[2014] UKFTT 212 (TC)
TC03352
Appeal number: TC/2012/04242
VAT-input tax-input VAT on
purchase of power boat- whether boat intended for the purpose of a business of
obtaining catering contracts at Powerboat races.
FIRST-TIER TRIBUNAL
TAX CHAMBER
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LAI’S LIMITED
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE &
CUSTOMS
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Respondents
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TRIBUNAL:
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JUDGE CHARLES HELLIER
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CLAIRE HOWELL
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Sitting in public in Exeter on 7 October 2013
Roger Bibby instructed by
Bedford & Co, accountants for the appellant
Martin Priest for the
Respondents
© CROWN COPYRIGHT
2014
DECISION
Introduction.
1.
In the VAT quarter ending 30 June 2010 Lai’s limited purchased a
powerboat from an American builder. The total cost recorded in its fixed assets
register was £297,991, and it claimed input tax of £31,219.
2.
HMRC concluded that the boat had not been acquired for the purpose of a
business or an economic activity, and made an assessment to recover the input
tax credited (together with some smaller associated items). Lai’s Limited
appeals, contending that the purpose of the acquisition of the boat was to aid
or enable a business of providing catering facilities at international
powerboat racing events.
3.
A penalty assessment which had originally been part of the appeal was
withdrawn by HMRC before the hearing of the apoeal.
The relevant law.
4.
There was no dispute as to the relevant law. Articles 167 to 169 of the
principal VAT directive 2006/112 confer on a taxable person carrying on an economic
activity the right to deduct input tax on goods used for the purposes of the
taxed transactions of that person.
5.
In Belgium v Ghent Coal Terminal NV [1998] STC 260, the CJEU held
that the right of deduction was exercisable immediately in respect of goods
supplied for the purposes of use in connection with taxable transactions, and
that, once established that right was not lost if the intended taxable
transactions did not materialise by reason of circumstances beyond the
taxpayer's control.
6.
The provisions of the Directives are reflected in the UK domestic legislation. Section 26 VAT Act 1994 provides for the credit of input tax attributable
to taxable supplies made, or to be made, and to supplies made or to be made
outside the UK which would be taxable if made within the UK where those
supplies are made in the course or further at the taxpayer's business. Input
tax is defined by section 25 of that Act to be VAT on the supply to the
taxpayer of goods or services used or to be used for the purposes of any business
carried on to be carried on by him.
7.
In relation to the requirement that the purpose of taxpayer must be to
use the input in an economic activity both parties referred us to Ian
Flockton Developments v HMRC [1987] STC 394. Describing the test for deductibility,
Stuart Smith J said:
"The test is were the goods or services which were
supplied to the taxpayer used or to be used for the purposes of any business
carried on by him? The test is a subjective one: that is to say, the
fact-finding tribunal must look into the taxpayer's mind as it was at the
relevant time to discover his object. Where the taxpayer is a company, a
relevant mind or minds are those of the person or persons who control the
company or are entitled to and do act for the company.
"In a case such as this, where there is no obvious
and clear association between the taxpayer company's business and the
expenditure concerned, the tribunal should approach any assertion that it is
for the taxpayer's companies business with circumspection and care, and must
bear in mind that it is for the taxpayer company to establish its case and the
tribunal should not simply accept the word of the witness, however respectable.
It is both permissible and essential to test such evidence against the
standards and thinking of the ordinary businessman in the position of the
applicant. If they consider that no ordinary businessman would have incurred
such an expenditure for business purposes that may be grounds for rejecting the
company’s evidence, but they must not substitute that as the test. It is only a
guide or factor to take into account in considering the credibility of the
witness, and no doubt there will be many other factors which bear on that
question which the tribunal should well understand.
“The tribunal must look at all the circumstances of the
case and draw such inferences as they think fit. In the end it is a question of
fact for them whether they were satisfied on the balance of probability that
the object in the taxpayer's company’s mind at the time the expenditure was
incurred was that the goods and services in question were to be used for the
purposes of the business."
8.
And, in relation to the question of whether or not an activity was a
business or economic activity, we were referred by Mr Priest to the indicia in Lord
Fisher [1981] STC 238. The six indicia were these :-
(i) whether the activity is
a serious undertaking earnestly pursued;
(ii) whether the activity is
an occupation or function actively pursued with reasonable or recognisable continuity;
(iii) whether the activity
has a certain measure of substance as measured by the quarterly or annual value
of taxable supplies made;
(iv) whether the activity was
conducted in a regular manner on sound and recognised business principles;
(v) whether the activity is
predominantly concerned with the making of supplies to consumers for a
consideration; and
(vi) whether the taxable
supplies are of a kind which, subject to differences in detail, are commonly
made by those who seek to profit from them.
9.
But we note that the cases show that in determining whether there is a
business, private enjoyment may indicate that there may not be a business, and
in relation to an asset capable of private enjoyment there needs to be a
careful examination of all the circumstances.
10.
Deductibility is, in our view thus dependent on an assessment both (a)
of the subjective intention of the taxpayer – what did he intend to do with the
supply to him?- and (b) of the objective nature of the activity in which he
intended to use that supply – was that activity a business or an economic
activity?
11.
Finally we should note that HMRC did not argue that the powerboat was
"something in the nature of a luxury, amusement or entertainment"
within section 84(4)(c) of VAT Act. Section 84(4) purports to limit the
functions the tribunal in a case relating to input tax on such items to
consideration of whether HMRC's determination was a reasonable. In Myatt
& Leason VATD 13780 the tribunal cast doubt on a literal interpretation
of that section.
The evidence and our findings of Fact.
12.
We had before us a bundle of documents. We heard oral evidence from Mr
Lai, a director of Lai’s Limited, and also from Helena Walker, an officer of
HMRC. We find as follows.
13.
Mr Lai opened a Chinese restaurant in Exmouth in 1984. It was
successful. He opened further restaurants in the following years in half a
dozen other towns in Devon. These businesses, and the properties in which they
were conducted, were owned and operated by one of Lai’s Limited or a
partnership called the Bamboo Group, each of which were controlled by Mr Lai or
Amana Limited (which, in turn, was also controlled by Mr Lai). In the early
2000’s most of the restaurant businesses were sold and rental income from the
properties was received by one of the other firms. In 2009 the only restaurant
being run by the company was in Pinhoe. This was owned and run by Lai’s Limited.
14.
Mr Lai controlled each of the companies and made all the strategic
decisions. He told us, and we accept, that his mode of operation had been to
open and run Chinese restaurants and then to sell them. He investigated a
chosen area: looked at the area, the concentration of similar businesses, and
the price and availability of premises. If he thought he could open a
restaurant and then sell it for a good profit he would. He said, and we accept,
that he prepared no formal plans for these ventures. He had a good business
sense for how profitable a restaurant would be or become and whether the
business could eventually be sold at a profit.
15.
In about 2000 Mr Lai developed an interest in powerboat racing. The boat
bought a ‘rib’ boat (“Boat 1”) for about £10,000. We understood it was bought
by him personally. He did not see it its purchase as a business venture but as
for recreation. He entered into competitions, and between 2000 and 2004 did
well in them. He still owns this boat, and on occasion he uses it.
16.
In 2005 or 2006 a second powerboat (“Boat 2”) was bought. This was 32
feet long and was more expensive. It cost £35,000 or so. He bought it because
he needed a large boat to compete in the world championships (in which the rib
could not compete). He entered these championships and, in one year, finished
third. Between 2000 and 2006 he also obtained income from the boat: people paid
to steer it and he obtained sponsorship from Shepherd Neame Limited in 2007/2008.
However, Boat 2 sunk in 2009. Mr Lai arranged the sale of its hull for
something under £20,000.
17.
Whilst Boat 1 had been bought by Mr Lai personally, we believe that Boat
2 was bought by Ocean Dragons Racing Ltd, a subsidiary of Lai's Limited and
that Ocean Dragons Racing Limited earned the sponsorship and other monies which
arose in connection with its use. The activities of Ocean Racing Ltd were
transferred to Lai’s Limited in 2011.
18.
With Boat 2 Mr Lai entered the P1 World Cup Championship in 2006 and
later years. At the racing events he met a director and the CEO of Powerboat P1
Management Limited ("P1"). P1 had a contract with Union International
Motonautique (which was described as the powerboat sport's governing body)
under which it was licensed to organise world championship powerboat events in
various maritime cities around the world.
19.
The P1 championship events organised by P1 generally spread over a week.
At the beginning of the week the teams and their support staff would arrive,
and at the end of the week, and across the weekend, there would be several days
of different classes of races.
20.
After attending a number of these events Mr Lai came to the conclusion
that there was money to be made in providing the catering for them. He noticed
that it had not been done well at some of the events he had attended. He had
some considerable expertise in catering and would be able to organise catering
for the whole event. Food would be prepared and reheated in mobile kitchens.
Kitchen staff would come from the UK, and porters and waiters would be hired
locally. The greatest demand would be over the weekend racing days. He
indicated that the possible catering was divided between that which was
organised directly by P1 and outside catering. He concluded that if he obtained
the contract for the P1 catering he could break even over a week, but he hoped
to get the outside catering contracts – “his name would be there” - on which he
said he might make £30-£40,000 in a week. There were about six events a year so
it was a lucrative possibility.
21.
Mr Lai had a family and business contacts in Hong Kong. In 2009 he
became involved in P1's attempt to obtain the Hong Kong authorities' blessing
for an international motor boat race in Hong Kong. He was the only Chinese
powerboat racer who took part in the world championships. He attended various
meetings. He assisted in speaking to the Hong Kong tourist board. However the
attempt was unsuccessful: a letter from Martin Wicks of P1 indicates that there
was insufficient commercial support for the event with the result that the
attempt failed. The letter also says that it was likely that Mr Lai could have
obtained sponsorship income from his participation but makes no mention of
catering.
22.
In 2010 P1 told Mr Lai that since 2002 they had lost some £30 million in
their activities and had decided to move out of large powerboat racing events.
It appears that thereafter the organisation of those events ceased.
23.
In 2010 Mr Lai also became involved in an attempt by a company called
Global Assets to promote powerboat race racing in Asia between 2011 and 2015.
Boat 3 had on it the legend "Powerboat Asia Event 2011 -2015".
24.
Mr Lai told us that he could see that unless he was involved in, and
committed to powerboat racing in the P1 competitions he would not be able to
secure the catering contract from P1. He thought that he needed to race and to
do well in the racing to be taken seriously.
25.
He said that he then decided to buy Boat 3. This was 42ft long and
capable of offshore racing. It was ordered in 2009 from America. There were problems with the builders and the costs rose. Mr Bedford told us that he
thought that the finance had been provided as to £140,000 indirectly by Mr Lai,
and that £100,000 came from the Barclay's mortgage. It was not delivered until
2010. Although it was not in service in 2009 Mr Lai said that those at P1 knew
that it had been ordered and that he would participate in the events.
26.
Mr Lai told us that he bought Boat 3 in order to enable him to get the
contracts to provide catering facilities for P1 events: that is to say the P1
catering and the external catering. Getting the P1 catering would give him a
platform from which to build up outside catering for the events. P1 said that
they would help him to get to the outside catering contracts. He also intended
to get sponsorship.
27.
In 2010 Mr Lai used Boat 3 in the Torquay to Cowes race but obtained no
sponsorship or other income in connection with the event. In 2011 he took part
in the same event and Lai’s Ltd obtained £6,500 of income of which £500 was
income from a sponsor who sat on board and steered while Mr Lai controlled the
throttle, and £1000 related to meals arranged by Mr Lai for guests.
28.
Since 2011 Boat 3 has not been used. It stands on Mr Lai's drive, and he
has been attempting to arrange its sale.
The parties’ arguments.
29.
Mr Priest submits:
(1)
That Mr Lai had a personal interest in power boats and power boat
racing. It had been a private leisure interest. A degree of scepticism should
thus be applied in assessing whether Mr Lai’s subjective intention was to use
the boat for the purposes of a catering business;
(2)
No P1 catering materialised. The indicia in Fisher suggested that
there was not a business activity in which the boat was to be used.
30.
Mr Bibby submits:
(1)
The question is the true motive for the acquisition of Boat 3;
(2)
The intention of the appellant is that of Mr Lai;
(3)
Mr Lai’s evidence was believable and clear, namely that he intended to
use the boat to obtain the catering work. Mr Lai also had an eye to making
money from sponsorship and contacts with the media and other powerboat event
organisers such as Global Assets;
(4)
Catering was Mr Lai’s expertise – his business. He acted in the same
manner as any other business imbued with entrepreneurial spirit. The
acquisition of the boat was a measured speculative decision in pursuit of and
in the course of an economic activity.
Discussion.
31.
Mr Lai’s oral evidence and Mr Bibby’s submissions presented a picture
which was quite different from that which we had obtained from our initial reading
of the papers. Mr Lai appeared to us to be a successful businessman who knew
how to make money. We accepted that he controlled Lai’s Limited and made all
strategic decisions. We accept that he saw no need to prepare formal business
plans for his ventures and that he had the commercial acumen to spot a venture
which was likely to be profitable.
32.
We were also persuaded that he would have been able, and that he knew he
would have been able, to deliver catering to the racing events on the requisite
scale, and that it was likely that if he was able to obtain the rights to all
the catering he would have made a good profit.
33.
It was also clear to us that on its own the provision of catering at P1
world championship events would have been a business or an economic activity:
it would have been a serious undertaking earnestly pursued, a venture entered
into for profit on a commercial basis, making supplies of a taxable nature.
34.
Further we were persuaded that before Mr Lai bought Boat 3 he had
identified the possibility of obtaining the catering work and that, in his
discussions with P1, he raised the possibility of obtaining it. We note however
that he had not been awarded any such contract by 2009 or 2010.
35.
It was clear to us from Mr Lai’s evidence that the purpose of acquiring
Boat 3 was not to obtain sponsorship. Not only did he not say so to us
(although he indicated that he intended to seek sponsorship), but the amount of
sponsorship income which had been earned in relation to Boat 2, even if
multiplied severalfold, would not have made the purchase of Boat 3 a commercial
venture. The amounts would not even have been icing on the cake. Thus the
company's case depends only upon whether Boat 3 was acquired for the purpose of
the P1 racing event catering contracts as a business activity.
36.
We have said that we accept that Mr Lai identified that owning and
racing a large powerboat might assist him in getting the catering contracts,
but we do not accept that this was his principle intention for the acquisition
of the boat. That is for the following reasons.
37.
First, although we accept that Mr Lai had in mind the possibility that
acquiring Boat 3 might help with obtaining the catering contract, the
realisation of that possibility could not in our view have been his sole
purpose in the acquisition. Mr Lai was an astute businessman. He would have
known a dicey proposition when he saw one, and would have been able to
distinguish it from a real business venture. This was a dicey proposition. He
must have had in mind the real possibility - the real likelihood - that he
would not obtain the outside catering contracts
38.
Therefore, because the commercial benefit was remote, in order to spend
such an amount on the boat he must have had in mind the other benefits which
came from acquiring Boat 3. He was aware of those benefits from his experiences
with Boat 2: participating in offshore racing and becoming further involved in
the world of P1, all of which he had started to do before ordering Boat 3.
39.
We are not persuaded that the fact that the boat has been mothballed
since P1 pulled out of Powerboat events indicates that its intended use was
only to get the catering contracts. There are no longer P1 championship events
in which to compete, and without the lure of competition, the use of the boat
may be less attractive – as the difficulties with its sale suggest.
40.
Second Mr Lai agreed with Mr Priest that none of the other powerboat
racers were catering contractors. It seems unlikely that Mr Lai would have
thought that owning and racing a boat of the right size was key to wining those
contracts if none of the existing contractors had pursued that route. And Boat
2 had already brought Mr Lai into contact with the important people at P1 from
2006 onwards. Had it been clear that having a Boat was the only way to get the
contracts it would have been more likely that Mr Lai’s principle intention
could have been to use it for that purpose.
41.
Further, in our judgement, even if Mr Lai’s sole purpose in acquiring
Boat 3 had been to use it to obtain the catering contracts, that would not have
been an intention to use it for a business. That is for the following reasons.
42.
First, we were not convinced that Mr Lai seriously pursued the catering
contracts. It was clear that he had provided real assistance to those
attempting to organise a Hong Kong powerboat event. We accept that if that
event occurred there would have been a prospect that he would obtain the P1
catering contracts and would have some chance of obtaining the outside
contracts (although it was not shown that they were in the gift of P1) . But
there was no evidence, other than that of his expressed hope, that he pursued
the award of those contracts. The serious pursuit of that business would surely
have involved more direct approaches and perhaps formal responses, and also
some further investigation of the requirements for the external contracts. But
there was no evidence of that either before or after 2009. And despite his
contact with P1 from 2006 onwards no mention of catering was made by Martin
Wicks in his letter (see [21]).
43.
Second, in determining whether there is a business the activities to be
examined must include the cost of the input on which deduction is sought. Thus
it must include the acquisition, and the cost of acquisition, of Boat 3. But we
were not persuaded that the activity which encompassed both the acquisition of
the powerboat and the hope of obtaining the outside catering contracts was a
commercial venture – that is to say something conducted on sound and recognised
business principles. For such a venture to be profitable in net profits from
the catering activity would have had to have covered the original costs of Boat
3 (some £250,000) and its running and travel costs. Mr Lai thought he could
break even on the P1 catering and make a profit if he obtained the outside
catering contracts. But he recognised that the prospect of outside catering
contracts was a "hope" rather than a degree of expectation. Buying a
lottery ticket is not in our view a business venture, even though it may be
defensible and turn out to be profitable; there may come a stage when a mere
hope of profit broadens into a real possibility of success, and the activity in
pursuit of that possibility becomes a commercial venture, but we were not
persuaded that Mr Lai had any more than a hope of success.
44.
Third, we do not view the proposed catering activity as a simple
extension of the appellant’s existing business. Mr Lai had organised dinner
parties abroad and was an expert manager of restaurant cooking, but that is different
from the provision at overseas venues of food for large numbers from mobile
dispensaries. We could not therefore regard the acquisition of the Boat as
being for the purpose of the existing business.
45.
The distinction between this appeal and that of Ghent Coal
illustrates these reasons. In that case land was bought to extend a port
installation, surveys were carried out, high voltage cables were installed and
the land was levelled. Then the municipal authorities compulsorily acquired the
land, ending the venture. In Ghent Coal the new installation was
earnestly pursued as part of an existing business. In this appeal there appears
to have been little pursuit of the contracts and merely a hope of their being
awarded.
46.
In Ghent Coal the Advocate General referred to INZO, a
case which concerned a company set up to exploit processes for turning sea
water into drinking water. The company had investors, borrowings, a bureau, and
land for a desalination plant. It conducted a profitability study from 1976 for
several years. As a result of problems thrown up by that study some investors
withdrew and the venture was liquidated. The ECJ held it was entitled to
reclaim the input VAT on its expenditure. In INZO the company was
engaged in a speculative venture, but it pursued it in a serious organised
manner; and the fact that external investors were willing to invest suggests
that the chance of success was more than a hope.
47.
We therefore conclude (a) that the acquisition of the boat with the hope
of acquiring the external catering contracts was not a business or an economic
activity; and (b) that Lai’s Ltd’s intention in acquiring Boat 3 was not shown
to be in order to make taxable supplies as part of an economic venture.
Conclusion
48.
We dismiss the appeal.
49.
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.
CHARLES HELLIER
TRIBUNAL JUDGE
RELEASE DATE: 19 February 2014
