United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2007] UKVAT V20032

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Paul Rhys Davies & Heather Kim Davies ((t/a Lymington Power Boat Charter v Revenue & Customs [2007] UKVAT V20032 (28 February 2007)

20032

VAT – power boat charterers, - whether purchase and charter of boats an economic activity within Article 4 of Sixth Directive (77/388/EEC), whether Appellants carrying on business – on facts no – appeal dismissed, assessment upheld.

LONDON TRIBUNAL CENTRE

PAUL RHYS DAVIES AND HEATHER KIM DAVIES
TRADING AS LYMINGTON POWER BOAT CHARTER

and

THE COMMISSIONERS OF HER MAJESTY'S
REVENUE AND CUSTOMS

Appellants

Respondents

Tribunal: RODNEY P HUGGINS FCIArb (Chairman)

ROY JENNINGS FCA FTII

Sitting in London on 17 November 2006 and 25 January 2007

Mrs Sylvia Davis, VAT Consultant, for the Appellants

Miss Anna Markham, Counsel. for the Respondents

© CROWN COPYRIGHT 2007

DECISION

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The appeal
1. Mr Paul Rhys Davies ("Mr Davies") and his wife Mrs Heather Kim Alexandra Davies ("Mrs Davies") collectively called "the Appellants" appeal against an assessment of the Commissioners for her Majesty's Revenue and Customs ("Customs") made on 26 October 2005. for the sum of £213,334 in respect of the recovery of value added tax paid by the Commissioners in response to previous claims made by the Appellants for the period from 1 August 2002 to 20 April 2005. The assessment also included a charge for acquisition tax of £45,500 not declared in respect of the importation of a motor vessel. The assessment arose as a result of a decision of the Commissioners, originally notified to the Appellants on 21 March 2005, that they were not satisfied that there had been a business or economic activity conducted by the Appellants under the name of Lymington Power Boat Charter such as to entitle them to be regarded as taxable persons.

The legislation
2. The scope of value added tax is determined by section 4(1) of the Value Added Tax Act 1994 ("the 1994 Act") which states "VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him".

3. A taxable person, is defined in section 3 of the 1994 Act as follows : "A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act".

4. The requirement to be registered for value added tax is provided by paragraph 1(1) of Schedule 1 to the 1994 Act as follows :

" … a person who makes taxable supplies but is not registered under
this Act becomes liable to be registered under this schedule (a) at the
end of any month [where the value of supplies exceeds the relevant
threshold] .."

5. The entitlement to be registered for value added tax is provided in paragraph 9 of Schedule 1 to the 1994 Act as follows : "Where a person who is not liable to be registered under this Act and is not already registered satisfies the Commissioners that he (a) makes taxable supplies or (b) is carrying on a business and intends to make such supplies in the course of furtherance of that business, they shall, if he so requests, register him …"

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6. In respect of the requirement or the entitlement to be registered, paragraph 19 of the same schedule 1 defines "supplies" as supplies that are "made in the course or furtherance of a business".

7. In section 94 of the 1994 Act "business" is defined as "any trade, profession or vocation".

8. The relevant European legislation is contained within the Sixth Council Directive (77/388/EEC) ("the Sixth Directive") Article 4 defines a taxable person as follows :

4(1) "Taxable person" shall mean any person who independently carries
out in any place any economic activity specified in paragraph 2, whatever
the purpose or results of that activity.

4(2) The economic activities referred to in paragraph 1 shall comprise all
activities of producers, traders and persons supplying services including
mining and agricultural activities and activities of the professions. The
exploitation of tangible or intangible property for the purpose of obtaining
income therefrom on a continuing basis shall be considered an economic
activity.

4(3) Member States may also treat as a taxable person anyone who
carries out, on an occasional basis, a transaction relating to the activities
referred to in paragraph 2 …"

The issues
9. The fundamental issue for determination in the appeal was whether Lymington Power Boat Charter ("LPBC") ever existed as a viable business carrying on an economic activity such as to entitle the Appellants to be regarded as taxable persons.

10. In the event of the tribunal findings that the hiring of vessels owned by LPBC did constitute a business, then is it appropriate for another assessment to be calculated on the basis of a comparison between personal and business usage as declared by the Appellants. Customs issued an alternative protective assessment in this connection simultaneously with their main assessment.

The evidence
11. Oral evidence for the Appellants was given by Mr Davies, Mr Andrew
Frederick Beadle ("Mr Beadle") a boatbroker and Mr Martin Scott Musgrove ("Mr Musgrove") a yacht master.

12. Customs called Mrs Roma Ann Whiteley (Mrs Whitely) a senior assurance officer of the Wales Tax Avoidance Team

13. Two joint bundles of documents were produced by both parties.

The facts
14. From the evidence before us we find the following facts.

The background
15. Mr Davies is a full-time spinal orthopaedic surgeon living in Penarth, Wales, married to Mrs Davies and they have four children ranging from 8 years to 15 years. They had been interested in small boats for some time and, at the beginning of 2000, formed the idea of acquiring a large power boat and letting it out for chartering (as well as having a boat available for family use). The intention was for Mrs Davies to have an interest outside her family responsibilities and to organise the chartering of a speed boat from their home.

16. They carried out research into their idea and came to realise that, in order to maximise chartering, the boat would have to be moored somewhere adjacent to the Solent. Advice was sought from various people including Mr Beadle and Mr Musgrove and their Accountants at the time Deloitte & Touche LLP of Cardiff ("Deloittes").

17. Although they had no previous experience in chartering boats, relying upon Mr Beadle's expertise, Mr and Mrs Davies, after visiting a Boat Show, approached their bankers with details of what income they expected to receive from chartering and the outgoings in such an enterprise. The Bank agreed to lend them a sufficient sum to complete the purchase of their first power boat.

18. Mr Beadle at the time was employed as a new boatbroker by Express Cruisers Limited of Lymington and he arranged for the Appellants to purchase their first speed cruiser which was a "Windy 37" from Berthan International.

The Appellants entered into a contract to buy the new boat in or about April 2000. It was on the drawing board at that time in the boat builders yard in Norway and built during the second half of the year 2000.

19. On 5 May 2000 Mr Beadle wrote to Mr and Mrs Davies giving details of their purchase which was being delayed. He said :

" …Looking on the positive side, you will be taking delivery of the boat
at the start of the season, saving the berthing fees etc for the winter and
your boat will probably be a 2001 specification boat. Couple this with
a reasonably successful chartering campaign, there should be an
income towards the running costs quite quickly …"

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Mr Beadle told the Appellants they could expect to get business in the range of 12 days per season and, if aggressive in advertising, 25 days per year.

20. When it was delivered, a mooring for the new boat was obtained through Express Cruises Limited at Lymington Marina.

21. After taking advice from their Accountant ( Mr Lucey) about the tax implications regarding any profits and losses of the prepared venture including the VAT aspect, it was decided to operate the enterprise as a partnership. No formal partnership deed was entered into. The Appellants informed Mr Lucey that in their opinion the proposal was a good business venture. He also discussed with them the possibility of setting up a limited company. As a result a company known as Lymington Power Boat Charter Limited was incorporated on 20 November 2000 in order to protect the name of the partnership of the Appellants. It was intended eventually that the business of the partnership would be transferred into this company. Because the business never succeeded, this did not occur and the company remained dormant. In error, Mrs Davies used the company's name in letter headings and invoices, but it never traded.

22. The purchase of the first boat was completed on 1 January 2001. The cost was £163,510 with an additional £28,614.25 value added tax charged by the suppliers Berthan International.

23. At the same time, the Appellants applied to be registered for value added tax as a boat chartering business and were allocated the number 762 5571 16 with effect from 1 January 2001. They indicated in the application form that they would make taxable supplies of £70,000 in the first 12 months of trading

24. In 2001 the Appellants obtained the services of Mr Musgrove of Southwest Yachting. He was retained under a verbal agreement to be the skipper of their boats and also the Charter Manager. His responsibilities were to market the vessels through his company, guardage on a weekly basis and commercially skipper the boats when charters took place. Mr and Mrs Davies only had minimal tuition in the running and handling of their boats. They were not qualified either to look after the boats or skipper them on charters.

25. Mr Musgrove arranged for the first boat to be commercially coded which was necessary before it could be used for chartering. Every vessel to be used in chartering has to be brought up to a standard which satisfies the Code of

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Practice for small commercial motor vessels set down by the Maritime and Coastguard Agency. There are various categories of the code. For example, category 2 enables a vessel to be operated up to a distance of 60 miles from a safe haven.

26. Codification entailed extensive work and modifications being carried out to any boat to be used for chartering. After codification, all boats have to be kept up to the required standard in order for chartering to take place.

27. The Appellants' cruiser was the first speed boat Mr Musgrove managed. He later added three others belonging to other people. He also had six sail boats for chartering under his management.

28. Mr Musgrove advertised Talulah on his firm's website and also advertised through a network of his corporate contacts. He offered the Appellants a marketing opportunity although it was a new venture for him. His monthly guardage fee was £250.

Charter activity and new boats
29. Although Mr and Mrs Davies had been led to believe by Mr Beadle initially that they could expect fourteen to twenty charters every season this did not materialise. There was no demand for charters. In 2002, the first boat was only chartered for two days for a total gross income of £1,500.

30. On the advice of their financial advisers, it was decided to purchase another larger speed boat in 2002 and this again was a new Windy boat but a "43". The net cost was £311,425,53, The transaction included the part exchange of the first vessel at an agreed value of £165,000. The Bank of Scotland found the whole of the final balance of £181,644,98. It was thought a larger boat would attract more charters.

31. During the 2002 summer season when the second boat (called Talulah 2) was latterly available, charters were arranged on both boats but only amounted to three charter days for a total of some £6,000. The second boat was out of commission for a short period when it was being fitted out in the codification process.

32. Unfortunately, the summer of 2003 was even more disastrous as only one charter was obtained for the sum of £750.

33. It was decided to obtain an even bigger boat to accommodate up to 12 people. On 10 June 2004, the Appellants purchased an "Atlantic 50" which

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15 cost £625,000 from Holland Boat Atlantic B.V. of the Netherlands. As the boat was imported from Holland the Appellants accounted for the acquisition value added tax of £109,375 and recovered that tax as input tax in period 07/04. As part of that transaction the "Windy 43" known as Tallulah Too was accepted in part exchange for £260,000.

34. Mr Musgrove asked Rea Associates Limited who were yacht surveyors to examine the third boat (named Talulah III) in order to highlight the work and modification necessary to satisfy the Code of Practice. It was discovered that this boat had many defects including a serious hole in the hull which had leaked when the boat had been brought across from Holland.

35. There were no charters arranged in 2004

36. Because of the state of Talulah III on 22 April 2005 the Appellants negotiated to re-acquire the Windy 43 boat known as Tallulah Too. This was achieved by another part-exchange transaction whereby the Atlantic 50 was sold back to the Dutch suppliers for £500,000 and the Windy 43 re-purchased for £260,000.

37. From diary records of Mr and Mrs Davies it was established that in the years 2003, 2004 and 2005 they personally used the boats on some 93 days. There was only one day's charter during this period revealed by documentary evidence to Customs. No records existed for the personal use of the boat in 2001 and 2003 and the information about charter hire during those periods was ascertained from personal knowledge of the Appellants.

38. Eventually the Windy 43 was sold to a purchaser from Jersey in April 2006. No value added tax was payable on the transaction. The sale was not

5 10 15 20 25 30 35 40	The appeal 1. Mr Paul Rhys Davies ("Mr Davies") and his wife Mrs Heather Kim Alexandra Davies ("Mrs Davies") collectively called "the Appellants" appeal against an assessment of the Commissioners for her Majesty's Revenue and Customs ("Customs") made on 26 October 2005. for the sum of £213,334 in respect of the recovery of value added tax paid by the Commissioners in response to previous claims made by the Appellants for the period from 1 August 2002 to 20 April 2005. The assessment also included a charge for acquisition tax of £45,500 not declared in respect of the importation of a motor vessel. The assessment arose as a result of a decision of the Commissioners, originally notified to the Appellants on 21 March 2005, that they were not satisfied that there had been a business or economic activity conducted by the Appellants under the name of Lymington Power Boat Charter such as to entitle them to be regarded as taxable persons. The legislation 2. The scope of value added tax is determined by section 4(1) of the Value Added Tax Act 1994 ("the 1994 Act") which states "VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him". 3. A taxable person, is defined in section 3 of the 1994 Act as follows : "A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act". 4. The requirement to be registered for value added tax is provided by paragraph 1(1) of Schedule 1 to the 1994 Act as follows : " … a person who makes taxable supplies but is not registered under this Act becomes liable to be registered under this schedule (a) at the end of any month [where the value of supplies exceeds the relevant threshold] .." 5. The entitlement to be registered for value added tax is provided in paragraph 9 of Schedule 1 to the 1994 Act as follows : "Where a person who is not liable to be registered under this Act and is not already registered satisfies the Commissioners that he (a) makes taxable supplies or (b) is carrying on a business and intends to make such supplies in the course of furtherance of that business, they shall, if he so requests, register him …"
5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40	6. In respect of the requirement or the entitlement to be registered, paragraph 19 of the same schedule 1 defines "supplies" as supplies that are "made in the course or furtherance of a business". 7. In section 94 of the 1994 Act "business" is defined as "any trade, profession or vocation". 8. The relevant European legislation is contained within the Sixth Council Directive (77/388/EEC) ("the Sixth Directive") Article 4 defines a taxable person as follows : 4(1) "Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity. 4(2) The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall be considered an economic activity. 4(3) Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2 …" The issues 9. The fundamental issue for determination in the appeal was whether Lymington Power Boat Charter ("LPBC") ever existed as a viable business carrying on an economic activity such as to entitle the Appellants to be regarded as taxable persons. 10. In the event of the tribunal findings that the hiring of vessels owned by LPBC did constitute a business, then is it appropriate for another assessment to be calculated on the basis of a comparison between personal and business usage as declared by the Appellants. Customs issued an alternative protective assessment in this connection simultaneously with their main assessment. The evidence 11. Oral evidence for the Appellants was given by Mr Davies, Mr Andrew Frederick Beadle ("Mr Beadle") a boatbroker and Mr Martin Scott Musgrove ("Mr Musgrove") a yacht master. 12. Customs called Mrs Roma Ann Whiteley (Mrs Whitely) a senior assurance officer of the Wales Tax Avoidance Team 13. Two joint bundles of documents were produced by both parties. The facts 14. From the evidence before us we find the following facts. The background 15. Mr Davies is a full-time spinal orthopaedic surgeon living in Penarth, Wales, married to Mrs Davies and they have four children ranging from 8 years to 15 years. They had been interested in small boats for some time and, at the beginning of 2000, formed the idea of acquiring a large power boat and letting it out for chartering (as well as having a boat available for family use). The intention was for Mrs Davies to have an interest outside her family responsibilities and to organise the chartering of a speed boat from their home. 16. They carried out research into their idea and came to realise that, in order to maximise chartering, the boat would have to be moored somewhere adjacent to the Solent. Advice was sought from various people including Mr Beadle and Mr Musgrove and their Accountants at the time Deloitte & Touche LLP of Cardiff ("Deloittes"). 17. Although they had no previous experience in chartering boats, relying upon Mr Beadle's expertise, Mr and Mrs Davies, after visiting a Boat Show, approached their bankers with details of what income they expected to receive from chartering and the outgoings in such an enterprise. The Bank agreed to lend them a sufficient sum to complete the purchase of their first power boat. 18. Mr Beadle at the time was employed as a new boatbroker by Express Cruisers Limited of Lymington and he arranged for the Appellants to purchase their first speed cruiser which was a "Windy 37" from Berthan International. The Appellants entered into a contract to buy the new boat in or about April 2000. It was on the drawing board at that time in the boat builders yard in Norway and built during the second half of the year 2000. 19. On 5 May 2000 Mr Beadle wrote to Mr and Mrs Davies giving details of their purchase which was being delayed. He said : " …Looking on the positive side, you will be taking delivery of the boat at the start of the season, saving the berthing fees etc for the winter and your boat will probably be a 2001 specification boat. Couple this with a reasonably successful chartering campaign, there should be an income towards the running costs quite quickly …"
5 10 15 20 25 30 35 40 45	Mr Beadle told the Appellants they could expect to get business in the range of 12 days per season and, if aggressive in advertising, 25 days per year. 20. When it was delivered, a mooring for the new boat was obtained through Express Cruises Limited at Lymington Marina. 21. After taking advice from their Accountant ( Mr Lucey) about the tax implications regarding any profits and losses of the prepared venture including the VAT aspect, it was decided to operate the enterprise as a partnership. No formal partnership deed was entered into. The Appellants informed Mr Lucey that in their opinion the proposal was a good business venture. He also discussed with them the possibility of setting up a limited company. As a result a company known as Lymington Power Boat Charter Limited was incorporated on 20 November 2000 in order to protect the name of the partnership of the Appellants. It was intended eventually that the business of the partnership would be transferred into this company. Because the business never succeeded, this did not occur and the company remained dormant. In error, Mrs Davies used the company's name in letter headings and invoices, but it never traded. 22. The purchase of the first boat was completed on 1 January 2001. The cost was £163,510 with an additional £28,614.25 value added tax charged by the suppliers Berthan International. 23. At the same time, the Appellants applied to be registered for value added tax as a boat chartering business and were allocated the number 762 5571 16 with effect from 1 January 2001. They indicated in the application form that they would make taxable supplies of £70,000 in the first 12 months of trading 24. In 2001 the Appellants obtained the services of Mr Musgrove of Southwest Yachting. He was retained under a verbal agreement to be the skipper of their boats and also the Charter Manager. His responsibilities were to market the vessels through his company, guardage on a weekly basis and commercially skipper the boats when charters took place. Mr and Mrs Davies only had minimal tuition in the running and handling of their boats. They were not qualified either to look after the boats or skipper them on charters. 25. Mr Musgrove arranged for the first boat to be commercially coded which was necessary before it could be used for chartering. Every vessel to be used in chartering has to be brought up to a standard which satisfies the Code of
5 10 15 20 25 30 35 40	Practice for small commercial motor vessels set down by the Maritime and Coastguard Agency. There are various categories of the code. For example, category 2 enables a vessel to be operated up to a distance of 60 miles from a safe haven. 26. Codification entailed extensive work and modifications being carried out to any boat to be used for chartering. After codification, all boats have to be kept up to the required standard in order for chartering to take place. 27. The Appellants' cruiser was the first speed boat Mr Musgrove managed. He later added three others belonging to other people. He also had six sail boats for chartering under his management. 28. Mr Musgrove advertised Talulah on his firm's website and also advertised through a network of his corporate contacts. He offered the Appellants a marketing opportunity although it was a new venture for him. His monthly guardage fee was £250. Charter activity and new boats 29. Although Mr and Mrs Davies had been led to believe by Mr Beadle initially that they could expect fourteen to twenty charters every season this did not materialise. There was no demand for charters. In 2002, the first boat was only chartered for two days for a total gross income of £1,500. 30. On the advice of their financial advisers, it was decided to purchase another larger speed boat in 2002 and this again was a new Windy boat but a "43". The net cost was £311,425,53, The transaction included the part exchange of the first vessel at an agreed value of £165,000. The Bank of Scotland found the whole of the final balance of £181,644,98. It was thought a larger boat would attract more charters. 31. During the 2002 summer season when the second boat (called Talulah 2) was latterly available, charters were arranged on both boats but only amounted to three charter days for a total of some £6,000. The second boat was out of commission for a short period when it was being fitted out in the codification process. 32. Unfortunately, the summer of 2003 was even more disastrous as only one charter was obtained for the sum of £750. 33. It was decided to obtain an even bigger boat to accommodate up to 12 people. On 10 June 2004, the Appellants purchased an "Atlantic 50" which
5 10 15 20 25 30 35 40 5 10 15	cost £625,000 from Holland Boat Atlantic B.V. of the Netherlands. As the boat was imported from Holland the Appellants accounted for the acquisition value added tax of £109,375 and recovered that tax as input tax in period 07/04. As part of that transaction the "Windy 43" known as Tallulah Too was accepted in part exchange for £260,000. 34. Mr Musgrove asked Rea Associates Limited who were yacht surveyors to examine the third boat (named Talulah III) in order to highlight the work and modification necessary to satisfy the Code of Practice. It was discovered that this boat had many defects including a serious hole in the hull which had leaked when the boat had been brought across from Holland. 35. There were no charters arranged in 2004 36. Because of the state of Talulah III on 22 April 2005 the Appellants negotiated to re-acquire the Windy 43 boat known as Tallulah Too. This was achieved by another part-exchange transaction whereby the Atlantic 50 was sold back to the Dutch suppliers for £500,000 and the Windy 43 re-purchased for £260,000. 37. From diary records of Mr and Mrs Davies it was established that in the years 2003, 2004 and 2005 they personally used the boats on some 93 days. There was only one day's charter during this period revealed by documentary evidence to Customs. No records existed for the personal use of the boat in 2001 and 2003 and the information about charter hire during those periods was ascertained from personal knowledge of the Appellants. 38. Eventually the Windy 43 was sold to a purchaser from Jersey in April 2006. No value added tax was payable on the transaction. The sale was not