HEATH HOUSE CHARTER Limitedappellant

[2009] UKFTT 305 (TC)

TC00249

Appeal number LON/2007/1173

VAT – Registration – Voluntary Registration – Taxpayer acquiring and letting out a yacht – Whether in fact there had been charters to associated companies –Whether yacht chartered to or through agent – Whether conducting a business or economic activity – Appeal allowed

FIRST-TIER TRIBUNAL

TAX

HEATH HOUSE CHARTER LIMITEDAppellant

-and-

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Value Added Tax)Respondents

TRIBUNAL: CHARLES HELLIER

PRAFUL DAVDA

Sitting in public in London on 10, 11 and 30 September 2009

Tim Brown, counsel, instructed by Maclntyre Hudson LLP for the Appellant

Christian Zwart, counsel, instructed by the Solicitor for HMRC.

© CROWN COPYRIGHT 2009

1

DECISION

1. This is an appeal against the Respondents’ decisions of 26 June 2007 and 16 October 2008 to uphold its earlier decision not to register the Appellant for VAT.

2. The heart of the Appellant lies in the question as to whether the Appellant was at the relevant date carrying on a business and intended to make taxable supplies in the course of that business.

3. The Appellant maintains that in August 2006 it acquired a yacht, the Citadel of Lymington, with the intention of chartering it to other persons as a business.

4. The Appellant is one of a set of companies who share one or more directors and shareholders. Theyoperate under the flag, “The Beadie Group”. We shall return to some of the detail later.

5. The Appellant’s case was that the yacht was acquired with financial assistance from two Beadie Group Companies and with a loan from Barclays Bank, and that it was intended, and that in fact it was the case, that the yacht be chartered (a) to Beadie Group Companies, (b) to persons who arranged a charter through an agent, Lymington Yacht Charters (LYC), and (c) to persons, including employees and direction of Beadie Group Companies whose chartering was arranged by the Appellant; and in each case that the chartering be for consideration. This activity was, the Appellant says, properly described as a business of making a taxable supplies.

6. The Appellant made its initial application on 25 July 2006. The Respondents requested supporting information from the Appellants. Having considered the evidence received they were unclear about the arrangements for the financingof the yacht, and were not convinced that the yacht had been chartered to the Beadie or St John Companies or to directors and employees for consideration. They were also of the view that the arrangement with LYC constituted a single charter of the yacht. They concluded that there was insufficient evidence to be satisfied that the Appellant was carrying on or intended to carry on a business activity and refused to register the Appellant.

7. Much of the hearing was taken up with an examination of the Appellant’s accounting records in order to determine how the yacht had been purchased and whether and how consideration had been given when it had been chartered. This exercise could have been much more efficiently and expeditiously conducted and the areas of real dispute clearly articulated if the Appellant’s accountant had sat down with the accounting records (and if necessary those of the Beadie and St Johns companies) and had explained to an officer from HMRC precisely what had happened when. Instead the Tribunal was provided with partial records and the evidence of a witness who had almost no knowledge of how they worked. This to our minds indicated a lack of proper response to HMRC’s concerns on the part of the Appellant. It would also have been helpful if the Appellant had provided a witness familiar with the company’s accountancy records.

8. In our conclusions on the facts we indicate briefly how we have drawn conclusions from the accountancy evidence before us.

The Legislation

9. Schedule 1 VATA 1994 deals with registration. Paragraph 1 deals with the case when a person’s turnover is such that he becomes liable to the registered. It was not suggested that the Appellant’s turnover was such that it became liable to be registered. Paragraph 9 deals with voluntary registration. It provides:-

“Where a person who is not liable to be registered under this Act and is not already so 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 or furtherance of

that business,

they shall, if he so requests, register him with effect from the day on

which the request is or from such earlier date or may be agreed between them and him.”

10. The argument before us turned on paragraph (b). It was not suggested that, at the time the Appellant’s request to be registered was made (namely 26 July 2006) it was then making a taxable supplies so that paragraph (a) would have been relevant.

11. Articles 9 to 12 of the Principal Directive address the meaning of taxable person. Article 9 provides:-

“1. “Taxable person’’ shall mean any person who independently carries out in any place any economic activity whatever the purpose or results of that activity

Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions shall be regarded as “economic activity’’. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular, be regarded as an economic activity.

2 [not relevant to this appeal]’’.

Article 10 provides:

“The condition in Article 9(1) that the economic activity be conducted “independently” shall exclude employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationships of employer and employee as regards working conditions remuneration and the employer’s liability.”

Article 12 provides:

“1. Member states may regard as a taxable persons anyone who carries out on an occasional basis a transaction relating to the activities referred to in the second paragraph of Article 9(1) and in particular….’’

12. Title XII Chapter 1 of the Directive deals with special schemes for small enterprises and permits member states to exempt traders whose turnover falls below certain limits. Under this provision or its predecessors the UK provides, in the legislation set out in Schedule 1 VATA, for the turnover limits for registration. But Article 290 provides that“taxable persons who are entitled to exemption from VAT may opt for the normal VAT arrangements.” That ability to opt is given effect in paragraph 9 of Sch1 VATA.

Summary of the legislative provisions

13. Under the EU directive a person who independently carries out an economic activity is entitled to opt for the normal tax regime i.e. to register for VAT. The requirement that the activity be independent excludes employees from being taxable persons. The use of ‘independently’ does not in our view exclude from taxability those persons, like all companies, who carry out their activities through the agency of others or do so with the help of others. Rather it excludes those who provide their services to another in an employment style relationship. Where an activity is the exploitation of tangible property, it will be economic if it is for the purpose of obtaining income on a continuing basis.

14. In the UK legislation those EU provisions are reflected in the requirement that to be taxable a person must be ‘carrying on a business’ and making or intending to make taxable supplies in the course of that business. Those provisions must be interpreted so far as possible to give effect to the relevant provisions in the Directive.

The Authorities

15. We were referred to two judgements of the ECJ: Enkler v Finanzamt Hambury [1996] STC 1316, and Lennartz v Finanzamt Munchen [1995] STC 514.

16. Enkler concerned a caravan which the taxpayer hired out on some occasions but which appears to have been used predominantly for her own private use. The Court addressed two questions of relevance to this appeal. First, whether hiring out tangible property was to be regarded as an economic activity within the first sentence of Article 9 or whether it was such only if it fell within the second sentence. It held that such hiring was an economic activity only if it was done for the purpose of obtaining income therefore on a continuing basis (see para 22).

17. The second question was in what circumstances such hiring out was to be regarded as done on such a continuing basis. The Court:

(i)noted that the onus of proof was on the taxpayer (para 24);

(ii) said that the national court must evaluate all the circumstances of the case (para 24);

(iii)said that the nature of the property was a relevant consideration, in particular if it was capable of being used for private and economic purposes all the circumstances of use had to be “examined in order to determine whether it is actually used for the purpose of obtaining income on a regular basis” (para 27);

(iv) said that the actual period for which the property is hired, the

number of customers, and the amount of earnings are factors

which may be taken into account with others. (para 29).

18. Lennartz concerned the deductibility of input tax on capital goods acquired potentially in one capacity and then later applied for business and other purposes, and the effect that little business use (and consequently more private use) thereafter would have on the right to deduction under Article 20 of the Sixth Directive.

19. The Court noted (at para 9) that where goods were acquired in a private capacity rather than for a person’s economic activities no right to deduct arose; it was the acquisition of goods for the purposes of an economic activity which gave rise to the right to deduct. At para 21 the Court indicated that whether the goods had been acquired for the purposes of an economic activity was to be determined in the light of all the circumstances including the nature of the goods and the periods between acquisition and use for the economic activity.

20. In relation to the effect of little business use on the Article 20 rules the Court said at para 35 that the right to deduct in Art 17 arose however small the proportion of business use’.

21. In our analysis in this appeal Lennartz affords little help in the determination of whether the Appellant’s activity was an economic one. We note it above because it illustrates the focus of the ECJ on the nature of the goods and the circumstances, and because the phrase ‘Lennartz calculation’ was used in one of the Appellant’s advisers letters to refer to the Article 20 adjustment of allowable input tax on the basis of the uses to which the yacht was in fact put.

22. We were also referred to a number of UK authorities on the meaning “in the course or furthermore of a business”. The earlier authorities addressed the question without reference to the EU provisions, Mr Zwart relied upon C&EC v Morrison’s Academy Boarding Houses Association [1978] STC 2 for the proposition that the words “in the course of a business’’ suggested that the supply “must be not merely in separated or isolated transactions but continued over an appreciable tract of time with such frequency as to amount to a recognisable and identifiable activity’’ (see p8 e). That requirement for continuity presciently reflects the decision in Enkler that, in relation to hiring goods the activity must be on a continuing basis to be an economic activity, and serves in our view usefully to elaborate the meaning of a ‘continuing basis’.

23. We were also referred to C&EC V Lord Fisher [1981] STC 238 in which Gibson J, looking only at the UK statute, said (at 245) that six indicia could be “useful tools… for the analysis of an activity’’ although they could not usurp the statutory words, and that there was a difference between an activity for pleasure and enjoyment (such as Lord Fisher’s shoot) and a business (see 248 a-b). Mr Zwart drew our attention to his comment (at 250 g) that tribunals would be able to detect a commercial business dressed up as a pleasure activity - and inferred that we would be quick to spot the reverse.

24. The six indicia were these :-

(i)whether the activity is a serious undertaking earnestly pursued;

(ii)whether the activity is an occupation or function actively pursued with reasonable or recognisable continuity;

(iii) whether the activity has a certain measure of substance as measured by the quarterly or annual value of taxable supplies made;

(iv) whether the activity was conducted in a regular manner on sound and recognised business principles;

(v) whether the activity is predominantly concerned with the making of supplies to consumers for a consideration; and

(vi)whether the taxable supplies are of a kind which, subject to differences in detail, are commonly made by those who seek to profit from them.

In Three H Aircraft Hire (a firm) v C&E Comms [1982] see 653(see below) Webster J noted that, since the requirement in that case was whether “any” business was being carried on (i.e. where only some of the activities might constitute a business), the para(v) indicia as phrased may not be apt (see 658 a). It seems to us that it might usefully be restated “whether there are activities which…’’

25. Institute of Chartered Accountants in England and Wales v C & E Commrs [1994] 1 W&R 701 was the first case (chronologically) we were referred to in which both the Directive and the UK statute were considered. Lord Slynn, having recited the six indicia referred to by Gibson J in Lord Fisher, said that that case indicated that ‘business’ needed to be given an ‘economic’ content, and that although differences between ‘business’ and ‘economic activities’ may arise the appellant in that case was right to accept that there were the same (see 707).

Specific Decisions

26. We were referred to four decisions dealing with the particular circumstances of the hiring out of boats or aircraft.

27. In Kenneth Gordon Coleman v C&E The Commissioners [1976] VATTR 24 Mr Coleman acquired a pleasure barge which he let out to a charterer immediately following its acquisition. In return he was to receive 45% of the hire fees received by the charterer. The agreement for the hire took “effect as a demise of the vessel’’ for a period commencing in May 1975 and expiring after 5 months notice on the 5 November in any year.

28. The Tribunal found that Mr Coleman was not carrying on a business, The letting of the barge by Mr Coleman enabled the charterer to carry on trade with the vessel - by chartering it out - but Mr Coleman did not participate in the carrying on of that trade. Although Mr Coleman derived income from the letting of the barge to the charterer this was the activity of an ordinary investor not a business.

29. Three H Aircraft Hire (a firm) v C & E Comms [1952] STC 652 concerned the hiring out by a partnership of an aircraft owned by the partnerships to BLS Aviation Ltd. BLS provided aircraft for private hire. Under the hiring agreement “BLS would take over the aircraft subject to certain rights that the partners had to use it for their own purposes and would hire it out and pay the partnership a hire fee related to the length of time it was hired”. The Tribunal, relying on Coleman, found that partnership was not as a result of this activity carrying on a business.

30. In the High Court, Webster J (at 655 j) noted that the terms of the agreement with BLS where very similar to, but not identical with, the agreement in the Coleman case. The differences identifiable from Webster J’s Judgement appear to be (a) that in Coleman the charterer had to take reasonable steps to maximise revenue, an obligation not undertaken by BLS, and (b) that certain accounting and administration duties accrued to Coleman which did not accrue to the partnership (see 650 j to 661 b). Webster J found that the Tribunal rightly found Coleman indistinguishable and was fully entitled to adapt the reasoning in that case (see 661 c-d).

31. One important distinction between both Three H Aircraft and Coleman and the facts in the appeal before us lies in the nature of the agreement between the taxpayer and the chartering entity. In Coleman (and therefore we conclude Three H Aircraft) there was a letting to the Charterer who then sublet on his own account. It will become apparent that such was not the case in the agreement between the Appellant and LYC.

32. Finally we were referred to two more recent decisions of the Tribunal which consider the issue of chartering a boat in the context of the “economic activity” words of the Directive.

33. In Mark Berwick and Christine Berwick VATD 17686 (2002), the Berwicks bought a yacht which they let to Sunsail, a yacht chartering company. The decision of the Tribunal records that the letting agreement provided.

(i)for Sunsail to use best endeavours to charter the yacht,

(ii)for Sunsail to pay a monthly fee of 10% of the price of the yacht for an initial period and thereafter to pay 25% of the net chartering income,

(iii)for Sunsail to maintain and repair the yacht at its cost and

(iv)for Sunsail to have 29 days use of the yacht “or another yacht owned by Sunsail’’.

There was no express finding in the decision as to whether the yacht had been demised to Sansail, but the provisions quoted do not to us indicate an agency agreement and are consistent with a charter of the boat into the possession of Sunsail for the period of the agreement. (See also Stockdale in next paragraph). (Helpfully the chairman of the Tribunal in Stockdale was the same as in Berwick, and made clear, at para 34, that in Berwick there was a four year agreement under which the yacht was given over completely to Sunsail). The Tribunal found that the letting of the yacht was a single isolated transaction which was without the requisite continuity for the exploitation of the yacht to amount to an economic activity for the purpose of the Directive.