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Dorset Yacht Co Ltd v Revenue & Customs [2007] UKVAT V20463 (20 November 2007)

20463

Customs and Excise - Customs Classification of various imported unsinkable boats - Whether the boats were seaworthy - Appeal Dismissed

LONDON TRIBUNAL CENTRE

DORSET YACHT CO LIMITED Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: HOWARD M. NOWLAN (Chairman)

MOHAMMAD M. HOSSAIN

Sitting in public in London on 10 September 2007

Mr. R. Culpan, Managing Director of Dorset Yacht Co. Limited, on behalf of the Appellant

Andrew O'Connor, counsel, on behalf of the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction

This was an unfortunate and sad case in which the Appellant was being assessed for a sum approaching £50,000 for having imported 52 consignments of boats manufactured in the USA, known as "Boston whalers" in the last three years (roughly 120 boats of various sizes) without paying duty. No duty was paid because the Appellant believed (clearly honestly) that the boats were categorised as "seagoing", whereupon he understood that no duty was chargeable. These boats had been imported for approximately 30 years without challenge. We reluctantly decide that the boats, albeit clearly seagoing, were declared by the Combined Nomenclature itself, not to fall in "seagoing" classes because they were not of 12 metres or more in length. Seagoing boats of less than 12 metres could only be classified within one of the seagoing classes if they were either professional fishing boats or lifeboats within various definitions, and we reluctantly concluded that these boats would rarely be classified as lifeboats, and probably never as professional fishing boats. Accordingly duty at the rate of 1.75% becomes due in respect of all the importations in the previous 3 years.

There were several reasons why we were sad and reluctant to reach the conclusions that we have done. The Appellant's mistake was plainly an honest one, somewhat occasioned by the obtuse drafting of the Combined Nomenclature. Had the Appellant realised that 1.75% duty was due in respect of the very superior boats that sold at a premium on account of their unique characteristics, we were convinced that no customers would have been lost on account of a resultant small price rise, whereas we were told that the Appellant company might become insolvent when now faced with the substantial bill for back duty, which it alone will have to bear. Whilst we accept that the following points were of no technical relevance, we do also sympathise with the Appellant because Customs officers themselves appeared to classify the boats wrongly as "sailboats with auxiliary motors", when only 1 of 23 classes of boat imported had sails or any facility to install sails, and other boats were classified as "motor boats, not being outboard motor boats", when approximately half of the boats had outboards and virtually every picture of the boats that we were shown illustrated a boat with an outboard motor. Perhaps more significantly still we were shown a Binding Tariff Instruction ("BTI") issued by the Customs officials in the Republic of Ireland that classified less seaworthy boats, all of less than 12 metres, as seagoing, and thus free of duty, without it seems any regard being paid to whether these boats were rightly regarded as lifeboats or professional fishing boats. We hope that these considerations may enable the Customs officers in the present case to do everything within their powers to reduce the burden on the Appellant company that will result from the fact that we have no power to do anything other than to confirm the classification of the boats into one or other class that carries duty at 1.75%.

The description of the boats imported

The common characteristic of all of the boats imported, all known as "Boston whalers", was that they were constructed with a double skinned fibreglass hull (the two skins being about three inches apart), with the cavity between the skins being filled with a very light but nevertheless quite strong foam. The key patented part of the novel manufacturing process was that the foam was somehow bonded chemically to the inner surfaces of the two skins so that on being shown a cross-section of the hull it was clear that the skins and the foam became one single and buoyant section. The advantages resulting from the bonding feature were that if one of the skins was punctured or ripped off by a rock, the foam would remain in place (save to the extent actually ripped off by impact), and there would still be no lateral penetration of water between the remaining skin and the foam. The buoyancy of the hull and the feature that that buoyancy would not be reduced, whatever the damage to the hull, led to two fairly extraordinary consequences. First the buoyancy meant that if a Boston whaler was carrying a full load of fuel, and was then completely swamped with water, the boat would still float even if carrying 14 people. The bonding feature between the skins and the foam secondly meant that if the boat was so damaged that it split in half, or was cut in half with a chain saw, both halves would also float, and if the 14 people were correctly distributed between the two bits of boat, the two halves of the boat would continue to float.

The foam filled twin skinned hulls of the Boston whalers, whilst naturally much lighter than water if the boat were to be swamped with water, are nevertheless heavier than an equivalent single skinned boat, so that the Boston whalers are actually more stable at sea than equivalent boats. They are also more expensive. We were told that Boston whalers were about 25% more expensive than other boats of similar size and appearance.

Boston whalers are made in 23 different sizes and specifications. Some are as small as 12 feet. Virtually all of the boats imported exceeded 17 feet in length though even the longest was somewhat short of 12 metres in length. Most of the boats appeared to be open, looking something like rigid inflatables, albeit without of course the rubber surround sections of inflatables. A few of the largest boats came equipped with a small front cabin capable of sleeping two people.

We were told that only one of the 23 classes of boat had a sail. All the others were motor boats, powered either by one or more outboards or by inboard engines.

We were also told that about half of the boats imported were imported as bare hulls, without in other words engines and other fittings. The Appellant company

was formed in 1938 as a boat-building company once employing 200 people. It now only employed 3 people who worked on imported boats, making modifications to the bare hulls, either to fit inboard or outboard engines, with most of this work now being sub-contracted to other firms in the United Kingdom.

We were given a certain amount of information about the customers who bought Boston whalers, and the uses to which they were likely to be put. We were told that about 80% of the boats were sold to private buyers who might use them as sport fishing boats, diving and water-skiing boats, or as tenders on larger yachts for going ashore, for possible rescue purposes and water sport uses. We assumed that the private buyers chose Boston whalers because of their inherent safety features.

The remaining 20% of the boats were sold to yacht clubs, harbour masters etc. When sold to yacht clubs the boats would usually be used for going to the assistance of capsized yachts. We were told that in 1985 the RNLI purchased a Boston whaler as a lifeboat. It was very badly damaged in 1988 during the course of a rescue, though it did manage to complete the rescue under its own power and return to port. Since it was too badly damaged to be repaired to RNLI standards, it was replaced by another boat in 1988 that was used until 1994. We were not told why other Boston whalers had not been bought by the RNLI, though it was suggested that this might have resulted from a preference to buy UK manufactured boats. In the United States, numerous harbour authorities and rescue services use Boston whalers for their harbour patrol and rescue purposes.

We were told that all Boston whalers above 17 feet in length were awarded a Category B rating, rather than a C rating under some European standard for assessing sea-worthiness. This classification had nothing as such to do with Customs classification but was perhaps geared to safety regulations. Category B apparently indicated that the boats are considered sea-worthy, and we were told that it is exceptionally unusual for such small boats, and for open boats to be awarded this classification. Virtually all of the boats imported carried this sea-worthy classification.

We were also told, and shown pictures that confirmed this, that when the RNLI operated a Boston whaler, the relevant lifeboat was given classification A, out of four available classifications of A to D for lifeboats, apparently in descending order of seaworthiness. It was apparently unprecedented for such a small boat to obtain this RNLI classification.

The relevant Customs classification.

It was clear that the Boston whalers fell to be classified somewhere within Chapter 89 of the Combined Nomenclature ("CN"), dealing with "Ships, Boats and Floating Structures". Before quoting the detail of the various classes, it is worth saying that in very general terms sea-going ships and boats are free of duty, whilst non-sea-going ships and boats attract duty, usually at the rate of 1.75%.

The relevant passages of Chapter 89, and then of the Combined System Explanatory Notes ("CSENs") were as follows:-

• Chapter 89 itself actually commenced with two relevant Notes, prior to giving the table of Codes. The relevant Notes were:-

"1. A hull, an unfinished or incomplete vessel, assembled, unassembled or dismantled, or a complete vessel unassembled or disassembled, is to be classified in heading 8906 if it does not have the essential character of a vessel of a particular kind".

"Additional notes:

1. Subheadings …… 8903 91 10, 8903.92 10… and 8906 90 10 are to be taken to apply only to vessels, designed as seagoing, having a hull of an overall length (excluding any projecting parts) of not less than 12 m. However, fishing boats and lifeboats, designed as seagoing, shall be considered as seagoing vessels regardless of their length."

• The most relevant sounding class of boats within the CN Codes in the Table to Chapter 89 was that defined as:-

"8903 Yachts and other vessels for pleasure or sports; rowing boats and canoes",

which was itself divided into Inflatables and Other. Inflatables were of course irrelevant, and Other were then sub-divided into "Sailboats, with or without auxiliary motor" (8903 91); "Motor boats, other than outboard motor boats" (8903 92); and "Other" (8903 99).

The common point to note about classes 8903 91 and 8903 92 was that they were both further subdivided into "Seagoing" and "Other", whereon the Code and rate of duty for Seagoing sailboats and inboard motor boats was Nil, and the rate of duty for non-seagoing was generally 1.75%.

At many stages it seems to have been assumed that the Boston whalers were either sailboats or motor boats (i.e. inboard motor boats), so that the rate of duty would simply be governed by whether they were seagoing or not. During the course of the hearing it was noted that since only one of the 23 classes of Boston whalers had any sails, and about half of the boats eventually sold (ignoring at his stage the fact that half of the boats were imported as bare hulls) were powered by outboards, it seemed that both of categories 8903 91 and 8903 92 might be irrelevant to the outboard Boston whalers whereupon they would be categorised as Other within 8903 99 in which case the rate of duty was inevitably 1.75%.

Turning to the issue of whether Boats rightly classed as Motor Boats within Code 8903 92 were free of duty as "seagoing" or not, there were some very relevant passages in the CSENs on this key subject. In supplementing Additional Note 1 of the CN, the CSENs contained the following paragraphs:

"The expression "vessels, designed as seagoing" means vessels which, by reason of their construction and equipment, are capable of operating at sea even in bad weather (winds of above force 7 on the Beaufort scale). Such vessels are generally fitted with watertight decks and weather-proof superstructures.

The expression "hull of an overall length" means the length of the hull measured between the foremost point of the bows and the aftermost point of the stern, but not including projections whether or not moulded with the hull (e.g. rudders, bowsprits, fishing platforms or diving boards).

The expression "seagoing vessels" means ships and hovercraft which satisfy the above conditions, whether or not they are actually used mainly in coastal waters, in estuaries or on lakes etc.

It is further to be noted that:

vessels less than 12 m. in length which are designed as seagoing are covered by the term "fishing boats" only when they are specifically designed and equipped for professional fishing, even though they may occasionally be used for pleasure purposes;

the term "lifeboats" covers vessels placed on seagoing ships for taking off the crew and passengers if the ships are in danger; it also covers lifeboats placed at suitable points along the coast and intended for going to the assistance of ships in distress."

Before applying these various definitions it is pertinent to note that Code no 8906 might also be relevant. This Code applies to "Other vessels, including warships and lifeboats other than rowing boats", and may be relevant on account of the initial Note to the CN which declared that unfinished boats without an essential character should be classed within Code 8906. Code 8906 divides boats into Warships and Other, with Other again being further divided between "seagoing" and "other".

Whilst this is to anticipate our decision, it will immediately be seen that if finished boats were imported with outboard motors, they would appear to fall into Code no 8903 99 whereupon without any regard to whether they were seagoing or not, the relevant rate of duty is 1.75%. If on the other hand, boats were imported as sailboats, inboard motor boats or part completed boats without an

essential character, their liability to duty will be governed by whether or not they are seagoing. In judging this, it is then pertinent to note that Additional Note 1, quoted above at the first bullet point in paragraph 13 applies to qualify each of the potentially relevant codes, i.e. sailboats, inboard motor boats and part completed boats, and it applies the "less than 12 metres" rule to all three classes.

The arguments on behalf of the Appellant

It was contended on behalf of the Appellant that:

On account of their unique method of construction the boats were plainly seagoing. They had the European Classification B, which denoted a seaworthy boat, and had even been classed A by the RNLI.

The boats could be used, and had been used as lifeboats. The RNLI had operated one as such, and about 20% of sales went to institutional buyers who would use the boats as patrol or rescue boats.

Private buyers sometimes bought the boats to be tenders on larger yachts, whereupon although the boats might be used as tenders from yacht to shore, and as sports boats, they could also be used as lifeboats, and the feature that the boat would have been chosen rather than a considerably cheaper boat that would serve equally as well as a tender and sport boat indicated that the buyer attached significance to the seaworthy characteristics of the boat, and to its potential as a life saver.

It was reasonable to assume that all buyers, all of whom could have bought a boat as a sport boat and tender at a considerably lower price had purchased the boat with some attention to its safety factor, and its seaworthiness.

The Irish Customs authorities had designated boats built by an affiliate of the manufacturer of Boston whalers in an Irish BTI as seagoing boats, subject to Nil duty, because they could operate in force 7 winds and above, and to the knowledge of the Appellant, none of the relevant boats were of 12 metres in length, and none were more akin to professional fishing boats or lifeboats than the Boston whalers. Indeed they were less likely to be used as lifeboats because they did not have the safety feature of the buoyancy of the double skinned hulls. It was said that other BTIs had been in similar terms but reference was only made to the Irish BTI because the Appellant was fully conversant with the specification of the boats involved.

It was finally contended, not that this was a technical point on classification, that the £50,000 odd "penalty" (as the Appellant described it) in this case was far too severe, since the Appellant's mistake was entirely innocent. The Appellant had thought it obvious that any boat that was classified as B under the European regulations dealing with the seaworthy characteristics of boats would obviously rank as "seagoing". Had the Appellant been aware that duty of 1.75% was due, that would not have lost the Appellant a single sale when the prices would have been raised, because all purchasers of these boats were already paying a far larger premium in order to acquire a boat with the essential safety characteristics of the Boston whaler. As it was if "the penalty" was confirmed by this Tribunal, there would be a risk that the Appellant company, a third generation family company, might be trading while insolvent, and would have to be placed in administration.

Whilst it was not pursued before us, it had earlier been argued that HMRC had misdirected the Appellant in relation to whether he was rightly or wrongly classifying the boats as being exempt from Customs Duty in that the boats had been inspected by Customs officers at Liverpool, the port of importation, on numerous occasions, and no issue ever raised that they should attract duty. Furthermore their status for VAT purposes had also been considered.

The Arguments on behalf of the Respondents

It is unnecessary to summarise the arguments on behalf of the Respondents since our decision is in line with the technical points made by HMRC on the proper interpretation of the CN and CSENs.

We should however mention, in relation to the misdirection point that was briefly discussed but not formally pursued by the Appellant, that it was suggested that the inspections at Liverpool had nothing to do with Customs classification, and that the VAT inspection had no bearing on Customs duty classification. It was also suggested that as a matter of law misdirection by Customs officials was no defence to an importer who wrongly classified goods since the Customs CNs were available for all to see.

Our Decision

In the case of those boats that had an "essential character" and that were imported in their complete state, with engines fitted and without sails, it appears to us that those with outboard engines fall within head 89 03 99. Boats without sails can hardly be "Sailboats, with or without auxiliary motor", and boats with outboards can manifestly not fall within Code 8903 92, since that Code expressly excludes outboard motor boats. The consequence thus, of complete outboard motor boats without sails falling within Code 89 03 99 is that these boats attract duty at 1.75%. One variation to that rate of duty, to a higher duty at 2.75% is irrelevant on the facts of this case.

It is possible that a completed outboard motor boat might be imported in a finished state, specifically designed to be a lifeboat. It would then of course cease to be a "Yacht and other vessel for pleasure or sports" within 8903 altogether, and would be duty free as a seagoing lifeboat under 8906 90 10. Were an outboard

motor boat imported with the essential character of a fishing vessel, then again it would be duty free under Code 8902 00 18.

It appeared on the facts that very few of the boats imported would fall within the terms of the preceding paragraph but it was accepted on behalf of the Respondents that if the Appellant could demonstrate that any boats fell within the two categories just mentioned, then HMRC would reduce the assessment to exclude those boats from the charge.

Having now dealt with completed outboard motor boats, it follows that all of the remaining boats will actually be liable for duty or not according to the same critical criterion of whether they rank as seagoing. For whether the boats are:

sailing boats;

inboard motor boats;

part completed boats, without an essential character;

fishing vessels, or

lifeboats,

in all cases, the same "seagoing" test is to be applied.

We have no doubt that all of the imported boats with a length of more than 17 feet (i.e. the vast majority, and the ones that qualified for the European Classification B as seagoing boats) were "seagoing" within the general terms of the first and third extracts quoted in paragraph 14 above, taken from the CSENs. The third paragraph clearly contemplates that boats can be seagoing even when more often used in coastal or inshore waterways. The criterion is whether the boats are capable of withstanding rough weather and all the boats of more than 17 feet in length plainly pass that test. The absence of watertight decks and superstructures is irrelevant where the seagoing characteristic of the boat derives from the type of construction involved here, and where the boat is seaworthy regardless of the fact that it has no deck at all. We did not understand the Respondents to dispute this conclusion.

We agree with the Respondents however that the conclusion just given does not conclude the issue because Additional Note 1 of Chapter 89 of the CN itself (quoted in paragraph 13 above) states that boats, designed as seagoing, will not fall within any of the codes ending with a 10 that we have extracted and quoted above if the boats are of less than 12 metres in length, unless the seagoing boats rank as lifeboats or fishing vessels.

It is undisputed that none of the imported boats were of 12 metres in length. It follows that none of the boats are to be treated as falling within any of Codes 8903 91 10, 8903 92 10 or 8906 90 10, even though plainly seagoing under the general test in the CSENs, unless they are "seagoing fishing boats or lifeboats". In order to rank as "fishing boats", the CSENs require that the boats be "specifically designed and

equipped for professional fishing, even though they may occasionally be used for pleasure purposes". It was barely argued by the Appellant that any of the boats could qualify within this wording. Again we believe that HMRC would accept that nil duty applied if a finished boat, at point of importation had the objective characteristics of a specifically designed professional fishing boat, but we fear that none will so qualify.

That leaves the question of whether any of the seagoing boats can qualify as lifeboats. It appeared to be common ground that if a boat was imported in a finished state, say for the RNLI, in a form that indicated that it was manifestly a lifeboat, then it would attract nil duty. We accept the contention of HMRC that if boats were simply imported in a state (even if finished) that failed to indicate whether they were to be used as private tenders and sports boats or as lifeboats, then they cannot qualify as lifeboats. If thus specific gear, relevant to use as a lifeboat was to be affixed after importation, or indeed say by the RNLI itself, then at the point of importation the boat would not as such be a lifeboat, and so would not qualify for the nil rate of duty. Quite apart from this consideration, it seems that very few of the boats were anyway destined to be used as lifeboats within the definition in the CSENs. Some privately owned Boston whalers might well be raised on to large private yachts, but they would inevitably be multi purpose boats, used as tenders, sports boats and in the final eventuality as rescue boats. They would hardly be "vessels placed on seagoing ships for taking off the crew and passengers if the ships are in danger". That definition envisages some form of lifeboat, possibly a rigid inflatable that is never touched until there is an emergency, albeit that it would doubtless also cover purpose built lifeboats that could be used as tenders on cruise ships.

We also consider that boats destined to be used by harbour masters and sailing clubs, the former presumably for patrol and possibly rescue purposes and the latter for rescue purposes, hardly qualify within the remaining part of the definition referring to "lifeboats placed at suitable points along the coast and intended for going to the assistance of ships in distress". The Boston whalers appear to fall outside this category for two reasons. Firstly even their intended use, were that relevant, is hardly "for going to the assistance of ships in distress". Picking up the crew of capsized sailing boats at a coastal sailing club is hardly "going to the assistance of ships in distress". Secondly we accept the argument on behalf of HMRC that it is the objective characteristics of the item imported that must be considered at the point of importation, and since we generally understood that at the point of interpretation boats would be identical whether to be used as a safe private water-skiing boat or as a harbour master's patrol boat or as a rescue boat by a sailing club, it cannot be said that the boats were essentially "lifeboats".

We accordingly decide, with great regret, that with the exception of any boats that could be shown to have had the essential characteristics of professional fishing vessels or lifeboats at the point of importation that none of the Boston whalers can fall within the Code numbers that attract Nil duty even though manifestly "seagoing" under the general definition.

The Appellant's appeal is accordingly dismissed. We would however like to record great sympathy for the Appellant because it was clear that:-

• the Appellant's case was totally honest;

• the relevant definitions in the CN and CSENs are hard to read because it is only when the initial Notes, the Codes and then the CSENs are read together that it becomes clear that there is a major carve out for boats of less than 12 metres in length from the status of being "seagoing", or rather than from qualifying within the Code numbers whereunder seagoing boats are said to attract Nil duty;

• we have no doubt that had the Appellant known that duty of 1.75% was due in respect of these boats, it, and the company's transparently honest managing director who represented the company, would have paid the duty and passed it on to customers who would not have flinched at the small additional element of price;

• as it is, the Appellant faces insolvency on being liable for duty on all the importations in the last three years;

• the Appellant is entitled to feel disgruntled on being faced with a bill that could put the company out of business, all for having made an innocent mistake in interpreting very inter-twined definitions in the Customs Combined Nomenclature and Notes. This mistake was made in circumstances where conflicting BTIs have been issued, and where the case was even presented before us by the Respondents on the basis that all the boats might rank as either sailboats or motor boats, when virtually none could have been sailboats, and half were excluded from ranking as motor boats because they had outboard engines. We well appreciate that any errors by HMRC were fairly irrelevant because 1.75% duty was owing on any basis, but the errors do emphasise how difficult the interpretation of the Combined Nomenclature can be.

In the light of the points made in paragraph 30, we repeat our request that if the burden on the Appellant can be moderated in any way by Customs officers, we hope that every opportunity will be taken to assist the Appellant.

Costs

No order was requested for costs by HMRC, and no costs are awarded.

HOWARD M. NOWLAN

CHAIRMAN

RELEASED: 20 November 2007

LON/2006/0969