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City Centre Commercials Ltd v Revenue & Customs [2007] UKVAT V20166 (22 May 2007)

20166

INPUT TAX — purchase of yacht by company dealing in waste disposal — was the purchase for a business purpose — on facts no — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

CITY CENTRE COMMERCIALS LIMITED Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Lady Mitting

Gilian Pratt

Sitting in public in Manchester on Tuesday, 3 April 2007

Nigel Gibbon, for the Appellant

Jonathan Cannan, general counsel and solicitor to Her Majesty's Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

The Appellant appeals against an assessment to tax in the sum of £85,818 plus interest of £11,941.95 and dated 8 August 2004. The assessment was raised to recover input tax claimed on the purchase of a yacht in the period ended 04/02 to which the Commissioners decided the Appellant was not entitled as in their view the yacht had not been purchased for business use.

We heard oral evidence on behalf of the Appellant from Mr Ian Monroe, who at the time of the purchase was managing director, and as described by himself, the owner of the Appellant company. He has since retired and currently acts as unpaid advisor to the company. The Commissioners called no oral evidence but put in an unchallenged witness statement from the assessing officer, Mr Christopher Turton.

The Legislation

Section 24(1) Value Added Tax Act 1994 gives entitlement to input tax credit for input tax on goods "used or to be used for the purpose of any business carried on or to be carried on" by the trader.

The question of whether there is a "business" is the same test as whether there is an "economic activity" referred to in Article 4 of the Sixth Council Directive (77/388/EEC) ("the Sixth Directive"). The relevant paragraphs of Article 4 read 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 the 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".

The Issues Before The Tribunal

Mr Cannan summarised, with the agreement of Mr Gibbon, that the following were the issues before us:

1. Does the business of the Appellant include that of yacht chartering;

2. Was the yacht that was purchased used in the Appellant's business;

Did the Appellant intend at the time of purchase that the yacht would be used for business purposes;

If the Appellant did intend at the time of purchase that the yacht would be used for the purposes of the Appellant's business, was it used or intended to be used wholly for the purposes of the business or for other purposes;

If the yacht was used or intended to be used for other purposes, what is the appropriate proportion of input tax that should be disallowed as referable to those other purposes.

The Evidence

Mr Turton carried out an assurance visit to the Appellant on 5 and 6 June 2003. In the course of the visit, he noted that the Appellant had purchased a yacht, the "Sean Louis" in April 2002 and had recovered the associated VAT as input tax to the value of £85,818 on its return for the period ended 30 April 2002. Mr Turton saw the Appellant's bookkeeper Mr Herbert and explained that he would need to see evidence of the intention to use the yacht for business purposes, such as the insurance certificate, otherwise he would have to disallow the claim. This request was backed up by letter dated 9 June 2003 but despite several reminders, both to the Appellant and to its accountants, no evidence was received. On 2 August 2004, Mr Turton therefore wrote to the Appellant advising that as it had not provided any evidence of business use or intention to use for business purposes, the input tax must be disallowed and the assessment under appeal was subsequently raised. In a telephone call of 16 August 2004, Mr Turton ascertained from the Inland Revenue that the Appellant's accountant had confirmed to them that the yacht was not purchased for business purposes.

Over the ensuing months, the Commissioners entered into correspondence with the Priory Partnership, the Appellant's accountants. In the course of the correspondence, the Priory Partnership confirmed that the company's boat division was trading and in fact the agreement with the Inland Revenue had been that a capital allowance claim would be allowed on the boat once it was trading (this letter dated 8 November 2004). By letter dated 20 December 2004, the Priory Partnership provided certain documentation. They supplied evidence that the Appellant advertised the boat for charter in "Motorboat and Yachting Magazine" in June, July, August and September 2004. A copy insurance cover note running for 12 months from 2 August 2004 was also supplied. This covernote displayed the following amendment "amended to include occasional Bareboat charter (not exceeding two months per annum)". A letter from Weightmans, solicitors, dated 21 September 2004 was enclosed. This letter referred to a charter running from 4 August to 19 August 2004 to some clients of Weightmans who were claiming that the boat was not seaworthy and cataloguing a long list of defects. Associated with this was a copy fax from Mike Allan Yachts dated 28 November 2004 reading "I thought it appropriate to write and confirm that indeed during the period of downtime due to the gearbox repair, Ian did in fact lose a number of already booked charters".

In September 2005, further documents were supplied, the most important of which were the annual accounts for the years ended 30 September 2002, 2003 and 2004, the assets register as at 30 September 2002 and a Directors' Minute dated 22 January 2002 and a copy of a charter invoice made out to SMB Accident Repair Group Limited dated 22 July 2004 and in the sum of £4,000. We will refer to the annual accounts later on when dealing with Mr Munroe's evidence. The asset register showed the sale of one yacht in April 2002 and the purchase of the current yacht in May 2002 for the sum of £490,390. The letter of 26 September also confirmed that the Commissioners had allowed the input tax on the purchase of the first yacht and output tax was accounted for on its sale. The Directors Minute was in the following terms:

"Present: Mr Ian Munro – Chairman

Mrs Pat Beckett – Secretary

Purpose of the meeting: To discuss the purchase of a replacement charter boat.

Mr Munro reported that the present 4-berth charter boat owned by the company and moored in southern Spain had failed to attract the charter business for which it had been acquired. From enquiries he had made it seemed there was more demand for 6+ berth boats and agents advised that it had been difficult to find charter customers for smaller boats. As a result it was unlikely there would be a return for the company on this investment and it was agreed the boat should be sold.

However, it remained the view of the Directors that the boat charter business still represented a good opportunity to generate additional profits for the company. Agents were confident that a bigger boat would have greater charter potential and provide a profitable return for the company.

With these assurances it was agreed that the company should invest in a bigger boat and that Mr Munro be authorised to act on behalf of the company to make appropriate arrangements in this respect."

On 24 March 2006, VAT Solutions UK Limited, instructed by the Appellant, wrote at length to the Commissioners. In their letter, they explained that the Appellant had initially purchased a four berth boat for charter that was moored in southern Spain. The boat had been used in a boat charter business and input tax had been reclaimed on its purchase and output tax accounted for on charters. This boat had been named the "Sean Louis". In the remainder of this decision, we refer to the first boat as the "Sean Louis I" and the replacement boat as the Sean Louis II". The demand for charter was not as much as had been anticipated so the company took advice on how better to generate income from the charter business. Being advised that a six berth boat would be more economically viable, the Board decided to purchase the Sean Louis II as a replacement for the Sean Louis I and as part of an existing boat charter arm of the company. The boat was due for delivery in February 2002 but due to various delays in manufacture, shipping and switching the names at the Ship's Registry, it was not shipped to Gibraltar until August. The letter went on to explain that during 2002 Mr Monroe took semi-retirement from the company in order to run the boat charter business from Spain. The boat was always insured for charter hire, initially with a skipper supplied and had generated about £20,000 of income on which output tax had been accounted for. The 2002 season was totally missed and charters did not start until 2003. The boat was advertised locally in Spain but the season was quiet so in 2004 it was advertised nationally in the United Kingdom and the insurance cover was changed to allow Bareboat charter. The charter that was the subject of the litigation was the first charter of 2004 and due to the extensive damage to the boat, no further charters took place during 2004.

Enclosed with this letter was further insurance documentation. This included a quotation for the Sean Louis II, dated 15 March 2002, the quote was for £3,750.00 and amongst the additional terms was "including skippered charter use – warranted owner / owners skipper on board and in command at all times". The policy itself which ran from 2 May 2002 to 1 May 2003 did not include the additional wording and on the face of it did not cover the chartering of the boat.

Further correspondence from VAT Solutions, in answer to queries raised by the Commissioners, explained that a full list of charters was not available as the supply of those services took place in Spain and were subject to Spanish legislation, not that of the UK. The letter also confirmed that the Appellant had not obtained detailed costings for the charter business, such costings being rare in a small and speculative business such as this.

In his oral evidence, Mr Monroe told us that he had started the Appellant company in 1984 and until his retirement he was managing director and owner. The principal business of the company was that of waste disposal and he confirmed that the boat was not used in any way for waste disposal. He told us he had always been interested in boating and the sea and having been advised there was a market for chartering boats, the company purchased a four berth boat, the Sean Louis I, in May 2000. The company undertook several charters skippered by Mr Monroe, who had by then got his skipper's licence. However, it was found that the four berth boat was too small and impractical. It had no accommodation for the skipper and he therefore had to travel back to port at the end of each day. The decision was thus taken by the Board (witness by the Board Minute) to purchase a six berth boat, the Sean Louis II. The boat was shipped to Spain where additional work was done on it, including the fitting of further accommodation for the skipper. The boat missed the 2002 season completely. In 2003, the boat was advertised as available for skippered charter, by way of a poster in the Marina office and although there were charters, there were not as many as Mr Monroe would have liked and it was therefore decided that in 2004, the yacht would be advertised as available for chartering in the UK Yachting press. Although the correspondence from the Priory Partnership (and indeed this was also contained in a witness statement from Mr Monroe), said that the August 2004 charter to SMB was the first of the season, in his oral evidence, Mr Monroe was adamant that there had been earlier charters that season, although he did not know how many. The boat, he told us, had always been insured for skippered charter but not Bareboat as there had been no intention to allow it out without Mr Monroe on board. However, further advice was to the effect that Bareboat charter would generate more business and consequently, in 2004, an amendment was made to the cover to allow this.

Charters were arranged either direct with the Appellant company in England, in which case invoicing was dealt with direct between the Appellant and the customer or they could be arranged through Mr Monroe in Spain. Mr Monroe owned a couple of property companies in Spain and he used the availability of the boat for charter to generate income for his lettings and indeed vice versa. The Spanish charters would be invoiced by Mr Monroe to the charterer through his property company and the charterer therefore paid the property company. Mr Monroe would then send copies of these invoices back to the Appellant who would take the income from the charters by way of contra, i.e. deduction from monies which they owed Mr Monroe for routine maintenance and repair work which he had carried out and paid for initially himself. Mr Monroe had no idea how, if at all, the Appellant dealt with the Spanish charters in its accounts or for VAT. It was, he told us, an internal matter.

In cross-examination, Mr Monroe said the two boats were purchased purely for the business. He had no intention of using them for his own benefit and had no need to as his enjoyment came from skippering. They were both purchased on finance, with the company putting down a 20 per cent deposit. Both boats were purchased from Princess Yachts who took the Sean Louis I back at its purchase price. The company had no business plan for either purchase, other than in Mr Monroe's head. He did not know in monetary terms how much he expected to make from chartering although he had hoped it would be "as much as possible". He did not have any figure in mind as representing a minimum income or even a break even. The cost to the customer of chartering would be between £200 and £1000 per day, depending on the number of people and the time of year. He had no tariff but would get what he could. He told us that there was no charter income in 2000; about £20,000 or £40,000 in 2001; none in 2002; he had no idea about 2003 but it was quiet and in 2004 there were several charters before the doomed SMB charter. The latter was invoiced for £9,143. He did not know what the earlier ones realised. There were no charters in 2004 after the SMB.

Asked about the running costs of the Sean Louis II, Mr Monroe initially said he had no idea but when pressed, he thought about £10,000 per year. The finance was at seven per cent, costing therefore about £28,000 per year on the £400,000 loan. Depreciation was put at £25,000 giving an overall cost to the company of running the boat of £63,000 per year. In fact, Mr Monroe thought that the depreciation would not be so great as boats tended to hold their value. He viewed the company's activities as a whole, it was an immensely profitable business but he did not know whether the boat arm in particular was or was not profitable.

When answering questions about the Appellant's income from the boat chartering, Mr Monroe repeatedly referred us to the accounts. When Mr Turton had visited in 2003, he had told Mr Herbert that the boat income had to be separately shown in the accounts. In the 2004 accounts there was an item for boat income, under the heading "Other Operating Income". The figure for 2004 was £9,143 and gave, for the same item in 2003, the figure of £10,000. In the 2002 and 2003 accounts, there was no boat income shown but there was in the same section an item of "sundry income" of which for 2003 the figure of £10,000 was given. We assume therefore that this is one and the same and that is what is described as sundry income in 2002 and 2003 is in fact the boat income. If this is the case, the accounts show an income of £8,936 in 2001 and £5,532 in 2002. The only other point we should make in relation to boat income is that Mr Monroe described the chartering season as running from June to October so the vast majority of one season's income would fall within the accounts for that year, the accounting period running to September 30^th. The accounts also show the boat displayed in the balance sheet as one of the fixed assets.

Case Law

We were referred by the parties to the following cases:

1/S Fini H v Skatteministeriet (2005) STC 903

Ian Flockton Developments Limited v Commissioners of Customs and Excise [1987] STC 394

Trevor Brian Vaux Stockdale trading as Compass Charters v Commissioners of Customs and Excise (18757)

PR and HK Davies trading as Lymington Power Boat Charter v Commissioners of Customs and Excise (20032)

Commissioners of Customs and Excise v St Paul's Community Project Limited (2004) EWHC 2490 (Ch)

Commissioners of Customs and Excise v Morrison's Academy Boarding Houses Association [1978] STC 1

Commissioners of Customs and Excise v Lord Fisher [1981] STC 238

Approach to be taken by the Tribunal

The burden of proof is on the Appellant and he has to satisfy us that the goods purchased were brought in to use in the business at the time of purchase or that there was an intention to bring them into use for the purposes of the business. The test was set out by Stuart-Smith J in Ian Flockton in the following terms:

"The test is were the goods or services which were supplied to the taxpayer used or to be used for the purpose 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, the 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 company's business with circumspection and care, and must bear in mind that it is for the taxpayer company to establish its case 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."

In Morrison's Academy, the Lord President stated:

"In my opinion it will never be possible or desirable to define exhaustively 'business' within the meaning of section 2(2)(b) [of the Finance Act 1972]. What one must do is to discover what are the activities of the taxable person in the course of which taxable supplies are made. If these activities are, as in this case, predominantly concerned with the making of taxable supplies to consumers for a consideration, it seems to me to require no straining of the language of section 2(2)(b) of the 1972 Act to enable one to conclude that the taxable person is in the 'business' of making taxable supplies, and that the taxable supplies which he makes are supplies made in the course of carrying on that business …"

In Lord Fisher, Gibson J states in relation to this:

"I am moreover confident that Lord Cameron [the Lord President] did not intend to say that in all cases the absence of the purpose of gain is irrelevant to the issue whether the potential taxpayer is carrying on a business …. The primary meaning of all these words, 'business, trade, profession and vocation', is an occupation by which a person earns a living. It is clear that all ordinary businesses, trades, professions and vocations can be carried with differences from this standard and norm in regularity or seriousness of application, in the pursuit or disregard of profit or earnings, and in the use or neglect of ordinary commercial principles of organisation. As the decision in the Morrison's Academy case has shown, the absence of one common attribute of ordinary businesses, trades, professions or vocations, such as pursuit of profit or earnings, does not necessarily mean that the activity is not a business or trade etc if in other respects the activity is plainly a 'business'".