VAT Input Tax Whether Incurred Wholly for Purposes of the Business Whether an Obvious

19541

VAT – input tax – whether incurred wholly for purposes of the business – whether an obvious and clear association between business and the expenditure incurred – whether apportionment appropriate – yes – approach on facts to process of apportionment – appeal allowed in part

LONDON TRIBUNAL CENTRE

AMANA BOOKS LIMITEDAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

Tribunal:JOHN CLARK (Chairman)

JOHN BROWN CBE FCA CTA

Sitting in public in London on 17 February 2006

Michael Thomas, counsel, instructed by Peter Mendham of AGM Partners LLP, for the Appellant

Phyllis Ramshaw of the Solicitor’s Office, Her Majesty’s Revenue and Customs, for the Respondents

DECISION

This is an appeal by Amana Books Limited (“Amana Books”) against a decision by the Respondents (“Customs”) to make an assessment to VAT in the sum of £46,564 (plus interest) for the periods from 1 November 2001 to 30 September 2004 inclusive. The assessment was issued to recover a substantial proportion (90 per cent) of the tax claimed as input tax by Amana Books in respect of supplies of services received by it from Premier Christian Radio (“Premier”). The supplies consisted of airtime in relation to radio broadcasts purchased by Amana Books. The main issue is whether those supplies were wholly used for the purposes of the business of Amana Books, as it contends, or, as Customs contend, only partly for the purposes of that business. Customs have accepted that a very limited proportion of those supplies was so used.

The law

“Input tax” is defined by section 24(1) of the Value Added Tax Act 1994 (“VATA 1994”):

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

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

(b) VAT on the acquisition by him from another member State of any goods; and

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.”

Where goods or services are used partly for business purposes and partly for non-business purposes, section 24(5) VATA 1994 provides:

“(5) Where goods or services supplied to a taxable person, goods acquired by a taxable person from another member State or goods imported by a taxable person from a place outside the member States are used or to be used partly for the purposes of a business carried on or to be carried on by him and partly for other purposes, VAT on supplies, acquisitions and importations shall be apportioned so that only so much as is referable to his business purposes is counted as his input tax.”

Under section 26(1) and (2) VATA 1994 a taxable person is entitled to credit for input tax which is attributable to taxable supplies:

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

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

(a) taxable supplies;

(b) supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom;

(c) such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection.”

The facts

The evidence consisted of a statement of agreed facts, a bundle of documents, two CDs containing recordings of extracts from programmes, and witness statements produced by Mr Joseph Davis of Amana Books, by Mr Richard Riley, a Revenue and Customs Officer, and by Mrs Ruth Farmer, a Senior Operational Accountant with Customs’ Large Business Services section. Each of these witnesses also gave oral evidence.
The statement of agreed facts is set out verbatim below, referring to Amana Books as “the Appellant”:

(1)The Appellant registered for VAT with effect from 1 February 1998. The Appellant operates a book shop from Heckfield Place, Heckfield, Hook, Hampshire. It also operates a mail order service.

(2)The Appellant sells Christian books, literature and cassettes published by the Living Stream Ministry (a non profit making United States corporation). Apart from the sale of cassettes and occasional training courses the Appellant’s sales are zero-rated.

(3)The Appellant, during the relevant period, purchased airtime from Premier Christian Radio, broadcasting a half hour radio programme each day.

(4)The Appellant has reclaimed input tax in full on the purchase of airtime from Premier Christian Radio.

(5)Following a visit and correspondence between the parties the Commissioners formed the view that the purchase of airtime by the Appellant was mainly for the purpose of promoting religious discussion and/or the religious views/ministry of Watchman Lee [this should be Nee, see below] and Witness Lee and was not for the purpose of the Appellant’s business.

(6)The Commissioners were prepared to accept that a small proportion of the airtime (approximately 10%) could be considered to be for the purpose of the Appellant’s business i.e. advertisement of the Appellant’s supplies of books and materials and was therefore attributable to business use and recoverable as input tax.

(7)The Commissioners notified the Appellant’s representative by way of a letter dated 1st December 2004 that they intended to allow 10% of the costs incurred in relation to the airtime purchased and to issue an assessment to recover the remaining 90% of the VAT attributable to non-business use previously claimed by the Appellant.

(8)The assessment was made on 12 January 2005 and notified to the Appellant on 25th January 2005.

(9)The Appellant appealed to the VAT and Duties Tribunals against the Commissioners’ decision on 18th January 2005.

From the evidence before us, we find the following additional facts.
Mr Davis had been a director of Amana Books since its formation in 1998. He had first come to the UK in 1996 to start a business selling books published by the Living Stream Ministry (“LSM”). These books are about the Life Study of The Bible and introduce readers to the teachings of Watchman Nee and Witness Lee, both of whom had originated in China and who had been engaged in Christian ministry. Witness Lee, who subsequently came to the UK, had spent the years from 1974 to 1995 preparing this Life Study, a book-by-book study of the whole Bible. Amana Books purchased the books from LSM and at all times sold them at commercial rates, the sale prices being the same as those used by commercial Christian bookshops in the USA. Occasionally books have been sold at discounted prices to increase sales, but never at a price below cost. Initially, before Amana Books was formed, a shop was leased in Mill Road, Cambridge and books were advertised in Christian publications, but early sales were disappointing. In 1998 the lease of a tea room was acquired and Amana Books was formed. This gave customers the opportunity to read the books while using the tea room. During the period from January 1998 to November 1999 the average sales went up from about £300 per month to about £770 per month.
At that time Mr Davis had discussions with LSM with a view to using radio broadcasting as a way of making the content of the books known to a wider audience, and thereby selling more books. He had been aware from his time in the USA of this method of selling Christian books, and was convinced that this was the only way that the sales of the books could be significantly increased and so make Amana Books a profitable venture. The problem for Amana Books was that a contract had to be signed with Premier committing Amana Books to eight months of daily broadcasts. However, LSM had funds available from donations, and they agreed to underwrite the cost of the broadcasts. There were delays in finalising the contractual arrangements between Premier and Amana Books, but initially the broadcasts were on two days a week, then from January 2000 seven days a week. Although Mr Davis acknowledged that there was an incidental benefit to LSM in that the teachings of Watchman Nee and Witness Lee were reaching a wider audience, he stated in his witness statement that the sole reason for his decision on behalf of Amana Books to commence the arrangement for radio broadcasting was to sell books. If it had been his intention to promote the teachings, other less expensive ways of doing so could have been used.
Having agreed the contract with Premier, Mr Davis set up an infrastructure to ensure that Amana Books derived the maximum benefit. Three dedicated call lines were set up to take orders; when people telephoned for further information, Amana Books arranged to send them some promotional material. This information enabled Amana Books to build up a database of potential customers, and this was used to keep in touch with Amana Books’ “audience” and to give it the opportunity of making regular mailings promoting the books. The broadcast had been an immediate success; on many occasions, particularly at the beginning, all three lines were busy. Mr Davis described the increase in book sales as “dramatic”; the effect on sales is analysed below. The current total of customers and other callers contained in the database was about 15,000, whereas previously Amana Books had not had any form of database.
The broadcasts have continued up to the present time. Each broadcast has different content. A typical programme will involve an introductory message identifying Amana Books as the seller of the books that will be discussed during the programme. The central segment will consist of readings and discussions on a particular part of the Bible with reference to one or more particular volumes of the Life Study, and possibly to other books. The programme is then brought to an end with a closing message telling people where they can obtain the books and giving the contact details of Amana Books. The opening and closing segments are produced by Amana Books and the central portion is produced by LSM. It is clear from the pages from LSM’s website shown in the bundle that those programmes (ie the central portions) are broadcast in the same form to other countries around the world.
Mr Riley, a VAT Assurance Officer, had reviewed Amana Books’ return for the period 12/03, as it was a significant claim for tax from an entity which normally made payments of tax. Following visits to the premises of Amana Books’ accountants, a CD and transcript of one of the radio broadcasts was provided, together with a transcript. Following a decision and pre-assessment letter sent to Amana Books on 1 December 2004, a final letter was sent on 12 January 2005 setting out Customs’ conclusion that the bulk of the airtime was a religious discussion and thus non-business activity of Amana Books. A proportion, ten per cent, of the airtime was considered to relate to its business activity, and an assessment was subsequently issued to recover ninety per cent of the input tax claimed in respect of the radio broadcasts.
We consider below matters of disputed evidence, and also evidence of opinion, including the Accountants Report prepared by Mrs Farmer.

Arguments for Amana Books

Mr Thomas submitted as the primary contention that Amana Books was entitled to full recovery of the VAT charged to it by Premier for the supply of airtime. Applying the test in Ian Flockton Developments v Commissioners of Customs and Excise [1987] STC 394, the airtime was purchased in order to promote Amana Books’ business of selling books. The test was subjective, and concerned the intention of the taxable person; where the latter was a company, this depended on the actual intentions of those who made decisions on behalf of the company. Mr Thomas emphasised that it was people who had intentions; it was wrong to confuse what the broadcast did with the intentions of the person making the decision on behalf of the company. Here the relevant intention was that of Mr Davis, who had made the original decision to undertake the radio advertising, and Mr Davis was clear that the purpose of the exercise was to increase book sales. Further, there was an “obvious and clear association between the taxpayer company’s business and the expenditure concerned” (Flockton at p 400) because book sales had increased dramatically as a result of the advertising. This advertising had also provided the foundation for the creation of Amana Books’ database and mailing list and was part of a book-selling business carried on on a commercial basis. Mr Thomas therefore argued that the Tribunal did not need to continue further in accordance with Flockton and test the taxpayer’s intention against the standards of the ordinary businessman by reference to objective factors.
If, contrary to his submission the Tribunal did consider it necessary to test the intentions of Amana Books by reference to objective factors, he argued that such factors only served to reinforce the conclusion that the airtime was purchased for the purpose of increasing book sales. The purchase had achieved its target of increasing book sales, with an increase of over 1000 per cent; it continued to be the best strategy to target what was a specialist market with a very high incidence of repeat sales. The source of the funding to meet the advertising costs was irrelevant; he referred to Yoga for Health Foundation v Commissioners of Customs and Excise [1984] STC 630, and to Netherlands Board of Tourism (1995) VAT Decision 12935. The decision to advertise in order to increase sales had been part of a commercial strategy to build a successful long-term business. Amana Books had operated in a commercial way; it had not achieved a profit, but had increased its sales. The making of losses did not affect the question of commerciality; Yoga for Health was relevant to this question also. It was not correct to go behind the activity and ask why the business existed. He referred to Article 4 of the Sixth Directive; this was an economic activity. He distinguished the case of Emmaus Ltd (1993) VAT Decision 11679 on the basis that the company in that case did not qualify for relief for input tax.
If, notwithstanding his other submissions, the Tribunal were to consider that input tax in respect of the purchase of airtime by Amana Books was not recoverable in full, he argued that the recoverability of input tax must be apportioned under section 24(5) VATA 1994 in accordance with the purposes for which the airtime was purchased. It was common ground that at least some of the input tax was recoverable, although Customs claimed that the correct apportionment was to allow recovery of only 10 per cent of that input tax.
Mr Thomas responded to various arguments set out in Customs’ skeleton argument. In response to Customs’ argument that the purchase of airtime was made almost entirely (as to 90 per cent) for the purposes of promoting religious discussion and the religious views of Watchman Nee and Witness Lee, he made additional submissions. The test as to why it was made was a subjective one (Flockton); thus the form which the advertising took did not determine recoverability. The test was not what the broadcasts did, what form they took or who benefited, but the purpose for which they were purchased; in support he cited Customs and Excise Commissioners v Rosner [1994] STC 228, especially at p 230f, and Lord Hope in Customs and Excise v Redrow Group plc [1999] STC 161 at p 166. Any benefit to other persons, such as to LSM, did not deprive Amana Books of the input tax deduction. Customs seemed to have taken the view that because the majority of each broadcast took the form of a religious discussion, they cannot have been undertaken to increase book sales. Not only was this the wrong test, but also there was no authority to say that a religious discussion could not be advertising. Customs had overlooked the fact that the content of the broadcasts was chiefly concerned with the subject matter of the books and contained readings directly from them. The existence of the telephone service, the related mailing list and, in particular, the increased sales figures clearly showed the necessary direct and immediate link between the broadcasts and book sales. The effect of Customs’ argument, if correct, was that the increased book sales were an incidental benefit of promoting the religious teachings. This was clearly inconsistent with the facts. In particular, the way in which Amana Books pursued its activities as a commercial operation clearly showed that book sales were not incidental to the religious teachings so far as Amana Books was concerned.
Customs relied on Premier’s invoices reading “Ministry Time”; Mr Thomas submitted that what was important was the substance rather than the form of the transaction, and that Amana Books used the airtime in a different way to other broadcasters; it was selling books, not seeking donations.
Customs argued that the purchase of the airtime was uncommercial as the cost exceeded book sales; Mr Thomas responded that the decision had been a commercial one as it had both increased book sales and as the costs were covered by donations.