LONDON TRIBUNAL CENTRE
- and -
THE COMMISSIONERS FOR HER MAJESTY'S
REVENUE AND CUSTOMS Respondents
Tribunal: Edward Sadler (Chairman)
Sandi O'Neill
Sitting in public in London on 30 October 2008
John Esling, consultant, for the Appellant
David Manknell, counsel, instructed by the General Counsel and Solicitor to Her Majesty's Revenue and Customs, for the Respondents
This case is an appeal by Independent Thinking Limited ("the Appellant") against an assessment to VAT raised by the Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") dated 3 December 2007 for the amount of £17,233 together with interest of £3,391.48 in respect of periods from October 2004 to May 2006. The Commissioners also raised an alternative assessment for the amount of £15,588 of VAT, against which the Appellant also appeals. The assessments were made as a result of a determination made by the Commissioners in their letter of 28 November 2007 to the Appellant. This determination was, at the Appellant's request, reconsidered by the Commissioners, but in their letter of 17 March 2008 the Commissioners upheld their original determination.
In summary, the Appellant carries on the business of educational training and consultancy, providing "thinking skills" courses primarily to schools. In 2002 the Appellant purchased a yacht. Substantial repair and refurbishment work was carried out to the yacht during the period February 2003 to December 2004 on which the Appellant paid VAT, for which it is claiming a deduction as input tax. The Commissioners deny that the VAT in question can be claimed as creditable input tax under section 26 Value Added Tax Act 1994 ("VATA 1994"), on the grounds that the expenditure incurred on repairs to the yacht has not been incurred by the Appellant for the purpose of its business. By its notice of appeal to the tribunal of 4 April 2008 the Appellant contends that the yacht, whilst not directly generating income for the Appellant, nevertheless has contributed to its business in terms of providing intellectual capital and creative inspiration to a business which depends for its success on developing thinking skills and lateral and creative approaches to ideas, and that therefore the yacht should properly be regarded as employed in the business carried on by the Appellant and, in consequence, the VAT paid on repair work to the yacht is validly allowable as input tax.
We dismiss the appeal. We do not consider that the Appellant has established that nexus between the expenditure on the goods and services on which the VAT was paid and the purpose of its business which is required if, under the relevant VAT legislation, the VAT is to be allowed as input tax credited against the output tax paid on the supplies made in the course of the business.
We had in documentary evidence before us correspondence between the Appellant and the Commissioners; various documents (invoices, correspondence, thinking skills books and other material) relating to the Appellant's business; and various documents (press articles, website material, advertising invoices, correspondence) relating to the "Around Deeply" project formulated by the Appellant.
As to witnesses, we heard evidence from Mr Ian Gilbert, managing director and principal shareholder of the Appellant. Mr Gilbert's evidence related to the nature and scope of the business of the Appellant; the purchase and refurbishment of the yacht; the "Around Deeply" voyage undertaken on the yacht and the project formulated by the Appellant as a result of that voyage, including plans for further cruises; the plans made by the Appellant to use the yacht and the actual use made; the attempts to charter the yacht to third parties and the attempts to sell the yacht. Mr Gilbert was cross-examined by Mr Manknell on behalf of the Commissioners as to the use made of the yacht and its relation to the Appellant's business.
For the Commissioners we had a witness statement setting out the evidence of Roma Whiteley (the officer of the Commissioners with responsibility for the assessments made on the Appellant) with exhibits setting out the factual background to the case and the chronology of events (as agreed in correspondence with the Appellant). Miss Whiteley was cross-examined by Mr Esling, on behalf of the Appellant, as to her conclusions and the basis of her determination leading to the assessments.
In this case the facts are for the most part not in dispute. What is in dispute is the nature and extent of the relationship between the use of the yacht and the Appellant's business and the relevance of that use to the business. The agreed facts can be summarised as follows:
Mr Gilbert's evidence (in addition to confirming the facts set out above, which were largely as appeared from the correspondence between the Appellant and the Commissioners) related to his intentions for the yacht, which he explained as follows:
In cross-examination Mr Gilbert was asked about references in the correspondence with the Commissioners to the use of the yacht as a venue for meetings. He said that his recollection was that when the yacht was moored in Suffolk it was used for one or two meetings, and that it was also used for meetings when it was moored in St Katherine's Dock in London. As evidence he referred to an email of 25 October he sent to a prospective collaborator on a project where he states, "I'll be in London next week at St Kath's – maybe we can get heads together then?"
The principal UK legislation is found in section 26(1) VATA 1994 which, so far as applicable to this case, states:
Section 24(1) VATA 1994 defines input tax in these terms:
The regulations referred to in section 26(1) VATA 1994 are the Value Added Tax Regulations 1995 (SI 1995/2518). The relevant provisions relating to the attribution of input tax to taxable supplies are principally concerned with cases where the taxable person makes both taxable and exempt supplies (which is not the present case). Two provisions are relevant to this appeal: regulation 101(1) states:
Regulation 101(2) then provides:
Regulation 100 provides:
The European provisions which the UK legislation gives effect to are now found in the VAT Directive of 2006 (2006/112/EC), in the section dealing with deductions and the Chapter headed "Origin and Scope of Right to Deduction". Article 167 provides:
Article 168 provides:
Mr Esling, for the Appellant, argued as follows:
For the Commissioners Mr Manknell made the following submissions:
Mr Manknell made further submissions in relation to the attempt to charter the yacht in the winter of 2004/05, but Mr Esling conceded in reply that it was not the Appellant's case that such chartering was a business purpose of the Appellant, and that accordingly the case for allowing a deduction for the input tax on the refurbishment work was not based to any extent on such chartering.
In an appeal such as this the burden lies on the Appellant to show that the input tax for which it is claiming a deduction should be so deductible in applying the rules which give credit for input tax against the tax charged on taxable supplies made by a taxable person. The Appellant has not discharged that burden, and it is our decision that no part of the input tax paid on the supplies comprising the re-fitting and refurbishment of the yacht is claimable as a deduction by the Appellant against the tax charged on the supplies it makes in the course of its business. Accordingly we dismiss the Appellant's appeal, and the assessment made by the Commissioners for the amount of £17,233 together with interest of £3,391.48 in respect of periods from October 2004 to May 2006 stands.
The parties are agreed as to what the law provides – their dispute is as to the application of the law to the circumstances of the Appellant. As to the law, the relevant provisions are set out above. Input tax (as relevant to this appeal) is the VAT which a taxable person pays on the supply of goods or services made to him where those goods or services are used (or are to be used) for the purpose of any business which that taxable person carries on (or is to carry on). The entitlement of a taxable person to a deduction or credit for input tax arises to the extent that it is attributable to taxable supplies made (or to be made) by him in the course or furtherance of his business. The language of the Directive is a little different from the domestic legislation, but the principle in both is clear and consistent.
There is a similar clarity and consistency in the European and domestic case law applying these provisions. In the Midland Bank plc case the European Court said (at paragraph 24) in relation to the provisions in the Sixth Directive corresponding to those in the VAT Directive of 2006 set out above:
The Court expressed this point once more, by reference to its decision in the BLP Group plc case (at paragraphs 29 and 30):
In the domestic courts the question of the relationship between the input tax on supplies made to the taxable person and the business carried out by him was examined in the Rosner case. The facts of that case, concerning as they do VAT paid on legal fees related to the defence of criminal charges, are far removed from those in the present case, but in the course of his judgment Latham J stated the principles to be applied in determining whether supplies to a taxable person bear sufficient relationship to the business as to permit the input tax to be deducted. He states that the concept that the supplies in some way benefit the business is too wide:
We are therefore required first to identify what the nature of the Appellant's business is, and then to determine the extent to which the expenditure on refurbishing the yacht can be said to be for the purposes of that business in the sense of being directly referable to such purposes.
The nature of the Appellant's business is the provision of consultancy services and related material in the field of thinking skills, providing courses and material to schools, businesses and other organisations designed to help them think creatively or to equip teachers or leaders to encourage a creative thinking approach in their pupils or workforce. In its case before us the Appellant also argued that its business prospectively extended to providing such skills through the "Around Deeply" project, which was a business it seriously attempted to establish, but without success. We deal with this point below.
We accept that creativity and inspiration are important qualities for the success of the Appellant's business, and we accept that they are intangible qualities which do not sit comfortably with the concrete world of VAT supplies of goods and services. We can see that there may be instances where expenditure is incurred to stimulate creativity or inspiration which is directly referable to the purpose of a business such as that carried out by the Appellant – this might be the case, for example, where the owner of such a business sends its employees to a series of lectures on philosophy or on some other less obviously cerebral venture designed to challenge or develop their own thinking skills.
Expenditure on the refurbishment of a yacht is not, however, expenditure which on any basis can be said to be directly referable to the purposes of the Appellant's business. This is so, even if we accept, as we do, that the yacht was not purchased as a recreational facility for Mr Gilbert and his family. It is not sufficient that the yacht, or a voyage made in the yacht, in itself provides a setting which might inspire Mr Gilbert to have creative thoughts – he was candid enough to tell us that he might have equally creative thoughts "driving a Morris Minor through Leeds". The yacht might in this way be beneficial to the Appellant's business (as could be the hiring of a Morris Minor for a journey that took in Leeds, if that experience were thought likely to prompt a creative thought relative to the business). But as is clearly set out in the Rosner case, whether or not the expenditure provides a benefit is not the relevant test. The connection between the expenditure and the purposes of the business must be more direct: in the language of the European cases, the expenditure must have a direct and immediate link with the business, such that it is part of the costs of the supplies made in the course the business. We had no evidence which supported a case that the expenditure on refurbishing the yacht was a cost of the business supplies made by the Appellant. Mr Gilbert could point us to nothing that we considered of significance or as having a unique or special quality (whether photographic or other material, or even promotional material) which was derived from the yacht or its use and which could be seen as a direct link with the supplies made by the Appellant in carrying out its business. He referred us to the development of the 8 Ways Thinking concept, but told us that it was conceived at the time the yacht was laid up, although developed as a concept in the course of the "Around Britain Deeply" voyage in 2005. He was unable to explain in what way the yacht enabled that concept to be developed other than that it provided a setting conducive to creative thinking. This exposes the flaw in the Appellant's primary case – the yacht might provide such a setting, but it is an entirely arbitrary matter as to whether it gives rise to anything which can be used for the purposes of the Appellant's business. The direct link, therefore, between the expenditure and the purposes of the business is not present in this case.
The Appellant's secondary argument was that the Appellant had a wider business in that it made a genuine attempt to run cruises, with fee-paying crews, by way of exploitation of the "Around Britain Deeply" concept, which was related to its thinking skills consultancy business in that the selling point of the cruises was that they encouraged people to look more closely at their surroundings and to reflect creatively on them. It is accepted that this business failed, but, the Appellant argues, that should not deny it the right to deduct input tax since it was an enterprise which it embarked upon with serious intent and at significant expense, and that in part it failed because it was frustrated by intervening events beyond its control. There was, it was argued, a direct link between the expenditure on the refurbishment of the yacht and the purposes of this wider business.
The Appellant does not succeed in this argument because it failed to show to our satisfaction that at the time the refurbishment expenditure was incurred (from early 2003 until December 2004) this wider business purpose existed; in consequence that expenditure could not have been intended to be for the purpose of that wider business.
The language of sections 24 and 26 VATA1994 is such as to recognise that the expenditure on goods or services giving rise to the input tax may be incurred in advance of the use of those goods or services for the purposes of the business or in advance of a business to be carried on by the taxable person. However, what is clear from the case law is that the taxable person must be able to show that at the time of the supply on which the expenditure is incurred he had the intention to use the goods or services in question for the purposes of the business. We were referred to the Lennartz case as authority for that proposition, and there are a number of cases in the domestic jurisprudence which decide this point also. Events which occur subsequent to the time of supply are relevant only if and to the extent that they evidence the intentions of the taxable person at the time of supply.
We can accept from the evidence that the Appellant conceived the 2005 "Around Britain Deeply" voyage whilst part at least of the expenditure on the refurbishment of the yacht was incurred. That voyage, however, was not a commercial venture, nor was there evidence that it was originally conceived as a commercial venture: it was undertaken by like-minded individuals who came together through personal contacts and who shared between them the costs of the voyage. As such it cannot be said to be an extension of the business then carried on by the Appellant. It was this voyage which in turn gave rise to the idea and possibility of organising similar cruises on a commercial basis: in correspondence with the Commissioners Mr Gilbert stated, when describing the benefits of the 2005 "Around Britain Deeply" voyage, "It made sense to exploit the process we had created first by offering it out to paying punters, something I had intended to do the following year." No evidence was produced in the form of notes, business plans, correspondence or other material to suggest that cruises on a commercial basis formed part of the intention for the business of the Appellant prior to 2005 – such evidence as there is (the plan to make the yacht available for charter through a chartering agency as soon as the re-fit was completed; the decision not to bring the yacht up to a specification where it could by "coded" for commercial use) points firmly to the conclusion that commercial use of the yacht for cruises based on the "Around Deeply" concept did not form any part of the Appellant's intentions during the refurbishment period.
Therefore, even if we are prepared to accept that the Appellant's business expanded in its scope to encompass "Around Deeply" cruises on a commercial basis, the intention to do so did not exist before 2005. In consequence the expenditure on the refurbishment of the yacht was not made with the intention that it should be used for the purposes of a business carried on or to be carried on by the Appellant, and the VAT charged in relation that expenditure cannot be deducted by the Appellant from the VAT it has charged on the supplies made in the course of its business.
Finally, the Appellant argued that a portion of the input tax should be deductible as the yacht had on occasion been used as an office venue by the Appellant. The Commissioners made an alternative (reduced) assessment to take account of this. Again it is for the Appellant to show that such use was made of the yacht, and the extent of such use, so that some proper basis of apportionment can be made. The Appellant failed in this. Beyond one vague reference to the possibility of a meeting in an email (quoted above) there was no evidence of any such office use of the yacht. Quite apart from the lack of anything by way of corroboration, the oral evidence of Mr Gilbert amounted to no more than general assertion, with nothing pointing to specific occasions on which the yacht was used for this purpose. There is therefore no basis on which to apportion the input tax by reference to office use of the yacht, and therefore no basis on which to reduce the full assessment originally made by the Commissioners.
For these reasons we dismiss the appeal.
The Commissioners indicated in their Statement of Case that they are not seeking to recover their costs in respect of this appeal and therefore we make no order as to costs.
LON/2008/927