[2012] UKFTT 565 (TC)
TC02243
Appeal number:
TC/2009/15261
VAT – input tax claim
refused – horse trading - is business test satisfied - no
FIRST-TIER TRIBUNAL
TAX CHAMBER
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GOODMAN EQUINE
LIMITED
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Appellant
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- and -
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THE COMMISSIONERS
FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE ALISON MCKENNA
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HARVEY ADAMS
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Sitting in public at Bedford Square on 27 June 2012
Tim Brown of counsel for the
Appellant, instructed by the VAT Consultancy
Michael Jones of counsel,
instructed by the General Counsel and Solicitor to HM Revenue and Customs, for
the Respondents
© CROWN COPYRIGHT
2012
DECISION
1.
This appeal concerns a decision by HMRC to deny Goodman Equine Limited
(“the Appellant”) the input tax claimed for the period 10/08. The input tax claimed
amounted to £73, 166.76, and related to the company’s purchase of one horse (“For
Fun” on 30 May 2008 for the VAT inclusive sum of £490,000) and associated
costs. The claim was denied by HMRC in a decision dated 9 March 2009, in
which it took the view that the Appellant company was not a business for the
purposes of VAT. The Appellant requested a Review of that decision, which was completed
and issued dated 15 October 2009 and upheld the original decision. The
Appellant now appeals to the Tribunal by way of its Notice of Appeal dated 21
October 2009.
2.
The Tribunal’s jurisdiction in this matter is derived from s. 83 (1) (c)
of the Value Added Tax Act 1994, so that the Tribunal may affirm or vary the
decision under appeal. Following Mr Jones’ closing submissions on behalf of
HMRC and the inclusion of suggested alternative bases for refusing the income
tax claim, Mr Brown objected on behalf of the Appellant that he had received no
prior warning of these alternative arguments. Mr Jones explained that they
were in response to the evidence heard by the Tribunal and that he had been
unaware of how the Appellant put its case until the hearing itself. The
Tribunal confirmed that it was seized of HMRC’s decision to refuse the input tax
claim, rather than being required to consider the reasons originally given for
doing so; however, we expressed the concern that the Appellant should have a
fair opportunity to respond to all the arguments and offered to consider further
written submissions on the new points raised, so as to give the Appellant more
time to consider them.
3.
After some discussion it was agreed by both counsel that the Tribunal
should now proceed to make its decision on the main issue before it, which is
whether the Appellant company meets the “business test”. If the answer to that
question is no, then the appeal will be dismissed. If the answer to that question
is yes, then the Tribunal will at that stage invite further submissions from
both counsel before finalising its decision as to whether the decision to
refuse the input tax claim should be affirmed or varied.
Background
4.
The Appellant is a company limited by shares. It was incorporated on 15
May 2008 with the sole director and sole shareholder being Mrs Jennifer Goodman.
It was registered for VAT with effect from 16 May 2008 and described the nature
of its business on the VAT 1 registration form as “show jumping and trading
in horses”. The estimated value of taxable supplies for the 12 months
following registration was given on the VAT 1 form as £500,000, however the
first year’s accounts showed the company’s turnover as nil.
5.
The Appellant’s objects as set out in its memorandum of association are
to carry on business generally as a commercial enterprise. It was not disputed
that the company has its own bank account and credit card; that its accounts for
the financial year May 2008 to May 2009 have been prepared by a firm of
chartered accountants and submitted to Companies House (but were not, and were
not required to be, audited); that it has since incorporation made certain taxable
supplies in relation to stud fees for another horse; that it has acquired a
number of horses in the past four years but has not, to date, sold any horses.
6.
By the time of the hearing it was no longer argued that prize money from
show jumping competitions constituted taxable supplies within the scope of the
VAT regime. The Tribunal heard that there were still some unresolved issues
between the parties in relation to the correct VAT treatment of the provision
of hospitality by the Appellant to sponsors, the appropriate treatment of the
sponsorship payments and of the provision of advertising to sponsors (by
displaying their corporate insignia on the horses’ numnahs during competitions).
However, it is not necessary for the Tribunal to reach a concluded view on the
tax treatment of those activities in order to decide the issues in this appeal.
7.
HMRC’s decision to deny the input tax claim was based on its view that the
company does not meet the business test set down in case law. The letter of 9
October 2009 made particular reference to the requirement for the Appellant to
satisfy HMRC that it had a realistic intention to make taxable supplies on a
regular and ongoing basis. It also referred to the absence of a plan of action
to increase the value of the horse before selling it on or of one to obtain
sponsorship for the horse.
8.
The Appellant’s grounds of appeal are that the company is entitled to
the recovery of input tax as it is acting as a taxable person, carrying out
economic activity and having a genuine intention to make taxable supplies. It
states that the company purchased For Fun as a show jumping horse with the
genuine intention of exploiting this asset for the purposes of obtaining
income, and that it has incurred costs which were preparatory to the carrying
out of an economic activity.
The Evidence
9.
The Tribunal heard sworn evidence from Mrs Goodman. She had filed two
witness statements in the proceedings, dated 8 November 2011 and 31 May 2012,
which were taken as her evidence in chief.
10.
In her witness statements, Mrs Goodman explained that she has been
involved with horses all her life. She has a background in polo, dressage and
show jumping and competes in dressage. She described the business model of the
company as being for her to use her knowledge of horses to identify horses with
potential for improvement and to purchase them, give them expert training, and
then sell them at a profit. She said that she enters into contracts with
riders who will provide the training and ride the horse in competitions. She
travels extensively throughout Europe to attend horse shows where she can
identify such horses. In her second statement she explained that the company
now owns twelve horses, which she lists. Of these, six were in active
competition and ridden by others; one was ridden competitively by herself; the
remaining five were retired or injured or intended to be retained for breeding,
or to be used as a companion for the other horses.
11.
In her evidence to the Tribunal, Mrs Goodman appeared unsure of when
and how all of these horses came into the ownership of the company. Some of
them had been purchased by the company itself but some had apparently been
transferred from her own private ownership to that of the company. She did not
explain why this was. She did not think that any valuation had been undertaken
before doing so. She said they are shown as assets of the company in its most
recent accounts (which we did not see) at what she had paid for them. She
accepted in answer to a question from the Tribunal that a retired horse and a
companion pony have no re-sale value. She also referred to the transfer of
the employment of her own groom to employment by the company, but accepted that
this expense had not been shown in the company accounts for the relevant
period.
12.
In cross examination, Mrs Goodman said that all her horses are always
for sale but it depends on getting the right offer. She explained that she had
received an offer of £100,000 for the horse Rossini but had decided not to sell
him. She had loaned him on terms that the host pays the costs of keeping him
but that she could ride him whenever she chose, including in dressage
competitions. Mrs Goodman said she does not pay to ride Rossini. In answer to
questions she explained that the benfit to the host is that they share any
prize money after expenses are paid and that they receive a share of the
proceeds of sale when the horse is sold.
13.
With regard to the company’s activities of sponsorship and hospitality,
Mrs Goodman explained that the Horse of the Year Show was televised with the
sponsor’s name visible on the numnahs. She had taken guests of the sponsoring
restaurant to the show, where they had watched For Fun compete. The Tribunal
had seen two different invoices in respect of this event. One had VAT included
and the other did not. Mrs Goodman said this was because a corrected invoice
had to be issued and the corrected one included VAT. She explained that the
estimated £500,000 turnover referred to on the VAT 1` form was stated in
anticipation of selling For Fun. The intention had been to sell him in 2 -3
years but he had not been sold. He had been unwell the previous year. She
told the Tribunal that For Fun is now 14 or 15 years old but that horses still
compete at a high level at aged 16 and above and live into their 20s.
14.
Mrs Goodman accepted that the first year’s accounts for the company
showed that its turnover was nil. It listed the cost of sales as £32,000, its
administrative expenses as £50,000 and the only income was derived from prize
money. The bottom line showed a loss of £73,000 and she accepted that it was
technically insolvent at that point. She said she was unsure if the second year’s
accounts showed higher income, they were in the process of being prepared and
had not been produced to the Tribunal. The company’s accounts for the year to
2009 showed that it had then received an interest-free loan from Mrs Goodman of
over £600,000. In her evidence to the Tribunal she estimated that she was now
owed considerably more by the company but said that she hoped and expected that
her loan would be re-paid. She accepted that the total output tax in 4
years was £144 and that the total input tax claimed was £87,000. It was
accepted that taxable supplies had been made in the sale of semen, however
these did not appear on the relevant VAT returns. Mrs Goodman said that she
had relied upon her advisers to include the relevant items in the VAT
returns.
15.
In re-examination Mrs Goodman confirmed that the main activity of the
company was buying, improving and selling horses although other activities were
also undertaken.
16.
The Tribunal also heard sworn evidence from Mr Greenough, the HMRC officer
who had taken the review decision in this case. His witness statement was, by
agreement, taken as his evidence in chief. He told the Tribunal that he had,
subsequent to the review decision, received and considered further evidence and
representations from the Appellant’s representatives. He had also heard Mrs
Goodman’s evidence to the Tribunal. Nevertheless he remained of the view that
the business test was not met in this case. He was asked in cross examination
why he had not de-registered the company for VAT. He said that this was not
his area of responsibility.
The Law
17.
The right to deduct VAT falls sunder Article 168 of Council Directive
2006/112/EC and requires the taxpayer to use the goods or services “for the
purposes of the taxed transactions of a taxable person”. A “taxable person”
is defined under Article 9 of the Directive as “any person who, independently,
carries out in any place any economic activity, whatever the purpose or results
of that activity”.
18.
The Directive is effected into UK law by s 24 of the VAT Act 1994, which
requires the goods and services to be used “for the purpose of any business
carried on or to be carried on by him”. “Business” is defined in s 94(1) of
the 1994 Act as including “any trade, profession or vocation”.
19.
The business test has frequently been discussed by the Courts with
reference to the “badges of trading” which are the generally recognised indicia
of economic activity, most recently stated in the High Court’s decision in CEC
v Lord Fisher [1981] STC 238. These may be summarised as:
(1)
whether the activity is a serious undertaking earnestly pursued;
(2)
whether the activity is an occupation or function actively pursued with
reasonable or recognisable continuity;
(3)
whether the activity has a certain measure of substance as measured by
quarterly or annual value of taxable supplies made;
(4)
whether the activity is conducted in a regular manner on sound and
recognised business principles;
(5)
whether the activity is predominantly concerned with the making of
taxable supplies to consumers for a consideration; and
(6)
whether the taxable supplies are of a kind which, subject to
differences of detail, are commonly made by those who seek to profit by them.
20.
The case law makes clear that the badges of trade are indicative only. Further,
that it is important to look at the whole picture, rather than considering each
“badge” in isolation as no one factor is decisive.
21.
Counsel referred the Tribunal to the authorities with regard to an
intention to commence business activity, and it is clear that preparatory
activity is a relevant consideration for the Tribunal. We were assisted in
particular by the European Court of Justice’s decision in Rompelman v
Minister van Financien (case 268/83) [1985] ECR 655 in which the Court
found that the stated intention to trade should be supported by objective
evidence in each case.
Submissions
22.
The Appellant’s submission was that the Tribunal has a duty to interpret
national legislation implementing an EU Directive so as to give effect to that
Directive. Mr Brown referred us to the ECJ’s decision in Wellcome Trust v
CCE (Case C-155/94) [1996] STC 945, in which the meaning of “economic
activity” had been given a wide interpretation. He submitted that the question
of whether the goods were used immediately for taxable transactions is
irrelevant and that neither the scale nor the profitability of the activity were
relevant considerations in assessing whether the company meets the test.
23.
The Appellant relied on this wide interpretation of “economic activity”
in submitting that the company was engaged in relevant activities. Mr Brown
pointed in particular to the activities of its director Mrs Goodman in
searching for and sourcing horses to improve and sell on.
24.
HMRC’s contention was that the issue of what constitutes a business or
economic activity is a question of law, but the question whether a business
exists or not is one of fact. Mr Jones submitted that the domestic legislation
and the European Directive establish the same test by a different route. He
accepted that there is no exhaustive definition of what constitutes a business,
but submitted that as Parliament had not opted to define the term it was a
matter for the Tribunal to apply the case law to the facts. The facts here did
not support the Appellant’s case that it was engaged in economic activity and,
in particular, the evidence heard by the Tribunal did not meet the “badges of
trading” test. Mr Jones characterised the Appellant’s activities as
furthering the “hobby” of Mrs Goodman and lacking in the necessary commercial character.
He submitted that the only taxable supplies to have been made by the company to
date were in respect of stud fees in August and October 2011. He accepted that
there had been one isolated example of sponsorship (in respect of which there
had been confusion over the VAT treatment) but submitted that this was not an
activity that fell within the stated business activity of horse trading on the
form VAT 1, and that For Fun could not be used in that line of business in any
event as he was a gelding. Mr Jones submitted that the company was not
conducted in a business-like way: it could not continue without the financial
support of Mrs Goodman.
25.
With regard to preparatory activity, HMRC’s submission was that it was
insufficient for the Appellant merely to state an intention to trade without
objective evidence to support this assertion. He submitted that, on the facts
of this case, if the Appellant states that its intention is to trade in horses
then the burden rests with the company to show that the relevant conditions of
the business test are met. Further, that in circumstances where there has been
no sale of a horse but there has been a stated intention to sell horses, HMRC
is entitled to seek objective evidence to support the stated intention. Mr
Jones conceded that there is no set time frame for the sale of a horse
(obviously, it might take longer to prepare for sale a foal than an older
horse) but there must be evidence of actions which are preparatory to sale,
rather than merely stated intentions.
26.
Mr Jones directed the Tribunal’s attention to the Lord Fisher decision,
in particular with regard to the question of whether pleasure and social
enjoyment in an activity can preclude it from being a business. He submitted
that the hurdle for the Appellant must be higher where an activity is ambiguous
as to business or social enjoyment.
27.
With regard to the indicia, Mr Jones submitted that this was not a
serious undertaking earnestly pursued – the undertaking should in truth be
regarded as the maintenance of horses for competition as there had been no
trading. Further, that there was no reasonable continuity as the only business
activities of the stud fees and the sponsorship were both isolated examples; that
there were negligible taxable supplies over a 4 year period; that the company
could not be said to be conducted in accordance with sound and recognised
business principles in view of the fact that it was trading at a loss and could
not continue without Mrs Goodman’s loan. Further that the records show it cost
the company some £7,000 per year to enter competitions in which it won £9,000
in prize money. Its predominant activity was not that of making taxable
supplies, and its activities were not (absent the stud fees) of a kind
undertaken with a view to profit.
28.
Mr Brown submitted on behalf of the Appellant that there is evidence of
economic activity in the company because if the business model involves buying
and training a horse then it is being used for the purpose of a taxable
transaction prior to onward sale. He accepted that a statement of intent
without more was insufficient to indicate a business, however he argued that
the Tribunal should take into account the specific market place in which the
company operated. In relation to the indicia he argued that there was a
serious undertaking here, involving substantial investment. The horses are in
training and competition all the time so demonstrating continuity. The
business is run in a regular manner with accountants and so forth (the mistakes
in the accounts were irrelevant). The predominant activity of the company is
concerned with making taxable supplies, and this should not be interpreted with
reference to the volume of those supplies. He reiterated that the horses were
always for sale but awaited the right offer. A wide interpretation of
“economic activity” should be given so that the time within which a sale should
be made is irrelevant.
Conclusion
29.
We have considered all the evidence in this appeal very carefully but
have concluded that the Appellant company is not engaged in economic activity
for the purposes of the VAT regime, even giving that term the widest
interpretation as argued for by Mr Brown. We have had regard to the
badges of trade in reaching our conclusion and in doing so we accept that neither
the scale nor the profitability of the company’s activities are relevant
considerations in deciding this appeal.
30.
We were not satisfied that this company constituted a serious
undertaking earnestly pursued, not simply because there had been no horse sales
to date, but because there had been no horse sales even in the face of a good
offer for Rossini having been made and where it would be reasonable to expect
the company to have accepted in view of its financial instability. The
alternative arrangement which was reached, of a horse loan allowing Mrs Goodman
to continue to ride the horse, did not give us the impression of a serious
undertaking but rather of an undertaking conducted principally to further the
competitive career and enjoyment of the company’s director.
31.
We were also not satisfied that there was reasonable continuity of
activity here as the only business activities we heard about (the stud fees and
the sponsorship income) were both isolated examples so that there had been
negligible taxable supplies even in relation to these activities (and none in
relation to the stated intention of trading in horses) over a 4 year period. We
did not accept Mr Brown’s argument that the continuous activities of the
director in relation to the horses, absent any identifiable business outcome
derived from those activities, were sufficient to meet the test.
32.
We did not conclude that the company was conducted in accordance with
sound and recognised business principles. This was in view of the evidence that
the company was not only trading at a loss, but clearly that it could not
continue to trade at all without reliance upon Mrs Goodman’s financial support.
We found it difficult to understand why, if the company’s business model was one
of “all the horses are always for sale,” the director had transferred the
ownership of a number of horses without any re-sale value to the company
balance sheet. This seemed to us to run counter to recognised business
principles.
33.
We were not satisfied that the predominant activity of the company was
that of making taxable supplies, or that its activities were of a kind
undertaken with a view to profit, given that it had not made any horse sales
over the relevant period and did not take advantage of offers to buy horses
when made. We consider that the predominant activity of the company is, in
these circumstances, more closely connected to the pleasure and social
enjoyment of equestrian activities by Mrs Goodman than it is to a business and
that the Appellant has not satisfied us to the contrary.
34.
We considered whether the company’s activities might be described as
preparatory to trade or undertaken with the intention of trading. Having found
that the company had failed to make taxable supplies in circumstances where it
might have done so and that it had acted to transfer assets with no re-sale
value to its balance sheet, we conclude that the objective evidence does not
support the stated intention to trade in this case.
35.
In all the circumstances, this appeal is dismissed.
36.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
ALISON MCKENNA
TRIBUNAL JUDGE
RELEASE DATE: 29 August 2012
