VAT Yacht Charterer Withdrawal of Registration Whether Appellants Carrying on Business

19473

VAT — yacht charterer — withdrawal of registration — whether Appellants carrying on business — on facts no — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

SIMON JAMES MCDONALD & CHRISTINE MARY MCDONALD

Trading as S MCDONALD CHARTERSAppellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE AND CUSTOMSRespondents

Tribunal:David Demack (Chairman)

Howard J Middleton

Sitting in public in Manchester on 22 August 2005 and 10 January 2006

J D McDonald for the Appellant

J Cannan, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

DECISION

The appellants, Mr Simon James McDonald and his mother, Mrs Christine Mary McDonald (“the partners”), claim to trade in partnership as yacht charterers under the name or style of S McDonald Charters. They appeal against a decision of Her Majesty’s Commissioners of Revenue & Customs (“the Commissioners”) of 19 November 2003, whereby they were informed that their VAT registration was cancelled because they were not in business, and thus not eligible to be registered. The form VAT 35, Cancellation of Registration, was issued on 23 November 2004 (sic). As a result of their decision, the Commissioners seek to recover from the partners £23,447.89 representing net repayments made to them in respect of accounting periods 10/01 and 04/02 totalling £23,723.48, less tax paid in respect of period 07/02 of £275.59.
In their Notice of Appeal, given on 30 January 2004, the partners through, Mr McDonald, gave their reason for appealing as, “The decision to prove the above business was never trading correctly is untrue. I have documentary evidence to prove this business was set up with the intention of making profits and will use this evidence at appeal. I was deeply worried by the fact that someone who obviously has no involvement in the yacht charter industry can make decisions of this magnitude. The business used a well known charter management company who are still trading today and were before we approached them.”
The partners’ case was presented by Mr J D McDonald, the father of the male appellant and husband of the female one. He produced a small bundle of copy documents, gave oral evidence himself and called his wife to give evidence. Mr Jonathan Cannan, counsel for the Commissioners, also produced a bundle of copy documents, but called no witnesses. From the evidence presented to us, we make the following findings of fact.
Mr McDonald junior applied for and was registered for VAT purposes as a yacht charterer with effect on 16 May 2001. It would appear, and we find, that initially he alone intended to purchase a yacht, and he registered as a sole trader. But, on finding that he could not complete the purchase without assistance, and Capital Bank, which was to finance part of the project, was not prepared to proceed without a third party being involved not merely as guarantor, but as a partner, his mother entered into partnership with him. No written partnership agreement was entered into, nor was there anything else in writing to record the arrangements between son and mother. Notwithstanding we find that there was a true partnership under the Partnership Act 1890. Mr McDonald junior’s VAT registration number was re-allocated to the partnership on 3 October 2001.
Mr McDonald junior lives in Sheffield and is a car body re-spray specialist. As he was not registered for VAT prior to May 2001, it would appear that he was not in business on his own account.
On 23 April 2001, the partners purchased a new six berth Jeanneau Sun Odyssey 32.2 foot yacht from Westways of Plymouth Limited (“Westways”) for £59,614, including £8,878.68 for “coding”, i.e. the provision of additional items necessary to comply with chartering requirements. On 16 May 2001, Mr McDonald junior entered into a Yacht Management Agreement with Westways whereby, in return for 40 per cent of the gross charter income earned by the vessel, Westways was appointed to act as its manager and to charter it to yachtsmen on certain specified terms. The yacht was to be delivered to the Plymouth Yacht Haven and Mr McDonald junior was required to pay for all maintenance, repair and replacement of worn and broken equipment, berthing and harbour dues, and to insure the vessel. He was to notify Westways when the vessel was not available for charter as being required for own use. In return, Westways was to account to the partners for income on completion of each charter. The agreement provided that the yacht could be withdrawn from charter only at the end of the season (31 November (sic)) after two months notice to Westways.
The partners borrowed £40,509 from Capital Bank to complete the purchase of the yacht. That sum was repayable over a ten year period, at an initial interest rate of 8.39 per cent. The monthly capital and interest repayments totalled £499.87 and ‘Keyman’ life insurance cover premiums, presumably on a policy on Mr McDonald junior’s life, were an additional £20 per month.
We were not told the source or sources of the balance purchase money for the yacht, but it would appear that the majority of it came from Mrs McDonald. However, as we need make no finding as to that source, and the evidence relating to the matter was scant, to say the least, we decline to do so.
The yacht was to have been delivered before the spring bank holiday in 2001, but it was delivered late, so that it was not available for charter during the whole of the summer of 2001. In that season, it was chartered on but three occasions, apparently resulting in income to the partners of £1,653.14 including VAT of £246.11. We say “apparently” for although that is the income shown on the invoices produced to us, in a statement of account for 2001 income is shown as £1,862.75 including VAT. In the absence of any corroborative evidence as to the correct figure, we proceed on the basis of the invoice figures, and thus reject the figure contained in the statement. The statement shows the following expenditure:

Berthing (3 months) 430.25

Insurance 162.50

Engine Service 111.00

Repairs 18.00

1141.00

(The statement contains no indication of whether those items of expenditure which were liable to VAT were tax inclusive or exclusive).

On the basis of the contents of the statement, Mr McDonald senior claimed that the return on capital employed was 1.91 per cent — equivalent to 5.1 per cent over a full season. In contrast, Mr Cannan claimed that the return obtained was a mere 1.2 per cent on capital of £59,614. We accept Mr Cannan’s claim, and reject that of Mr McDonald senior.
The partners sold the 32.2 ft yacht in October 2001 but we were provided with no documentary evidence of the sale. It was replaced by a second-hand 37 foot Jeanneau Sun Odyssey yacht costing £81,000, including VAT of £12,063.83. To complete that purchase, the original marine mortgage was increased to £54,200. The reason given for the change was that Westways advised that there was far more scope for the chartering of a 37 foot yacht than a 32 foot one. Again, no evidence was adduced of the source of the money additional to the increase in the marine mortgage required to fund the purchase.
The larger yacht was managed by Westways in 2002, but the Yacht Management Agreement relating to it was not produced. Consequently, we are unable to say whether it contained identical, or very similar, terms to those contained in the earlier agreement, or contained very different terms. Its absence does not help us. In 2002, the yacht was chartered on four occasions earning a gross income for the partners of £1850.42 and net income, after deduction of VAT, of £1574.83. We were provided with no statement of income and expenditure or profit and loss account for 2002 so that we are unable to say what return on capital was achieved in that year or what the partners’ expenses totalled. But we can, and do, assume that expenditure was substantially greater than that in 2001 for there would have been a liability for berthing and insurance for the whole year rather than for part of it, and assuming the 2002 figure for berthing was approximately four times that of three months in 2001, that item alone would have absorbed the whole of the charter income. (In fairness to the partners, we should mention that they claimed, and we accept, that in 2002 Westways itself acquired and let out 37 foot yachts and gave preference to letting its own vessels over that of letting the partners’ yacht. There was nothing to prevent Westways from doing so, and we treat the matter as nothing other than an ordinary commercial risk the partners had to take).
For completeness, whilst dealing with financial matters, we should add that, following the Commissioners’ initial decision to de-register the partners, they were asked to provide their business plan. In response, they merely produced a Westways document entitled “Rates Analysis” for 32 foot yachts in 2001. It showed ‘a realistic breakdown of what can be expected’. Based on six weeks and eight weekends chartering, Westways estimated income of £3,256, including VAT.
Although Mr McDonald senior claimed that a bank account existed in the name of S McDonald Partners, we were provided with no evidence of it, and in its absence, we decline to find its existence as fact. And, against a background of no evidence being adduced of the partners maintaining any books or financial records, we also find that no such books or records were kept.
Mr McDonald senior maintained that the partners had bought the yachts with the intention of running a business of letting them, explaining that, whilst the yachts were berthed in Plymouth, his son lived in Sheffield so that his own opportunities for sailing the yachts were effectively limited to his annual holidays of three weeks. Further, Mr McDonald senior disclosed that he himself owned a yacht, which was available for use by his son and family at any time. In those circumstances, he submitted that it was plain the partners’ yacht had been acquired for and had been used in their business, rather than for anything other than occasional use by Mr McDonald junior.
Against that factual background, the law which we must apply is to be found in paragraph 1 and 2 of article 4 of the Sixth Council Directive (77/388/EEC). They read as follows:

“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.

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 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.”

Those provisions are implemented in domestic legislation in section 4 of the Value Added Tax Act 1994 as follows:

“(1)VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

(2)A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.”

Section 94 of the 1994 Act states that “in this Act ‘business’ includes any trade, profession or vocation”, but provides no definition of business. It is plain, however, that “the same meaning must be given to ‘business’ as it appears [in the 1994 Act] as that given to “economic activity” as it appears in article 4 of the Sixth Directive”, see paragraph 17 of the judgment of Evans-Lombe J in Customs and Excise Commissioners v St Paul’s Community Project Limited [2004] STC.
In the St Paul’s case, the learned judge observed that the appellant in that case accepted that “the imposition of VAT, being a tax on turnover, is not dependent on the making of profits by a taxpayer, or a presumed intention by him to make profits in the future”; and submitted that the appropriate test to determine whether a business existed was to be found in the judgment of the Lord President in the Inner House of the Court of Session in Customs and Excise Commissioners v Morrison’s Acadamy Boarding Houses Association [1978] STC 1, as later developed in subsequent cases. In the Morrison case, the Lord President is recorded as saying (at p.6):

“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 …”

Gibson J, giving judgment in Customs and Excise Commissioners v Lord Fisher [1981] STC 238, cited and commented on the Lord President’s judgment, saying, inter alia:

“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 on 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”.”

In Customs and Excise Commissioners v Lord Fisher [1981] STC 238, Gibson J considered the following criteria relevant in determining whether a business was being carried on:

(1) whether the activity was a serious undertaking earnestly pursued;

(2) whether it was an occupation or function actively pursued with recognizable or reasonable continuity;

(3) whether it had a degree of substance;

(4) whether it was conducted in a regular manner and on sound and recognized business principles;

(5) whether it was predominantly concerned with making taxable supplies for consideration; and

(6) such as consisted of taxable supplies of a kind commonly made by those who seek to profit by them.

Mr McDonald relied heavily on the decision of the tribunal in the case of TBV Stockdale trading as Compass Charters v Customs and Excise Commissioners (2004) Decision No. 18757 in which the appellant, who also chartered his yacht through Westways, succeeded in establishing that he was carrying on an economic activity. Mr Cannan observed of that decision that the absence of a business plan by Mr Stockdale had not proved fatal to his case, but was an important factor to be put in the balance, saying that each case in this area was fact sensitive.
On the basis of the case law referred to above, Mr Cannan submitted that the partners did not carry on a business of yacht chartering. In relation to the first of the factors identified by Gibson J in Lord Fisher, he contended that the evidence indicated anything but an intention on the part of the partners to pursue the undertaking seriously. They had no business plan: they appeared to have ignored the costs of financing and insurance: and there was a distinct lack of any serious financial records. He maintained that it was clear from the authorities that occasional supplies did not constitute a business; and, at best, it was borderline whether the partners’ supplies could be described as being pursued with reasonable continuity. The partners’ supplies at £1,862 (at most) in 2001 and £1573 in 2002 could hardly be described as “substantial in amount”, particularly in relation to the total capital involved. Mr Cannan submitted that the evidence showed that the partners’ “business” had never been conducted on sound and recognised principles; and the return they had achieved as capital was minimal. There was no evidence that the returns had been “businesslike” for the partners’ venture. He found it difficult to reconcile with the partners “business plan”, a claim by Mr McDonald senior that the partners were in business “to make money” and expected to make a profit, if not in their second year of trading, then in the third. He submitted that, against a background of the evidence not making sense and in the absence of any evidence from Mr McDonald junior, the only plausible explanation for purchase of the yachts was that they were intended for his use: a profit nature was not essential, but it was a factor to be taken into account. Looking at the partners’ activities as a whole, Mr Cannan submitted that their predominant purpose was personal use, and did not amount to a chartering business. In the Stockdale case, which he contended we should distinguish, he observed that the bank financing the appellants’ transaction in that case viewed it as a business proposition – a factor not present in the instant case.
Mr McDonald senior submitted that we should follow the Stockdale decision, maintaining that it was identical in every material respect with the instant case. Notwithstanding that in 2003, Mr Stockdale had made a loss, the tribunal found him to be running a genuine business. He contended that the partners had good reason to believe that the charter income of their business would, after their first and second years of trading, be sufficient to provide a surplus for application against their finance costs. In that case, the partners were running a business, and their appeal should be allowed.
There are two very important factors of the Stockdale case that enable us to distinguish it from the instant one. First, there is the tribunal’s finding of fact that Mrs Stockdale suffered a brain tumour which prevented her husband from playing the much more active part in chartering his yacht he intended to play. Secondly, between charters, Mr Stockdale took his yacht out to check for faults that would not have emerged from the checks which Westways carried out under the yacht charter agreement. We could add other distinguishing factors, but find it unnecessary to do so.
The evidence adduced on behalf of the partners did not satisfy us that they had an intention of pursuing the undertaking seriously. They had no business plan, using that expression to describe a plan thought through seriously to establish an undertaking that could be financially viable; and appear completely to have ignored the costs of financing the purchase of the yachts in any calculations they may have made. In the first year alone, interest on the mortgage on the 32 foot yacht would have amounted to £3,500. No evidence was adduced as to how that sum was intended to be met in the absence of charter income covering it. Since Mr McDonald junior chose not to attend the hearing, we heard nothing of his financial situation, nor was any evidence adduced of his mother’s financial position. Consequently, we are unable to say whether they were able to meet the liabilities which they faced. (We should add that in cases such as this the burden of proof is on the appellants, and not on the Commissioners).
The limited information disclosed to us indicated that, if not insolvent from the outset, without a substantial injection of capital, the partnership would quickly have become so. It had no degree of substance.
Against that background, we conclude that the partners’ never conducted a business on sound and recognised principles; they kept no proper financial records; and their supplies were not substantial in amount. And whilst what they did amounted to the making of supplies of a kind commonly made by those who seek to profit by them, and to a limited extent was pursued with recognisable continuity, in our judgment, those two factors, even in combination, are insufficient to justify the “business” as warranting the description economic activity.
Since we are satisfied that the Commissioners’ decision to de-register the partners was the correct one, we dismiss their appeal. In entering into the yacht management agreements with Westways, the partners were simply managing their investments; they were not conducting a business.

DAVID DEMACK