United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2004] UKVAT V18719

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R F Bailey T/A Llancillo Hall Farm v Customs and Excise [2004] UKVAT V18719 (05 August 2004)

Value added tax – whether tax paid by Appellant is "input tax" – whether goods or services supplied to Appellant were used or to be used for the purpose of any business carried on by the Appellant – s 24(1) VATA 1994 – farming business – possible diversification to include commercial game shoot – attendance at another shoot by way of research – whether VAT on shoot fees recoverable as input tax – Appellant's objectives in attending shoots - appeal allowed in relation to VAT on initial shoot fees but not later shoot fees

LONDON TRIBUNAL CENTRE

R F BAILEY trading as LLANCILLO HALL FARM Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Mr A E SADLER (Chairman)

Mrs E R ADAMS FCA ATII

Sitting in public in London 2 July 2004

The Appellant in person

Mr Hugh McKay of Counsel, instructed by the Solicitor for Customs and Excise for the Respondents

DECISION

Summary of issues and decision

Mr R F Bailey, trading as Llancillo Hall Farm ("the Appellant") appeals against a decision of the Commissioners dated 19 March 2003 refusing to allow the Appellant to claim credit as input tax certain VAT incurred on the supply to him of services by a game shoot. In consequence of that decision the Commissioners have, by a Notice of Assessment dated 28 March 2003, assessed the Appellant for VAT in the sum of £2,886 together with interest of £188.08. The VAT assessed relates as to £770 to the VAT quarter 05/01 and as to £2,116 to the VAT quarter 05/02.

In summary, the Appellant claims that he attended a game shoot on a number of occasions as part of the research he was conducting as to possible ways of diversifying his farming business, so that the services supplied to him by the owners of the shooting rights were services which were used or were to be used for the purpose of a business carried on by him (that is, his farming business as diversified by providing a shoot). On that basis he argues that the VAT charged to him on the supply of those services was correctly claimed as input tax which he is entitled to credit against the output tax charged by him on the supplies he made in the course of his business. The Commissioners argue that the services in question cannot be regarded as services used or to be used for the purposes of the Appellant's business or prospective business since in all the circumstances the attendances of the Appellant at the shoot were in pursuit of his leisure activities rather than in the course of his existing or prospective business activities.

It is our decision that the Appellant's appeal should be allowed in part, namely in relation to the services supplied to him in the VAT quarter 05/01 only, and that the assessment, including the interest, should be reduced accordingly. On the evidence before us, and the inferences we draw from that evidence, we conclude that the Appellant attended the game shoot in question by way of research for the purposes of his business in the shooting season of 2000/01, but subsequent attendances in the following season of 2001/02 were not in connection with his then or prospective business, so that the services supplied to him on those subsequent occasions were not services used or to be used for the purposes of any business carried on or to be carried on by him. In consequence the VAT charged to him on the supply of the services in the season 2000/01 was input tax for the purposes of the relevant provision of the VAT legislation, namely section 24(1) Value Added Tax Act 1994 ("VATA"), but the VAT charged to him on the supply of the services in the season 2001/02 was not input tax for such purposes.

Findings of fact

We heard evidence from the Appellant at the hearing. No evidence was adduced by the Commissioners. In the correspondence prior to the hearing the Appellant had made comments point by point on the Statement of Case prepared by the Commissioners, and to the extent that the Appellant expressed his agreement with matters set out in the Statement of Case we have taken those as matters agreed between the parties. From the matters so agreed and from the Appellant's evidence we find the facts as set out in the following paragraphs.

The Appellant carries on business as a farmer at Llancillo Hall Farm on the borders of Herefordshire and Wales. He has carried on this business since 1994, and the principal business activity is breeding Hereford cattle. The farm is of approximately 190 acres.

The Appellant had a career in the City as a Lloyds Underwriter and for a while continued this career in tandem with his farming business. At the time of his first attendances at the shoot which gave rise to the disputed VAT in this appeal (that is, in the shooting season 2000/01) the Appellant was still engaged in his City activities, but by the time of his subsequent attendances at that shoot (the season 2001/02) he was engaged full-time in farming.

Although the Appellant has always endeavoured to run the farming business on a profit-making basis, the Appellant has found it very difficult to make a profit. His business has been adversely affected by the BSE crisis, the foot and mouth epidemic and the general economic downturn in agriculture. His earnings from his City career subsidised the losses incurred in his farming business, but he saw the need to diversify his business in an attempt to run it at a profit.

From 1995 to 1999 the Appellant operated a pheasant shoot over his farm. It was on a modest scale, releasing 300 – 350 birds each season. The Appellant marketed the shoot outside his neighbourhood in the hope of attracting American customers, but with limited success. There were certain problems with the topography of the land and the covers provided for the birds which meant that it was difficult to get the birds up to shooting height. The costs of acquiring, rearing and feeding the birds in itself (approximately £3,000 without taking into account labour costs) significantly exceeded the modest income of approximately £1,500 from the shoot – it was a small-time operation which failed.

In the pheasant shooting season 2000/01 the Appellant attended, on two occasions, a shoot in Kent known as the Owley Shoot. On these occasions (as well as on the subsequent visits in the 2001/02 season referred to below) he attended as a full paying member of a shooting syndicate which enjoyed the shooting rights for the relevant days which the syndicate had "purchased". It is the Appellant's case that he attended this shoot on these occasions for the purpose of researching the way in which a large, commercially successful, shoot operates, to see if he could operate a shoot on his farm and over neighbouring land in a similarly commercially successful way.

The Owley Shoot extends over 4,000 acres and each season releases 75,000 birds, which are bred from eggs which the shoot incubates (rather than from bought-in poults). It is a large operation, employing a number of gamekeepers and, on shoot days, about 50 beaters, including beaters with retrieving dogs. "Guns" are transported around the estate on shoot days in two special vehicles, and they are supplied with food for the day, accessories such as ear defenders, and cartridges. The charges made are based on the number of birds shot, in the range of £20 - £30 per bird plus VAT. About 500 birds are shot on each day's shoot.

In the pheasant shooting season of 2001/02 the Appellant attended shoots on six occasions at the Owley Shoot. Again, it is his case that he made these visits by way of research.

The Appellant was aware from his previous attempts to establish a commercial shoot that his own farm was not large enough to sustain a commercial shoot. Prior to visiting the Owley Shoot in 2000/01 he had some discussions with neighbouring landowners to see if he could arrange in some form shooting rights over a more substantial area. However, by the time he had completed his visits to Owley in 2001/02 the Appellant concluded that he could not establish on a profitable basis a commercial shoot, even with shooting rights over substantial additional land. Based on his knowledge of local shoots, the Appellant was of the view that in his locality – distant from London and the South-East - a shoot would be unable to charge more than £16 per bird. No further action was taken to pursue the project.

Apart from visiting the Owley Shoot and using those visits to observe and question keepers and others (including other shoot members, to learn what they required of a shoot), the Appellant took no significant action by way of research into commercial shoots except for reading "trade" journals, and drawing on his own experience from his previous attempts to set up a shoot. In his experience commercial shoots were very reticent – even secretive – about their activities, so he considered that it was unlikely that they would respond to questions or enquiries, and hence in his view the only way to find out how they operated was to attend a shoot. The Appellant had prepared no business plan before abandoning the idea of setting up a commercial shoot.

The Appellant pursues shooting as a leisure activity. He has his own guns, a trained retriever dog, and shooting equipment. In each of the 2000/01 and the 2001/02 seasons he attended at least fifteen shoots by way of leisure activity, and he has made no claim to recover the input tax charged to him in relation to his attendance at those shoots. Those shoots were run as a commercial venture, but were significantly smaller than the Owley Shoot.

The applicable statutory provisions

The relevant statutory provisions are shortly stated. Section 24(1) VATA provides, so far as relevant to this appeal, as follows:-

(1) Subject to the following provisions of this section, "input tax", in relation to a taxable person, means the following tax, that is to say –

(a) VAT on the supply to him of any goods or services;

(b) …

(c) …; and

being … goods and services used or to be used for the purpose of any business carried on or to be carried on by him.

Section 25(2) VATA provides that the taxpayer "…is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him."

Section 26 VATA provides, so far as relevant, as follows:-

(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business –

(a) taxable supplies;

(b) …;

(c) ….

It is common ground that the Appellant is a taxable person. It is also common ground that services were supplied to him when he went shooting at the Owley Shoot and that VAT was charged on that supply. The Appellant has to show that those services so supplied were used or to be used for the purposes of the business carried on by him or of a business to be carried on by him, so that the VAT charged is, in relation to him, "input tax" – that is the point in contention between the Appellant and the Commissioners. If the Appellant succeeds on that point it appears to be common ground that he should be entitled to credit for that input tax on the basis that it is attributable to taxable supplies made or to be made by him in the course or furtherance of his business.

Before turning to the arguments put forward by the parties it is helpful to refer briefly to the case of Ian Flockton Developments Ltd v Commissioners of Customs & Excise [1987] STC 394, since that directs us as to how section 24 VATA should be applied. This well-known authority (one of the many cases dealing with the purchase and running of a racehorse to promote the taxpayer's business) holds that we must apply a subjective test in determining whether, for the purposes of section 24 VATA, goods or services supplied to a taxpayer were used or to be used for the purpose of any business carried on or to be carried on by him. The relevant question is whether, at the time the expenditure was incurred, the object in the mind of the taxpayer was that the goods or services in question were to be used for the purposes of his business.

The Appellant's case

The Appellant, appearing in person, put his case clearly and succinctly. He explained the need to diversify his farming business in order to seek to make it profitable. He explained his failed attempt to establish a shoot over his farm and the need to find out how a large commercially-run shoot operated to see if that presented a viable business model for his circumstances. He realised from his failed venture that he could not run a shoot simply over his own farm, so he took preliminary steps to see whether he could organise shooting rights over neighbouring land. From his own experience (both the failed venture and his "leisure" shooting) he had some depth of knowledge, but he considered that the only way to find out how a successful commercial shoot operated was to attend as a paying "gun", to observe and question both those running the shoot and those who attended as customers. In this particular type of venture, where there was concern about "animal rights" activists, direct and detailed information was not readily available, so that the most effective research was by way of direct participation and the opportunities which that opened up. He had used his visits to the Owley Shoot over two seasons to carry out his research and had then concluded, as a result of that research, that he could not run a shoot over his land (even with shooting rights over neighbouring land) on a commercially viable basis.

The Appellant acknowledged that shooting was a leisure pursuit of his, but pointed out that over the periods relating to the present appeal he had distinguished between the shoots he had attended for his pleasure (where he had not claimed the VAT charged to him) and those he had attended by way of research for his business (where he was claiming the VAT as input tax).

The Commissioners' case

Mr McKay's case for the Commissioners was equally clear and succinct. He argued that the expenditure of the Appellant in attending the Owley Shoot over two seasons was personal expenditure and therefore the VAT paid in respect of the relevant supplies was not "input tax" within section 24 VATA since it was not VAT on supplies of services used or to be used for the purpose of the Appellant's business or of a business to be carried on by him.

In drawing our attention to the Ian Flockton Developments Ltd case Mr McKay accepted that the test to be applied is whether the taxpayer has it in his mind at the time that the expenditure was incurred that the services were to be used of the purposes of his business, so that it is a subjective, rather than an objective, test: it is the taxpayer's purpose which is determinative of the point. However, in seeking to ascertain the taxpayer's true purpose, the tribunal must assess carefully the credibility of the evidence put forward by the taxpayer, and should not necessarily accept it at face value. He referred specifically to the following passage in the decision in the Ian Flockton Developments Ltd case [1987] STC 394 at p 400:

"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 company's 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 business man in the position of the applicant. If they consider that no ordinary business man would have incurred such an expenditure for business purposes that may be grounds for rejecting the taxpayer company's evidence, but they must not substitute that as the test. It is only a guide or factor to take into account when 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 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."

In Mr McKay's submission, the Appellant's case that he attended the Owley Shoot for the purposes of his business lacked credibility. He pointed out a number of features which showed a significant disparity between the shoot which the Appellant might hope to run on his own land and the commercially viable shoot run by the Owley Shoot. These included the area of the shoot, the location of the shoot, the number of birds, the overall size of the business, the distinction between birds reared from eggs and those reared from bought-in poults, and the different scale of staffing. He also pointed out that there was no evidence from the Appellant of any costing of a shoot over his land, or of any kind of business plan, nor was there any evidence of a serious attempt to see how the earlier failed shooting activity might be upgraded into a commercially viable activity. The Appellant attended shoots for his own pleasure, and he urged us to draw the inference from all the circumstances that the Appellant's eight visits to the Owley Shoot over the 2000/01 and 2001/02 shooting seasons were more credibly made for that purpose, so that the VAT charged to him did not comprise input tax for the purposes of section 24 VATA.

The decision

In reaching our decision we think it is necessary to distinguish between the two VAT accounting periods covered by the assessment under appeal. The VAT claimed in the first period relates to the initial two visits made by the Appellant to the Owley Shoot in the 2000/01 shooting season. The VAT claimed in the second period relates to the further six visits he made in the 2001/02 season.

In applying section 24 VATA to the VAT claimed in the first period, and having regard to the subjective test – the object in the taxpayer's mind when the expenditure was incurred – as set out in the Ian Flockton Developments Ltd case, we are satisfied on the balance of probability that the Appellant attended the Owley Shoot, and incurred the consequent expenditure, with the object in mind that the services supplied by that Shoot were to be used for the purposes of his farming business as he hoped to diversify that business.

We accept the Appellant's evidence that he intended to diversify his farming business by establishing a commercially viable shoot, and we accept that he needed to carry out research into the way in which a successful shoot operated, and that one effective way of carrying out that research was to visit a shoot as a paying "gun", as a means of access to a range of information which we accept may not have been readily available through other means. It is true, as Mr McKay pointed out, that there were significant disparities in scale between the Owley Shoot and the shoot which the Appellant might hope to establish, although most of the more significant disparities would be reduced or eliminated if the Appellant had been able to organise a shoot that extended over neighbours' land. We accept that he actively considered organising a shoot on that basis, and took some preliminary steps to discuss the point with land-owning neighbours, since his previous venture had shown that his own farm alone could not sustain a shoot on a commercial basis.

Further, in assessing the Appellant's evidence and in seeking to ascertain his objectives in making those two visits to the Owley Shoot, we note that he distinguished at the time between those shoots (the majority in number) he attended that season for his leisure purposes and those (the Owley Shoot) he attended as he claims for research. As he explained in reply to the tribunal's questioning, the shoots he attended for leisure were smaller than the Owley Shoot, and with the benefit of hindsight might have provided a more directly comparable business model for the shoot he had in mind to establish, but he had heard of the commercial success of the Owley Shoot, and wanted to learn how it achieved that success. He claimed the VAT, therefore, on the Owley Shoot fees alone.

Whilst it might be argued that the Appellant could have used other means of researching a commercial shoot, or could have demonstrated his intentions by drawing up business plans or whatever, we have to look at his objectives in the light of the action he chose to take in the circumstances of the case as we see them. The Appellant established to our satisfaction a credible case in support of his claim that he had a business purpose in attending the Owley Shoot in the 2000/01 season. We should add that the fact that the Appellant subsequently decided not to establish a shoot – in part, no doubt, making that decision as a result of what he observed and learnt at the Owley Shoot – does not in any way retrospectively affect or invalidate his objectives at the relevant time, namely at the time the goods or services were supplied to him. Nor does it mean that, at the time they were supplied, the goods or services in question cannot be said to be used for the purpose of his farming business as he then hoped to diversify that business.

We take a different view, however, in relation to the VAT claimed in relation to the further six visits he made to the Owley Shoot in the following season – the VAT claimed on the fees for those visits comprises £2,116 of the total amount under appeal. Our concern here is that the Appellant offered no explanation as to why his research required visits in the subsequent season, or why a further six visits were required by way of research. He said that his other work activities constrained the number of shoots he could attend in the 2000/01 season (although he was still able that season to attend 15 or thereabouts shoots for "leisure" purposes), and that one or two visits were not sufficient to enable him to obtain a real "feel" for the workings of the Owley Shoot. But he offered no evidence as to the additional information gathered in the further six visits, or of any appraisal or assessment he made following the 2000/01 season visits which might have provided a basis whereby he could have evaluated the need for the visits in the following season to complete his research. Whilst we can accept, in relation to the initial visits, the Appellant's general case that his visits were genuinely by way of research for a commercial shoot he aimed to establish, that case is inherently less credible for subsequent visits (and subsequent visits, moreover, made a year later) unless it is supported by evidence justifying the need for those subsequent visits, and no such evidence was put before us by the Appellant. Therefore, the Appellant has not established to our satisfaction, on the balance of probabilities, that at the time of attending the Owley Shoot in the 2001/02 season his objective was that the services supplied to him by the shoot were to be used for the purposes of his business.

It does not seem to us that this finding as to the subsequent visits in any sense impugns the Appellant's objectives as we have found them to be in relation to the 2000/01 visits: it is clear from the Ian Flockton Developments Ltd case that the taxpayer's objectives have to be judged at the time the expenditure was incurred on the goods and services in question, and in this particular case a year, or thereabouts, separates the expenditure on the first visits from that on the subsequent visits. Nor need it concern us that there is no action, statement or other evidence before us that points to an identifiable change of intent on the Appellant's part between the initial and the subsequent visits. We are dealing here with the credibility of the Appellant's case in the light of all the circumstances. For the reasons given that case is credible in relation to the initial visits. Without further evidence in support (which was not provided to us) the case ceases to be credible in relation to the six subsequent visits made the following season.

The Appellant's appeal is therefore allowed in relation to the VAT claimed of £770 for the VAT quarter 05/01 but is dismissed in relation to the VAT claimed of £2,116 for the VAT quarter 05/02. An appropriate adjustment should be made to the amount of interest assessed.

Costs

We make no order as to costs. Mr McKay applied for the Commissioners' costs, limited to £500, in the event of us finding in their favour. His reasons were as follows: in the correspondence prior to the hearing between the Appellant and the Commissioners the Appellant had made suggestions that the Commissioners may have been motivated by discrimination and bias in pursuing the case. The Commissioners wished to refute any such allegations and to that end had brought to the hearing officers who were prepared to testify that there had been no such motivation on the part of those investigating the Appellant's affairs. At the outset of the hearing Mr McKay invited the Appellant to withdraw the relevant remarks made in the correspondence, which the Appellant agreed to do. Nevertheless, the Commissioners had incurred the costs of bringing the officers to the hearing, and they wished to recover those costs.

It seems to us that the Commissioners could well have invited the Appellant to withdraw the relevant remarks in advance of the hearing, and so saved themselves the costs they incurred in relation to the attendance of the officers at the hearing. They knew that the Appellant was unrepresented, and had they explained the situation to him in advance, and indicated the possible costs implications to him if he wished to pursue the point at the hearing (or if he persisted with the point only to withdraw it at the hearing), then the Appellant could have made an informed decision in the knowledge of the likely consequences as to costs. The fact that at the hearing the Appellant agreed to withdraw his remarks without any hesitation indicates to us that he was not seeking to make any point of principle, so that, properly informed, it is likely that he would have withdrawn his remarks before the hearing had the matter been put to him. In these circumstances we do not consider it appropriate to make any award of costs in favour of the Commissioners.

A E SADLER

CHAIRMAN

RELEASED: 05/08/2004

LON/2003/0527