.  These periods are also in dispute, HMRC leaving the days out of account.  A professional crew sailed Crackerjack back to the UK between 11 May 2006 and 8 June 2006.

(12)     While in the UK she was chartered for one day from Lymington on 30 June 2006 and the Appellant claims two days of business use getting there from the River Hamble (for the start of the charter at 8.30 am) and returning after the end of the charter at 7 pm. This is another item of dispute, HMRC leaving the days before and after the charter out of account.  She was used for private use between 3 and 7 July 2006 and between 19 and 25 August 2006.  She was chartered to Charter Jubilee Sailing Trust without charge on 1 and 2 September 2006, and chartered on 7 October 2006.  She was then laid up in Brighton for the winter.

(13)     She returned to the Hamble on 31 March 2007.  She sailed to Valencia between 6 May 2007 and 6 June 2007 for chartering in the Mediterranean during the summer.  She was used for personal use between 16 and 22 June 2007.  She was chartered for the Americas Cup between 23 June 2007 and 7 July 2007.  She was used for personal use between 21 and 27 July 2007.  She was then delivered to Minorca between 28 July 2007 and 11 August 2007 for a proposed charter that did not occur.  She then went to Sardinia to be promoted in a boat show between 17 and 21 August 2007.  She was used for personal use between 29 and 30 August 2007, exhibited at Porto Chervo [Cervo?] on 31 August 2007, then moved to Malta between 2 and 6 September 2007 for winter berthing.  While out of the water it was discovered that she had extensive osmosis.  Ultimately she was sold back to Oyster Marine on 1 April 2009 for £426,000 plus VAT of £63,900.  Oyster Marine offered a higher value in part exchange for another of their yachts but Mr Podbury did not want to take this up having had bad experiences with two of their yachts.

(14)     According to documents that were sent to the Tribunal that were not in evidence at the hearing the Appellant was put into creditors’ liquidation on 15 June 2009 with a deficiency of £410,379, the principal creditors being Mr Podbury (£764,989) and HMRC (£63,900, being the output tax on the resale of Crackerjack as above).  The liquidators are Mr James Money and Mr Anthony Cliff Spicer of Smith & Williamson.  Mr Moll said that a dividend had been paid to the creditors and although Mr Rivett’s instructions were that none had been paid to HMRC we consider that it is likely that it has been, although that is not material to our decision and we make no finding on it.

(15)     We infer that Mr Podbury (and hence the Appellant) knew that Crackerjack would also be used for personal use.  No consideration was paid for the private use.

4.       Mr Rivett asked us to make a finding that Mr Podbury’s evidence was unreliable.  Our problem is that we are unable to resolve the many differences between the spreadsheet and other documents and no attempt was made to resolve these by evidence.  One would expect Mr Podbury’s knowledge to be superior as he was on Crackerjack and Mr Moll prepared the spreadsheet from the log book, but we are bound to allow the spreadsheet to stand as the assessment was based on it and the burden of disproving it was not satisfied.  We do not consider that we should make the finding requested by Mr Rivett given the state of the evidence.  We would, however, say that we consider that Mr Podbury’s approach to the Appellant’s activities was un-businesslike and muddled.  We find this surprising for someone who has built up and sold a successful computer business.  He said that he was not a “details” person but the lack of information about the Appellant’s activities and the unresolved contradictory evidence is extremely unsatisfactory.  He seemed at times to fail to make any distinction between the Appellant and himself.  He also found it difficult to give a straight answer to a question asking for factual information without also going into other matters justifying his actions that were irrelevant to the question.  But we do not consider that this was because he was not a truthful witness.  The Appellant had the misfortune to lose accounting documents in the post between the accountants and Appellant but, for example, that is not an excuse to produce invoices from Oyster Marine on the second day of the hearing (with the Tribunal’s consent as we considered that it might help us to decide the appeal).  Did not the accountants have some records that would have helped to give a full picture of the Appellant’s activities?  We would have expected a higher standard of preparation of documents produced to the Tribunal with a full explanation of any discrepancies between the spreadsheet and the other documents particularly as this is a type of case in which the Appellant may not have wanted to disclose the full extent of its activities relating to personal use of Crackerjack.  We were also hampered by the absence of the log book. 

5.       We make the following findings in relation to the disputed use of Crackerjack.  In relation to the journey out to the Caribbean with the ARC Atlantic Rally, while we agree with Mr Podbury that this was a safe way to travel and was the cheapest means of getting Crackerjack to the Caribbean, we find that on the journey it was not being used for the purposes of the Appellant’s chartering business.  We find that it also had the purpose of being used in the competition during the Rally, and for the purpose of personal use while in the Caribbean.  The same is true for the return journey made by a professional crew.  The purpose included private use in the UK and the Mediterranean on its return.  So far as the day before and the day after the charter in Lymington are concerned, we find that it was necessary to move Crackerjack from its home mooring in the Hamble and allow these days as business use.  We do not find that the Appellant has satisfied the burden of proving that the “reconnaissance for arranged charter” between 20 January 2006 and 19 March 2006 (57 days, excluding the 8 days of personal use) for a charter of 6 days), or “reconnaissance for future charters” between 20 April 2006 and 8 May 2006 (19 days, after which she left the Caribbean on 11 May 2006 and never returned) were business use.  We consider that they should be excluded as being mixed business and personal use.  We consider that the same applies to “delivery to Brighton for Winter Layup” on 8 October 2006, “delivery to Valencia for charter” between 6 May 2007 and 13 June 2007, “delivery to Minorca for charter” between 28 July 2007 and 11 August 2007, delivery to Sardinia to promote yacht in Boat Show” between 17 and 21 August 2007, and “delivery to Malta for berthing over winter” between 2 and 6 September 2007.  Nor in the absence of any evidence do we accept exhibiting her at Porto Cervo on 31 August 2007 as business use.  

6.       Article 26 of the Principal VAT Directive (formerly art 6(2)(a) of the Sixth Directive) provides:

“1. Each of the following transactions shall be treated as a supply of services for consideration:

 (a) the use of goods forming part of the assets of a business for the private use of a taxable person or of his staff or, more generally, for purposes other than those of his business, where the VAT on such goods was wholly or partly deductible;…”

The domestic law provision giving effect to this is para 5(4) of Sch 4 to the VAT Act 1994:

“(4)     Where by or under the directions of a person carrying on a business goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, that is a supply of services.”

Paragraph 7(1) of Sch 6 provides:

“(1) Where there is a supply of services by virtue of—

(a) a Treasury order under section 5(4); or

(b)  paragraph 5(4) of Schedule 4 (but otherwise than for a consideration),

the value of the supply shall be taken to be the full cost to the taxable person of providing the services except where paragraph 10 below applies.”

7.       Mr Moll, for the Appellant, contends in outline:

(1)        The Appellant did not choose to adopt the Lennartz approach because its directors did not know about the possibility.  The Appellant should have apportioned the input tax but was not aware of the obligation to do so.  HMRC are trying to apply the deemed supply as a means of avoiding the 3-year cap on assessing the amount that should have been apportioned.

(2)        The cost of providing Crackerjack for personal use should be based on the depreciation actually suffered during the period of ownership.

(3)        The days of moving Crackerjack to and from the Caribbean and the Mediterranean were business use as the principal reason was business and personal use was incidental.

(4)        The place of supply rules should be applied to the deemed supply for personal use.  This equates the position with the zero-rated supply of a yacht under the Sailaway Boat scheme.

8.       Mr Rivett, for HMRC, contends in outline:

(1)        The Appellant was entitled to apply the Lennartz approach and is to be taxed on the basis of the decision in fact made whether or not it made a positive decision to do so.

(2)        The period for calculating the cost should be the 5-year period normally applied by HMRC in the absence of any evidence to the contrary, particularly in view of the connection with the capital goods scheme recognised in Wollny Case C-72/05:

“32 As emphasised by the German Government and, at the hearing, by the United Kingdom Government, the purpose of that device [ie the charge to tax on personal use] is, firstly, to ensure equal treatment as between a taxable person and a final consumer by preventing the former from enjoying an advantage to which he is not entitled by comparison with the latter who buys the goods and pays VAT on them (see, to that effect, Enkler, paragraphs 33 and 35, and Case C-412/03 Hotel Scandic Gåsabäck [2005] ECR I-743, paragraph 23).

33 Secondly, the aim is to ensure, in accordance with the underlying purpose of the system introduced by the Sixth Directive (see paragraph 20 of this judgment), a correspondence between deduction of input VAT and charging of output VAT (see, to that effect, the Opinion of Advocate General Jacobs in Charles and Charles-Tijmens, paragraph 60).

34 Although its scope is not exactly the same as that of Article 6(2)(a) of the Sixth Directive, the system of adjustment of deductions introduced by Article 20 of that directive finds application, like Article 6(2)(a), in situations where goods, the use of which is eligible for deduction, are then put to a use which is not eligible for deduction (see Uudenkaupungin kaupunki, paragraph 30). As the Advocate General observed at paragraph 98 of his Opinion, both Article 6(2) and Article 20 of the Sixth Directive relate to situations in which goods are used simultaneously for business and for private purposes.”

(3)        The deemed supply was not an actual supply capable of having a place of supply, by analogy with Seeling Case C-269/00 [2003] STC 805 where a deemed supply of residential accommodation was held not to be an exempt supply.

9.       Mr Moll’s first contention was that the Appellant had not chosen to apply Lennartz because Mr Podbury did not know about it and therefore should have apportioned the input tax between business and private use (although HMRC were out of time for assessing a proportion for private use).  He did not make an apportionment because of ignorance.  As we said at the hearing we found this an unsatisfactory contention.  Mr Podbury obviously had considerable business experience and clearly knew that there would be some private use of Crackerjack.  The possibilities are that the Lennartz approach was adopted, that he (and the other director) failed to address their minds or to take proper advice on the apportionment as we would expect a reasonable director to do, or that the claim for the entire input tax was fraudulent.  In the circumstances we prefer to find that the Appellant adopted the Lennartz approach.

10.    We have resolved the disputed periods business or private use in our findings of fact above.

11.    Mr Moll raises two contentions relating to the operation of the deemed supply for personal use.  The first contention is that the cost should be based on a retrospective calculation of the difference between the cost and sale price spread over the period of ownership.  We believe that he would start with the depreciation according to the accounts (the accounts to 30 April 2005 show a 5% pa rate of depreciation, but we did not see any later accounts) and then adjust that retrospectively.  The accounts are not audited, the Appellant being entitled to exemption from the audit requirement, and so the 5% pa is the directors’ estimate.  This approach has a logical attraction of getting to an equitable answer in this particular case but we consider that it is completely impractical.  Here the assessment was made before the sale back and so on that basis the amount of the assessment would not be known until later and our task is to find whether the assessment was made in the correct amount.  The same argument could be made in any case of any capital asset and clearly the calculation needs to be done every quarter and not put off until some unknown time in the future when the asset might be sold.  HMRC’s published practice is to use a 5-year basis for depreciating assets other than land and buildings.  This is the same as the period under the capital goods scheme and Wollney, Case C-72/05, specifically linked the two provisions in the passage quoted above as being the way to achieve a charge to tax for private use that neutralised the input tax deduction on the purchase.  We simply decide that the Appellant has not discharged the burden of showing that this period is inappropriate.  We would not in any event have allowed the depreciation in the accounts when we had no evidence of how the directors arrived at this depreciation rate and we did not see the accounts for part of the relevant period.

12.    Mr Moll’s second contention is that the deemed supply for personal use is a supply of transport of passengers which is zero-rated where this is between the UK and other EU member states and outside the scope of VAT where this is outside the EU.  Mr Rivett contends that it is a deemed supply for the purpose of charging tax which, not being an actual supply, cannot be zero-rated or outside the scope of VAT.  He relies on Seeling Case C-269/00 in which a building was constructed to be used partly for business and partly as a residence.  The taxpayer applied Lennartz and claimed to deduct the entire cost of the building as input tax.  German law treated the acquisition of the residential proportion as exempt.  The ECJ found that the Directive precluded German law from applying.  Input tax was deductible on the whole amount and the deemed supply of personal use was not exempt as it was not an actual letting since there was no rent and no right to occupy the building and exclude third parties from it.  We consider that the same principle applies here.  The purpose of treating personal use as a deemed supply of services, which under the Directive occurs only “where the VAT on such goods was wholly or partly deductible,” is to tax it so as to neutralise the deduction of input tax on the acquisition of the asset, otherwise a taxable person would obtain a benefit not available to a private consumer (see Wollny at [31] and [32]).  If an individual had acquired the asset for personal use he would not have been able to deduct any input tax.  Having deducted the part referable to personal use under Lennartz the deemed taxable supply effectively recovers the tax that was deducted on the acquisition.  The Sailaway Boat scheme relates to different factual circumstances in which the yacht must be kept outside the UK for 12 months after purchase, which Crackerjack was not.  Just as the deemed supply was not an actual letting in Seeling nor can the deemed supply in this case be an actual supply of transport of passengers.  The reason for deeming the personal use to be a supply of services is so as to bring into effect a charge to tax in order to neutralise the input tax deduction; there is no need to carry the deeming further.  A good analogy is found in Lord Walker’s judgment in HMRC v DCC Holdings (UK) Limited [2010] UKSC 58 at [40]:

“If a 40-something woman says to her teenage daughter, “If you were my age you would see things differently”, you could not be sure that the mother was referring to anything more specific than the experience or disillusionment that is supposed to come with the advance of middle age. Of course, if she added something like “Because then you would have lived through the miners’ strike” (or other words giving some real-life context) the hypothesis becomes more specific. But there would almost certainly be no contextual grounds for taking the mother’s hypothesis as implying that they would no longer be seeing things as mother and daughter (as they were hypothetically the same age) or alternatively that the mother herself must have been born a generation before her actual birth. Either implication would be taking the hypothesis further than was warranted.”

13.    Accordingly apart from the adjustment of two days’ business use on 29 June 2006 and 1 July 2006, we dismiss the appeal.  This seems to us to reduce the assessment by £1,011.92 but if the parties do not agree with this adjustment or consider that we have not covered all disputed periods we shall determine the figure on the basis of written representation made within 21 days of the date of release of this Decision.

14.    Mr Rivett asked for costs.  As these are “current proceedings” within para 7 of Sch 3 to the Transfer of Tribunal Functions and Revenue and Customs Order 2009, we direct that the rule 29 of the VAT Tribunals Rules 1986 shall apply and direct the Appellant to pay the costs of and incidental to the proceedings on the standard basis to be determined in default of agreement by a Tribunal Judge.

15.    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.

JOHN F AVERY JONES

TRIBUNAL JUDGE

RELEASE DATE: 25 February 2011