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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Stockdale (t/a Compas Charters) v Customs and Excise [2004] UKVAT V18757 (02 September 2004) URL: http://www.bailii.org/uk/cases/UKVAT/2004/V18757.html Cite as: [2004] UKVAT V18757

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18757

ECONOMIC ACTIVITY – whether purchase and charter of boat an economic activity within Article 4 of Sixth Directive – Berwick distinguished – Appeal allowed

LONDON TRIBUNAL CENTRE

TREVOR BRIAN VAUX STOCKDALE Appellant

T/A COMPASS CHARTERS

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MISS J C GORT (Chairman)

MR SUNIL K DAS

Sitting in public in London on 1 July 2004

The Appellant appeared in person

Mr James Maxwell-Scott of counsel, for the Respondents

© CROWN COPYRIGHT 2004


 


DECISION

1. This is an appeal against a decision of the Commissioners contained in a letter dated 28 August 2003 to disallow tax claimed on the 03/03 VAT return on the basis that they were not satisfied that the Appellant's yacht chartering activity was a business for VAT purposes.

Background

2. The Appellant had been in business dealing in swimming pools and property for over 25 years. In August 2002 he deregistered for value added tax, that registration having been in respect of a partnership with the Appellant and his wife. On 23 January 2003 he re-registered on the basis that he was intending, in addition to his other activities, to enter the yacht charter business.
3. Sometime towards the end of 2002 the Appellant entered a contract for the building of a boat, a Jeanneau Sun Odyssey 40. The cost of the boat was £103,618. The boat was purchased from Westways of Plymouth, with whom the Appellant also entered a management agreement which was expressed to be operational from 1 March 2003.
4. By a return in respect of the period 03/03 the Appellant reclaimed the value added tax on the purchase price of the boat.
5. Following receipt of this VAT return the Respondents visited the Appellant, requested various documents and, having inspect them, subsequently disallowed the claim.

The law

6. The Sixth Directive article 4.

"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.

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.

Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2 and in particular one of the following:

(a) the supply before first occupation of buildings or parts of buildings and the land on which they stand; Member States may determine the conditions for application of this criterion to transformations of buildings and the land on which they stand.

…..

7. The Tribunal was referred to the following cases:

Mark Berwick and Christine Berwick (VAT Tribunal Decision No.17686)

Van Tiem v Staatssecretaris van Financien [1993] STC 91

Enkler v Finanzamt Homburg [1996] STC 1316

The facts

8. The Tribunal was given a small bundle of documents by the Respondents and, in the course of the hearing, a large bundle of documents from the Appellant. We were not referred to all the documents in the Appellant's bundle. The Appellant himself gave evidence, as did Mr Richard Trafford the owner and manager of Westways, on behalf of the Appellant.
9. The Appellant was himself an experienced sailor who had in the past owned and skippered his own boat and who possessed a coastal skipper's certificate.
10. A deposit of £10,361.80 had been paid by the Appellant to Westways on 14 October 2002. A subsequent receipt issued by Westways shows that the Appellant had paid in total £108,375 by 14 March 2003. This amount includes VAT and the amount of £4,757 in addition to the original stated price and relates to various extras.
11. The Appellant paid the sum of £1,671.56 in respect of insurance for the boat for the year 2003 and a sum of £2,867 in respect of mooring charges. The insurance was initially paid by Westways on behalf of the Appellant, but the invoice for the year 2004 was sent direct to the Appellant from the insurance company.
12. In addition to the above, there is an invoice in the sum of £5,107 made out by Westways to the Appellant in respect of a large number of items which are headed "Codes of Practice". It would appear that these are items which it was necessary for the Appellant to purchase in order to make the yacht comply with the charter requirements. Various other items were purchased by the Appellant from Westways, including an upgraded storm jib system for the sum of £428.24, and the sum of £484.92 in respect of life raft hire. The Appellant who was a keen sailor had bought the boat with the intention of chartering it out to gain income. In his evidence he told the Tribunal that he had wanted something which gave him a bit more personal interest in his business affairs, and he had wanted to diversify. He had also wanted the pleasure which came from owning a boat. The Appellant had intended to sail the boat for some three weeks each year, but on a daily basis, rather than taking it for a specific three-week period. He did not intend his private use to interfere with any charter periods. He had specifically reclaimed VAT in respect of 49/52 of the total purchase price and other sums to reflect the periods when he himself would be using the boat.
13. The agreement with Westways is headed "Yacht Management Agreement". It contains the following terms, inter alia:

OWNER'S OBLIGATIONS

…

Agree that WW shall act as managers of this vessel and shall charter it out at the rates included in the brochure or as determined by WW (discounts sometimes offered for marketing purposes/or structure from pricelist) to Yachtsmen/women who guarantee their experience (all reasonable care to be taken by WW to ascertain that statements made relating to experience are correct).

Agree to pay WW the management fee of 40% of the gross charter income earned by the vessel with WW. Shall be entitled to deduct as a first charge of such income.

Pay for all maintenance, repair and replacement of worn and broken equipment where not covered by insurance, and where not the result of the charter negligence (except as stated under WW Obligations para 2.).

Pay berthing and harbour dues incurred at the berthing location.

Agree that WW shall use the vessel when necessary for testing.

Notify WW at the earliest opportunity the periods that are not available for charter, when the vessel will be required for Owner's use, and agrees to honour charter bookings already confirmed prior to any such notification.

Equip the vessel to Yacht Charter Association minimum standards and WW Specifications.

In the event of a decision to cease charter, only withdraw the vessel at the end of the season (31st November) after two months notice, unless otherwise agreed by WW.

…

Insure the vessel using standard charter cover.

Leave the vessel in a clean and tidy order ready for the next charter.

NB: Westways are not responsible for cleaning the vessels after owner/private use, (a standard cleaning charge of £30 plus VAT applicable if vessel not suitable for charter presentation).

WESTWAYS OF PLYMOUTH LTD OBLIGATIONS

Render the vessel into good seaworthy condition and equip her as necessary to the Yacht Charter Association minimum standards at least at the owner's expense.

Carry out such repairs and maintenance as are necessary which shall be at the owner's expense where not covered by insurance and where not the result of the Charterer's negligence. (Should any single outlay necessary for the repair of the vessel exceed £1,000 WW will obtain the owner's consent in carrying out or arranging any such work).

Clean, fuel, and water the vessel and inspect all gear at each change of charterer.

Pay for printing of that part of the brochure which pertains to the vessel.

Pay for additional advertising of the vessel in Yachting periodicals.

Arrange all advertising, booking, food orders, administration relating to the chartering, maintenance, purchasing of equipment and mooring of vessel.

…

GENERAL CLAUSES

All bills for repairs and maintenance, where not arising from charterers' negligence shall be paid within 21 days of presentation. In default WW shall be entitled to retain the whole of the charter income due, or becoming due, without prejudice to their claim for any balance outstanding, provided that, where there is an insurance claim, up to a period of three months from such a claim, payment by the owner to WW may be deferred until 14 days after the owner has received payment from the insurers. …

If due to any misconduct or dispute that WW deem as detrimental to the Westways charter fleet occurs with the owner, then WW will give notice of one week for the vessel to be removed from Westways marina berth, and no further business will continue between the said two parties and this contract will be cancelled with immediate effect. …

ACCOUNTING PROCEDURE

WW will account to the owner at the completion of each charter. Payments are only issued on presentation of an invoice from the charter owner. Accounts for the fitting out of the vessel or for repairs, spares or services other than the charter of the vessel will be presented separately as required throughout the year.

14. This agreement was said to commence on 1 March 2003 and to continue until 30 November 2003. It was signed and dated by the Appellant on 12 April 2003.
15. The evidence showed that both parties had been operating in accordance with that contract.
16. On 6 May 2003 Jennifer Trafford, the joint owner of Westways, had written to the Appellant in a letter in respect of various matters with regard to the arrangements between them. Towards the end of this letter she stated as follows:

"You do not carry out any of the charter duties in any way yourself. THIS IS ALL THE RESPONSIBILITY OF WESTWAYS.

Westways are responsible for all advertising. YOU ARE NOT REQUIRED TO DO ANY.

Westways carry out all administration with regards to chartering out your yacht, reservations etc. To cut a long story short Trevor, you are not involved in any way with the entire charter process, this is ALL Westways responsibility."

17. Westways' promotional literature includes a statement headed "Charter Management". This document is obtainable on-line and has a heading "The solution to helping your boat pay her way" under that heading it states. "VAT is reclaimable on your new yacht purchase and any related items i.e Chadlery (sic)". There was no evidence that the Appellant had seen this document prior to making his purchase, although he agreed he had seen it at some stage.
18. On 14 May 2003 the Appellant wrote to the Commissioners and included an undated business plan, which, in the course of his evidence he accepted had been prepared at the time of that letter rather than prior to purchase of the boat. The items set out in that business plan are as follows:

Nine weeks' charter at £1,655 per week at 60% £8,937

Six week-ends at £925 at 60% £3,330

Total income £12,267

Less moorings £ 3,400

£ 8,867

Cost of yacht £88,185.54

Additional equip for coding for charter £ 4,346.39

£92,531.00

Equals approximately 9.5% return

19. In order to purchase the boat the Appellant had borrowed money from a Bank of Scotland current account which was in the Appellant's own name, not in the name of Compas. This account appears only to have been used for business purposes.
20. At the time the Appellant got his loan from the bank he had not presented them with a business plan. There was no evidence of the terms of the loan.
21. In the 2003 season the boat was chartered on 33 days giving an income to the Appellant of £3,920. The actual cost of mooring the boat was £2,440, and the insurance (which was not included in the business plan) cost £1,671 giving a total expenditure of £4,111 exclusive of VAT, neither of which items were included in the Appellant's breakdown.
22. A week's charter had been arranged for January 2004, but that was cancelled because of the bad weather. The turnover in 2004 there were several bookings. The boat was available for charter forty-nine weeks of the year.
23. It was accepted by the Appellant that the yacht would depreciate, but he considered it would be at a level of only 6-7% per annum.
24. In his evidence the Appellant told the Tribunal that he had purchased the boat with a view to it being comfortable and easy to handle for potential customers. It could sleep 6-8 people which would give a reasonable income. At the time that he had ordered the boat he had intended to handle the chartering arrangements himself, possibly in conjunction with a friend who was a chartering agent. After the Appellant had placed the order, but before he received delivery of the boat, his wife had developed a brain tumour and he was then having to spend much of his time looking after her. He therefore decided to use the services of Westways in order that he might have more time to look after his wife. That decision was taken in about January 2003. The Appellant's wife eventually had an operation for a brain tumour on 3 March 2003.
25. A large number of the invoices in the bundle are made out to the Appellant, some of the invoices in respect of items for the boat are made out to the Appellant by Westways. These invoices relate to items which were purchased direct from Westways, as opposed to them having come from a third party.
26. From time to time the Appellant took out the boat after there had been a charter and would himself notice matters which need rectifying which would not necessarily have been obvious to anyone from Westways checking over the boat. He would then see that those matters were corrected. On one occasion he had noticed that the helm was getting stiff and he had seen to it that this had then been rectified. Although he lived some was the person who would be contacted if the alarm should go off at any time. He would then either himself go to sort the matter out, or ask Westways to do it. It was his responsibility to look after the boat at all times when it was not out for charter, and if it needed to be moved from its berth in the marina where it was at the outset, he would be the person responsible for seeing that it was moved, for example if there was bad weather. It was for him to decide when any anti-fouling process was to be carried out. It would then be for Westways to ask the relevant yard to deal with it and to invoice the Appellant.
27. It was Mr Trafford's evidence that prior to the Respondents' decision not to allow the Appellant's application to reclaim VAT on his boat, owners had always been able to reclaim value added tax on their purchases. There was now an inconsistency in that some people were allowed to reclaim and others were not.
28. The terms of the Agreement were deemed necessary by Mr Trafford because Westways had a public liability insurance which required that his own staff carried out all the safety checks and ensured that the charterers had the proper qualifications. The majority of the work done on the boat was done by Westways because they did it at trade price. On occasions the Appellant had done work himself. Westways had a continuing obligation to ensure that the boat was seaworthy. However the owner played a valuable role in that it was not viable to test every aspect, and, by the charter owner sailing the boat periodically as here, it was possible to detect matters which otherwise might be overlooked.

The Respondents' case

29. The Respondents relied principally on the Tribunal's decision in the case of Berwick (Tribunal decision 17686). In that case Mr Berwick had purchased a boat with the intention of entering an agreement with a yacht chartering company, Sunsail, whose terms obliged Mr Berwick to enter into a four-year contract with them. For the first year Mr Berwick was repaid 10% of the purchase price of the boat. For the remainder of the period Sunsail were to pay Mr Berwick a charter fee of 25% of the net chartering income, payable quarterly. Sunsail themselves were obliged to maintain the yacht and to make any necessary repairs. Mr Berwick was allowed use of a boat for 29 days each year, but the agreement did not specifically provide for his having use of the boat that he had purchased. Sunsail were responsible for insuring the yacht and for obtaining commissions. Mr Berwick was to be paid a commission on any new clients that he introduced, but in fact he had not introduced any. The agreement provided for termination after one year.
30. The evidence showed that Mr Berwick had no plans to make any practical efforts to charter the yacht himself and when asked what his intention was when the agreement had run its course he stated: "I may sell the yacht and pay all the VAT due or possibly charter in my own name which I think much less likely."
31. In the present case the Respondents relied on the fact that Mr Stockdale had not taken any steps to market the boat, and submitted that all he was engaged in was an isolated let to Westways.
32. It was further submitted that what was relevant was who had the obligation to carry out the work, namely Westways, not who paid for the work to be done. The Appellant in the present case was not under any obligation to sail the boat himself to ensure that there were no problems needing rectifying. Furthermore, the agreement in the present case was more flexible than that in Berwick in that there was no restriction on the owner's use of the boat. Because in Berwick the owner was guaranteed an annual return for the first year, his activities were closer to a viable business. The Respondents pointed to the fact that in the 2003 season the Appellant had chartered the yacht for only 33 days, and made a loss in doing so, as well as suffering a depreciation in the value of the yacht. The Respondents also relied on the fact that Westways' website recommended placing a purchased yacht with its charter fleet as a means of reclaiming the VAT on the purchase price.
33. The Respondents also referred the Tribunal to the case of Enkler v Finanzamt Homburg and submitted that, whilst the yacht was not only suitable for economic exploitation, it was also clearly suitable for pleasure. The Appellants only "activity" was said to be to enter into the management agreement with Westways, and that single isolated transaction lacked the element of regularity required to constitute an economic activity within Article 4(3) of the Sixth Directive. The Tribunal was also referred to the case of Van Tiem v Staatssecretarias van Financien.

The Appellants' case

34. The Appellants relied principally on the differences between the present case and that of Berwick. In that case there was a four-year agreement in the course of which the owner gave the boat over completely to Sunsail who paid for all the alterations and insurance. In the present case the Appellant not only purchased the boat, but paid to have it modified at the factory to bring it up to the required chartering standard. He was responsible for paying all the berthing fees and insurances.
35. The Appellant had given consideration in respect of his own personal use, and had deducted it from the VAT he had reclaimed. At the time of the hearing several bookings had come in and the Appellant had passed the break-even point in terms of the cost and was coming into profit.

Reasons for decision

36. Although there are many similarities between the present case and that of Berwick, we find that it is possible to distinguish the case of Berwick, which turned on its particular facts. Berwick concerned the appellant's entitlement to be registered for value added tax and it was Mark Berwick's intention at the time of purchase that was the prime consideration in that case. In the present case the Appellant had other business activities which entitled him to be registered for value added tax and so entitlement to register was not an issue for us. Nonetheless, it is relevant for the Tribunal to consider Mr Stockdale's intentions at the time of purchase, insofar as they shed light on the central question of whether or not he was engaged in an economic activity. Unlike in the case of Berwick there was no evidence before us that Mr Stockdale intended anything other than continuing to make the boat available for charter, whereas Mr Berwick intended only the four-year arrangement with Sunsail (the yacht chartering company), and then possibly, he would sell the boat. In the present case the Appellant was involved in other economic activities at the time of purchase of the yacht. It was Mr Stockdale's evidence that he regarded the purchase of the yacht as a complementary activity to those other business interests. Whilst we do not ignore the fact that it was also his evidence that part of his purpose in buying the yacht was for pleasure, we do not find that that was his sole purpose and the fact that its use is partly for purposes of pleasure does not rule out its also being put of an economic activity. We bear in mind that in the present case it was Mr Stockdale's initial intention to be far more involved in the chartering process than he was subsequently able to become. This was because of his wife's most unfortunate and serious illness which precluded him from undertaking the greater role which he had initially intended.
37. As was submitted on behalf of the Commissioners in the Berwick case, it is a taxpayer's intentions at the time of the purchase which are relevant in determining whether or not the purchase of the boat is to be considered an economic activity. In the Berwick case, if the appellant had been found to have had ab initio an ultimate intention to act as a skipper/charterer, it is highly probable that the decision would have been different. It appeared in the Berwick case that the appellant's initial intention was to make the yacht available to Sunsail in order to defray the initial cost of purchase and there was no continuing intention to charter it after the end of the contract period. In the present case there is no evidence that the Appellant did not intend to continue chartering out the yacht in the future, and using it for his own purposes only when it was available, as he does at present.
38. We find that the Appellant has a continuing involvement in the decision-making with regard to the boat, unlike in the Berwick case where all the decisions were made, and the expenses paid, by Sunsail. We accept Mr Stockdale's evidence that he is the person who is contacted if there are any emergencies in respect of the boat and, whilst during the week he may then ask Westways to deal with the problem, at week-ends he is the person who is called upon to deal with any crisis.
39. Whilst Mr Stockdale does not appear to have acted in a very business-like way when he initially purchased the boat using a loan from his bank, in that he did not have any properly constructed business plan at the time showing the expected return, nor the risks, nor the cashflow, nonetheless he was able to obtain the loan and therefore the bank considered it a viable enterprise. We do not consider it fatal to his claim that the purchase of the boat and subsequent charterings are an economic activity that he did not have any such proper business plan set down in writing.
40. The Appellant in the present case was issuing invoices to Westways in respect of the charterings, and was in turn issued with invoices. This again is a distinction from the Berwick case where all the commercial side was handled by Sunsail without any involvement of Mr Berwick. We do not ignore the fact that it is the case that Westways have a considerable responsibility for many aspects of the charter, but that is because of their public liability insurance and the heavy responsibility this entails. We accept that the Appellant himself insures the boat, despite the initial cover having been taken out by Westways, which was done for reasons of expediency, and he does arrange for subsidiary repairs to be done.
41. In all the circumstances this appeal is allowed. The Respondents to pay the Appellant's costs of and incidental to the appeal.
42. Liberty to apply.

MISS J C GORT

CHAIRMAN

Release Date: 2 September 2004

LON/03/864