Howard Rowland Patrick And Jennifer Rosemary Patrick v Revenue & Customs [2011] UKFTT 865 (TC) (30 December 2011)
[2011] UKFTT 865 (TC)
TC01699
Appeal number: TC/2010/07656
VAT –
Bed & Breakfast business carried on by one Appellant who is also partner in
farm with other Appellant – Self-catering accommodation part of farm business –
Direction to treat both business as a single taxable person — VATA 1994 Sch 1
paras 1A, 2 – s 84(7) — Whether direction reasonably made — Yes—Appeal
dismissed
FIRST-TIER TRIBUNAL
TAX
HOWARD
ROWLAND PATRICK and
JENNIFER
ROSEMARY PATRICK Appellants
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL: JOHN BROOKS (TRIBUNAL JUDGE)
NORAH
CLARKE (MEMBER)
Sitting in public at Eastgate
House, Newport Road, Cardiff CF24 0YP on 7 December 2011
Francis Golden of Highmead VAT
Consultants for the Appellants
Gloria Orimoloye of HM Revenue
and Customs, for the Respondents
© CROWN COPYRIGHT
2011
DECISION
1. East
Hook Farm in Pembrokeshire is run as a partnership by Mr Howard Patrick with
his wife, Mrs Jennifer Patrick. The business, which is VAT registered, includes
the traditional farming activities of beef and sheep production as well as a
haulage operation and the provision of self-catering accommodation in an
outbuilding that has been converted into a holiday cottage.
2. In
addition to, and quite separate from, the farm partnership, Mrs Patrick operates
a Bed and Breakfast (“B&B”) business as a sole trader. The farmhouse is used
to accommodate B&B guests with two additional rooms, in the same building
as the self-catering cottage, used for those guests unable to use stairs or
requiring disabled access. As its turnover was below the then threshold (£61,000)
requiring registration this business was not registered for VAT.
3. Following
a visit to East Hook Farm, on 24 February 2009, by Mr Jeffrey Harrison, a
Higher Officer of HM Revenue and Customs (“HMRC”), and subsequent
correspondence Mr and Mrs Patrick received, by way of a letter from HMRC dated 22
January 2010, a Notice of Direction that the farm partnership (Mr and Mrs
Patrick) and Mrs Patrick’s B&B:
… will be treated as a single taxable person
carrying on the business activities of Farm, Haulage, Holiday Cottage and Bed
and Breakfast at East Hook Farm and registered for the purpose of VAT with
effect from 22 February 2010.
4. This
appeal by Mr and Mrs Patrick is against that direction.
5. The
statutory provisions which under which the direction was made are contained in
paragraphs 1A and 2(2) of schedule 1 of the Value Added Tax Act 1994 (“VATA”)
which, insofar as are relevant to this appeal, provide:
1A(1) Paragraph 2 below is for the purpose of
preventing the maintenance or creation of any artificial separation of business
activities carried on by two or more persons from resulting in an avoidance of
VAT.
(2) In determining for the purposes of
sub-paragraph (1) above whether any separation of business activities is
artificial, regard shall be had to the extent to which the different persons
carrying on those activities are closely bound to one another by financial,
economic and organisational links.
2(1) Without prejudice to paragraph 1 above, if
the Commissioners make a direction under this paragraph, the persons named in
the direction shall be treated as a single taxable person carrying on the
activities of a business described in the direction and that taxable person
shall be liable to be registered under this Schedule with effect from the date
of the direction or, if the direction so provides, from such later date as may
be specified therein.
(2) The Commissioners shall not make a direction
under this paragraph naming any person unless they are satisfied—
(a) that he is
making or has made taxable supplies; and
(b) that the
activities in the course of which he makes or made those taxable supplies form
only part of certain activities, the other activities being carried on
concurrently or previously (or both) by one or more other persons; and
(c) that, if all the
taxable supplies the business described in the direction were taken into
account, a person carrying on that business would at the time of the direction
be liable to be registered by virtue of paragraph 1 above;
6. It
is clear from the letter to Mr and Mrs Patrick, dated 3 December 2009, that
HMRC “accept that separate businesses [the farm partnership and B&B] exist
as a matter of fact. Also, it would appear to be common ground that the
conditions in paragraph 2(2) schedule 1 VATA apply. Therefore the issue between
the parties is whether the separation of the business activities, in particular
the self-catering holiday cottage and B&B, is artificial having regard to
whether the different persons carrying on those activities are closely bound to
one another by financial, economic and organisational links.
7. The
Tribunal’s jurisdiction in relation to an appeal against a direction is derived
from s 83(1)(u) VATA and is limited by s 84(7) VATA which provides:
Where there is an appeal against a decision to
make such a direction as is mentioned in section 83(1)(u), the tribunal shall
not allow the appeal unless it considers that HMRC could not reasonably have
been satisfied that there were grounds for making the direction.
The effect of s 84(7) VATA is that we can
only allow Mr and Mrs Patrick’s appeal if we consider that HMRC could not
reasonably have been satisfied that there were grounds for the decision to
issue the direction.
8. We
heard from Mr Jeffrey Harrison, the HMRC officer who visited East Hook Farm,
who explained that the decision to issue the direction had been made after
taking account of the following matters:
(1)
The bank accounts for the farm partnership and B&B are both joint
accounts in the name of H & J Patrick although the B&B account is “T/A
East Hook B&B”.
(2)
Putting the holiday cottage into the partnership keeps the B&B below
the VAT registration limit.
(3)
Although separate records are kept, the same bookkeeper is employed for
both businesses.
(4)
Money is sometimes transferred from the B&B bank account to the farm
account to ease cash flow and is then transferred back (Mr Harrison did however
accept when asked by the Tribunal that he would not necessarily expect to see
formal arrangements in place where, as in this case, the parties concerned were
husband and wife and that he had taken this into account when considering
whether a direction was appropriate).
(5)
The self-catering cottage and B&B were included on the same website
where they are presented as one business.
(6)
Although advertised in separate sections of the Farm Stay website
and brochure they appear to a potential customer to be part of the same
business.
(7)
The same building (a converted outbuilding) is used for both B&B and
self-catering.
(8)
There is a combined insurance policy in the names of both partners which
specifically mentions the B&B.
(9)
The farm/haulage business is loss making and would not be viable without
the holiday business.
(10)
The properties are all owned jointly by Mr and Mrs Patrick and there are
no charges for rent or for the use of fixtures and fittings by Mrs Patrick
(However, when giving evidence Mrs Patrick told us that she did pay rent to the
farm partnership for the use by the B&B of the two rooms which are in the
same outbuilding as the self-catering cottage).
(11)
The purchase of the farm and refurbishment of the farmhouse to make it
suitable for B&B was financed by mortgages in the joint names of Mr and Mrs
Patrick together with the proceeds of sale of their previous property.
(12)
Mrs Patrick deals with all the bookings for the B&B and
self-catering.
(13)
The same invoice book is used for the B&B and self-catering.
9. Mrs
Jennifer Patrick, who also gave evidence, explained that she and her husband
had sold their farm in Herefordshire to buy East Hook Farm in 1997. Their
reason for doing so was to move to Pembrokeshire, a tourist area, to enable her
to run her own B&B business while bringing up her two young children. She
had used her own money, cashing in ISAs etc., to ensure that the farmhouse was
brought to a suitable standard for her B&B guests. Following the foot and
mouth outbreak in 2001 she, and not the farm partnership, had received a grant
from the Welsh Tourist Board to further upgrade the property to its present
four star grading.
10. Mrs Patrick told
us that the self-catering cottage had been kept within the farm partnership as
it had been converted from a farm outbuilding at a cost to the farm.
11. She agreed that
she did handle the bookings for the cottage and the B&B which was a simple
process as most clients booked and paid in advance of their stay via the
website and because of this it was rare for a manual invoice to be issued.
However, she accepted that on occasions the same invoice book had been used for
both B&B and self-catering clients and explained that this would have been
for those who had not booked in advance.
12. At the time of
Mr Harrison’s visit to East Hook Farm there had been a single business website
which referred to both the B&B and holiday cottage. Mrs Patrick said that
there were now separate sites for the B&B and holiday cottage. She explained
that 80% of the bookings came through Farm Stay and that the B&B and
self-catering holiday cottages were advertised separately on the Farm Stay
website and in its brochure.
13. Mrs Patrick told
us that, other than the bookings, her only involvement with the holiday cottage
was to clean it once a week after the guests had departed and before the new
guests had arrived. Its maintenance was the responsibility of Mr Patrick and
this was often carried out by a farm employee.
14. Although the B&B
bank account had been in joint names at the time of Mr Harrison’s visit Mrs
Patrick told us that this was a mistake which had now been rectified and despite
Mr Patrick’s name being included on the account he had never been involved in the
operation of the B&B.
15. With regard to
the transfer of money from the B&B to the farm business Mrs Patrick
explained that this had occurred after her husband had suffered a stroke in
2006 and had been unable to manage the farm and haulage business profitably and
thought this was why Mr Harrison had considered that the farm and haulage business
was loss making and would not be viable without the holiday business. However,
Mr Patrick was now recovering and able to return to work and the business was
slowly getting back on its feet.
16. We were provided
with a copy of the 2010 Farm Stay Wales brochure. In the section headed
“How to use this Brochure” it is explained that the “entries in this brochure
are colour coded”. This refers to a coloured bar, above a photograph and
description of a property, in which the location, map reference and grading of
the property concerned are shown. A red bar identifies those businesses that are
Bed and Breakfast only and a blue bar signifies self-catering cottages. The
section continues, “a split colour bar indicates members advertising other
types of accommodation elsewhere in the guide.”
17. Although the
B&B and holiday cottage are shown separately in the brochure the colour bar
above the B&B is predominantly red with a blue section. This indicates “Bed
and Breakfast with separate Self-Catering Cottages entry”. The colour bar for
the self-catering cottage is predominantly blue with a red section signifying
that it is advertised by a member who has “Self-Catering Cottages with separate
Bed and Breakfast entry.”
18. We also note
from the “Farm Combined Policy Schedule” that the insurance policyholders are
Mr and Mrs Patrick. Under the heading “Business” the schedule refers to “Mixed
Farm, Bed and Breakfast Proprietor and Property Owner.”
19. Mr Golden, who
appeared on behalf of Mr and Mrs Patrick, explained that all expenses had been
apportioned and that there was not any artificial separation of the B&B and
Farm business, which included the self-catering cottages. He emphasised how Mrs
Patrick had financed the refurbishment of the farmhouse to make it suitable for
the B&B business and that funds were only transferred to the farm because
of Mr Patrick’s decline in health. He contended that, other than this, there
was no inter-connection between the B&B and the farm. Mr Golden also
explained the detrimental effect of the direction on the B&B business which
had seen a 43% decline in bookings and a fall in profit as a result of having
to charge VAT.
20. For HMRC, Mrs
Orimoloye contended that having regard to financial, economic and
organisational links closely binding the B&B and farm, particularly the
self-catering cottage, there was an artificial separation of business
activities which resulted in the avoidance of VAT. For this reason she
submitted that it was reasonable for HMRC to issue the direction that Mr and
Mrs Patrick be registered for VAT as a single taxable person with effect from
22 February 2010.
21. As we have
previously noted (in paragraph 7, above) the effect of s 84(7) VATA means that we
can only allow Mr and Mrs Patrick’s appeal if we consider that HMRC could not
reasonably have been satisfied that there were grounds for the decision to
issue the direction. It is not sufficient that we might ourselves have reached
a different conclusion.
22. In Lindsay v
Commissioners of Customs and Excise [2002] STC 508 Lord Phillips of Worth
Maltravers MR (as he then was) said, at [40]:
“the Commissioners
will not arrive reasonably at a decision if they take into account irrelevant
matters, or fail to take into account all relevant matters”
23. Having carefully
considered the evidence and submissions of the parties we find that in making
the direction HMRC have not taken into account irrelevant matters or failed to
take into account all relevant matters. As such we consider that HMRC could
reasonably have been satisfied that there were grounds for making the direction
and cannot allow the appeal (see s 84(7) VATA).
24. The appeal is
therefore dismissed.
25. 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 BROOKS
TRIBUNAL JUDGE
RELEASE DATE: 30 December 2011
