Amana Books Ltd v Revenue & Customs [2006] UKVAT V19541 (10 April 2006)

                                                                                                      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 LIMITED	Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS	Respondents

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

© CROWN COPYRIGHT 2006

DECISION

1.	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
2.	“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
	(c)  VAT paid or payable by him on the importation of any goods 		from a place outside the member States,
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.”
3.	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.”
4.	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
5.	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.
6.	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.
7.	From the evidence before us, we find the following additional facts.
8.	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.
9.	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.
10.	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.
11.	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.
12.	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.
13.	We consider below matters of disputed evidence, and also evidence of opinion, including the Accountants Report prepared by Mrs Farmer.
Arguments for Amana Books
14.	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.
15.	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.
16.	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.
17.	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.
18.	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.
19.	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. In the medium to long term the business was now moving into profit. Further, the source of funds was irrelevant to the ability to deduct input tax, for the reasons already mentioned.
20.	Mr Thomas accepted that LSM, the Amana Trust (an additional entity formed for the promotion of religious teachings) and others who followed the teachings of Witness Lee and Watchman Nee might consider the broadcasts to be of benefit. However, the test was not who benefited from a broadcast; an incidental benefit did not prevent the input tax from being deductible in full. He referred again to Rosner and Redrow Group and the points made at paragraph 17 above.
21.	If the issue of apportionment was in point, he submitted that Customs had approached the question of apportionment on the wrong basis. Even if Customs were successful in their argument that the airtime was purchased mainly to promote religion, the figure of 10 per cent input tax as allowable was far too low. If Customs’ approach was the appropriate one to follow, they had not applied the test in the right way. The “meat” of each broadcast was directly related to book sales. In addition to the opening and closing parts of each broadcast, the excerpts and direct readings should be taken into account. He distinguished Creflo Dollar Ministries (2002) VAT Decision 17705. This had concerned one entity with two functions. The Tribunal had decided that there had been three purposes of the convention in that case; preaching of the gospel, for the production of a video to enable the word to reach a wider audience, and a general marketing exercise to increase awareness of Pastor Dollar and his works and to generate sales of his existing works. The position of Amana Books was different; it had the one function of selling books. Other associated entities had the task of spreading the teachings.
Arguments for Customs
22.	Mrs Ramshaw argued that the services supplied to Amana Books were mainly for purposes other than Amana Books’ business. In determining the question, the Tribunal should consider all the circumstances and weigh the evidence against the standards and thinking of the ordinary businessman. She cited the comments of Stuart-Smith J in Ian Flockton Developments at page 400. In the present case, whilst there had been an undoubted positive effect resulting from the advertising, this was wholly negated by the cost. The cost of the advertising had exceeded the gross sales figures. Over a five year period the cost of the advertising had been £539,190 and the gross sales turnover of books had been £425,820. This meant that the cost of advertising had exceeded sales revenue by £113,370. A business did not need to be profitable, but Mr Davis had stated that the sole reason for commencing the radio broadcasts had been to sell books and that the aim was to make Amana Books profitable. Mrs Ramshaw submitted that it was inconceivable that a reasonably prudent businessman would continue to incur such expenditure when there was clearly no commercial benefit. Amana Books was not getting a return on its expenditure. Between eighty and ninety per cent of sales were repeat sales.
23.	The vast majority of the expenditure incurred did not relate directly to the function and carrying on of the business activity of Amana Books, which was to sell books. Mrs Ramshaw argued that Amana Books had a dual purpose in incurring the expenditure. Mr Davis had referred in his evidence to the purpose of increased book sales being to spread the ministry. It had been confirmed in Commissioners of Customs and Excise v Rosner [1994] STC 228 that there had to be a clear nexus between the matter in relation to which the expenditure had been incurred and the business itself. That nexus could not merely be the fact that the business would benefit from the expenditure. Benefit could not be the test. The expenditure had to be directly referable to the purpose of the business. Amana Books had purchased “ministry time”; the supplies received were for a broadcast of half an hour every day. This was not consistent with a contract for the purposes of advertising. The broadcasts had a purpose and an end in themselves, as shown by the link from Amana Books’ website to that of Premier and by the link from the latter to LSM’s website. Amana Books appeared to accept that the supplies received were for the purpose (at least in part) of the promotion of the ethos of LSM. LSM had undertaken to underwrite the cost of the broadcasts in the UK. The main body of the broadcast content was produced by LSM; these programmes were broadcast in over one hundred countries. The promotion of the teachings of Watchman Nee and Witness Lee was not a taxable activity and did not form any part of the nature and purpose of Amana Books’ relevant taxable activities, which were the sale of books and cassettes.
24.	The argument on behalf of Amana Books that no books would be sold unless people were made aware of the teachings of Watchman Nee and Witness Lee amounted to a “but for” test. In Customs and Excise Commissioner v Southern Primary Housing Association Ltd [2004] STC 209, at [32], Jacob LJ had indicated that “but for” did not equate to the “direct and immediate link” test.
25.	The proportion allowed by Customs as attributable to advertising was ten per cent. This had been calculated by reference to the proportion of time of the part of the broadcast produced by Amana Books, namely the opening and closing sections, as a percentage of the total time of the whole broadcast. There was no reason to disturb this apportionment, and the appeal should be dismissed.
26.	In relation to Netherlands Board of Tourism, Mrs Ramshaw did not seek to distinguish the case. It related to the question whether onward supplies were taxable. Customs agreed that sources of funding were not material. In that case the funding was consideration for a supply; that was not the case with Amana Books. Yoga for Health did not really assist, as it was on a question of exemption.
Reply for Amana Books
27.	Mr Thomas accepted that there might well have been a benefit to LSM from the broadcasts, but this was irrelevant to what the Tribunal had to decide. The only issue was what Amana Books’ purpose had been in purchasing the airtime. Mr Davis had said that the purpose had been to sell more books. It was not correct to ask what the purpose of the broadcast had been; the broadcast did not have a purpose or intention. Mr Thomas emphasised that in Flockton, the test was held to be subjective rather than objective. Thus the focus should be on the intentions of Mr Davis, rather than on inventing additional objective factors. For Customs to succeed in their contention, Mr Thomas agreed that they must show a dual purpose, and not look at benefit. On the question of apportionment, Customs’ case was not very clear. It had been said that most of the broadcasts were for the teachings of LSM. It was not correct to consider who made the broadcast; that was remote from the real issue. Not only should the beginning and end of each broadcast be taken into account, but either the whole of each broadcast or a large proportion of it should be taken into account for its references to the books sold by Amana Books.
Discussion and conclusions
28.	We consider first the evidence of Mrs Farmer, which consisted of her witness statement and a ten page Accountants Report with six Annexes consisting in total of a further twenty-three pages. In the Report, Mrs Farmer commented at certain points that further information would be needed to give a more complete view of the affairs of Amana Books; at one stage she wrote:
“It is my opinion that further information needs to be obtained from the company before I can complete my analysis and review of the credibility of the business.”
29.	The overall conclusion of the Report, subject to those caveats, was that although Amana Books had increased its turnover, it had always made a loss after taking into account the selling and distribution costs and administrative expenses.
30.	We have noted Mrs Farmer’s conclusions, but as both parties acknowledged in their arguments, the test is not whether the taxable person is carrying on a business profitably, but whether the taxable person is engaged in an economic activity. Under Article 4 of the Sixth Directive:
‘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 . . . ”
31.	On the facts as we have found them, Amana Books has clearly been engaged in an economic activity. The form of its accounts seems very strange to us, in that the donations made by LSM have been treated as part of turnover for each of the six years analysed in the Report. Mr Davis confirmed that he had sought advice as to the proper accounting treatment of these contributions, and had been told that it was appropriate to show them as part of turnover. If, as we would have expected, the contributions had not been treated as part of the turnover, the losses reported for each of the six years would have been significantly greater. Despite this, Amana Books has demonstrated that it has been engaged in an economic activity throughout that six year period. Our conclusion is that although we take note of Mrs Farmer’s Report, it does not affect the question of Amana Books’ economic activity. The treatment of a taxable person cannot depend on whether its activities are profitable or loss-making, as this would fail to take into account the words “. . . whatever the . . . results of that activity” in Article 4. In an extreme case it might be tempting to take into account the pattern of the losses in such a way as to demonstrate that the activity engaged in by that person did not amount to an economic activity. However, looking at the broad scope given by the European Court in various cases to the concept of economic activity, even this appears doubtful.
32.	Amana Books has been making supplies for a consideration on a recurrent basis. In our view, having regard to the totality of Amana Books’ activities, it is engaged in an economic activity notwithstanding the losses incurred, whether as shown in the accounts or as increased by not treating the LSM donations as part of turnover. The relevance of the losses is limited to the question of deductibility of the input tax, in which the losses are merely one background factor. We therefore turn to the question of the deductibility of the input tax incurred by Amana Books in respect of the broadcasts.

33.	In Flockton, Stuart-Smith J accepted at page 396 that five propositions of law were applicable:
(1)	the statutory test is, were the goods or services which were supplied to the taxpayer used or to be used for the purposes of any business carried on by him;
(2)	the purpose of the taxpayer is fundamental to this test: the fact-finding tribunal must look into the taxpayer’s mind at the relevant time to discover his object;
(3)	where the taxpayer is a company, a person . . . who is entitled to or does act for the company is the person who decides the company’s purpose;
(4)	subsequent events are irrelevant except as a reflection of the taxpayer’s state of mind at the relevant time;
(5)	it is irrelevant whether the taxpayer’s purpose is misconceived or whether his reasons are good or bad.
34.	On Mr Thomas’ primary contention that the “first limb” of the test in Flockton was satisfied, we do not consider the position to be as clear as he argued it to be. We do accept that a material consideration in the mind of Mr Davis was to find a way of making Amana Books’ products more widely known so that sales could be increased. On the basis of his evidence, we consider it to have been an objective in incurring the expenditure on the broadcasts that Amana Books should be able to increase its sales of books; however, we do not consider that it was the sole objective. When asked whether Amana Books promoted the teachings, Mr Davis confirmed that the individuals involved at Amana Books believed in those teachings, and that they would not have tried to sell the books if they had not believed in the teachings. He indicated that there were other ways in which the teachings could have been promoted, and that those ways, such as printed information cards, would have been far less expensive than the broadcasts. He accepted in cross-examination that in the first issue of LSM’s Radio Newsletter published in May 1998, reference was made to Witness Lee having said some time before his death in 1997 that the time was now right for the spread of the ministry through radio. Mr Davis recognised that this was a benefit for Amana Books, but if the teachings had not been available, there would have been no reason for Amana Books to exist. Mr Davis acknowledged that spreading the ministry through the broadcasts could be seen as another purpose. However, in re-examination he said that the reference to spreading the teachings as part of “our” purpose was to the individuals who worked for Amana Books.
35.	On the Amana Books website the following statement appears after a reference to the publications of LSM, particularly the writings of Watchman Nee and Witness Lee:
“ . . . Our goal is to supply spiritual food for the nourishment of all believers that they might grow in the divine life for the building up of the Body of Christ. In addition to the written publications Amana sponsors Life-Study of the Bible with Witness Lee, a radio program broadcast . . . ”
36.	Our conclusion is that there were two purposes in the mind of Mr Davis, and therefore in the “mind” of Amana Books; one was to support the broadcast as widely as possible of programmes including religious discussions and extracts from the teachings of Watchman Nee and Witness Lee, while the other was the clearly acknowledged purpose of advertising the materials distributed by Amana Books. In practice it is a complex process completely to disentangle the one from the other, but the result of our analysis is that we do consider these purposes to be separate and distinct from each other. Thus we consider that there was a duality of purpose. We therefore reject Mr Thomas’ primary contention.
37.	It is therefore necessary for us to consider the “second limb” of the test in Flockton. Stuart-Smith J said at page 400:
“In a case such as this, where there is no obvious and clear association between the taxpayer company’s business and the expenditure concerned, the tribunal should approach any assertion that it is for the taxpayer company’s business with circumspection and care, and must bear in mind that it is for the taxpayer company to establish its case and the tribunal should not simply accept the word of the witness, however respectable. It is both permissible and essential to test such evidence against the standards and thinking of the ordinary business man in the position of the applicant.”
38.	Applying the latter test, we consider that the element of the combined purpose relating to the support of the broadcasts can only be regarded to a more limited extent as associated with the purpose of Amana Books’ business. Increasing the sales of books is clearly an appropriate purpose. We take into account that, despite the increase in turnover, this increase in sales has not prevented the business from running at a loss, whether or not the broadcasting contributions from LSM are excluded from turnover. However, we do not consider on the facts that having the business running at a loss amounts to an indication that the intention to increase sales should be discounted in any way. The question is, what elements of the programmes can be regarded as amounting to advertising or promotion of the materials available from Amana Books? We do not consider that the more general religious discussion contained in the programmes can be said to promote Amana Books in any way; Amana Books merely sponsors that discussion. Clearly, the beginning and closing sections of the programmes are part of the promotion, as Customs have already accepted. The further issue is whether the element of the programmes containing the teachings can be said to amount to a form of advertisement for the materials available through Amana Books.
39.	Our view on the evidence is that the radio programmes do promote the publications available from Amana Books by giving extracts from the teachings of Watchman Nee and Witness Lee. The programmes also mention other publications available from Amana Books, such as an annotated version of The Bible. Listeners to the programmes may well wish to buy publications mentioned in the programmes, and may wish to read the teachings at greater leisure. This may be appropriate for any listeners who find Witness Lee’s diction difficult.
40.	Both parties accepted that it was not correct to look at who benefited from the expenditure. We agree that the only question to be considered is the intention of Amana Books in deciding to incur that expenditure, viewed by reference to the objective factors relevant to its business.
41.	We accept Mr Thomas’ argument that it is not appropriate to examine who produced the programmes. What matters is the content, and whether any part of that content can be said to fulfil an intention on the part of Amana Books in purchasing the airtime to advertise books and other materials. We are satisfied that there was such an intention, and that part of the expenditure on the airtime was therefore for the purposes of Amana Books’ business.
42.	As we do not accept that the whole of the input tax can be regarded as incurred for business purposes, an apportionment is necessary. We have analysed the sample programme, both by examining the transcript and by listening to the CD recording. We do not think that a “line count” of the transcript produces the correct answer. In reviewing the programme on CD, we measured the total length of the broadcast, including the opening and closing sections. We also timed the sections of the programme containing the statements of Witness Lee, and added in the time taken for advertising of other materials. The percentage of the time taken for opening, closing, advertising and the statements of Witness Lee was approximately 43 per cent. We also listened to other sample opening and closing sections, which were longer as they were advertising a coming Convention at which Amana Books would be providing their material, with special offers and a free £5 book token to anyone booking in advance. To make allowance for such possible differences between programmes, we consider that it would be appropriate to round the percentage up slightly to 45 per cent.
43.	Accordingly, the appeal is allowed to the limited extent of increasing Amana Books’ recovery of input tax to 45 per cent. Mr Thomas applied for costs. As we have found that only a limited part of the input tax is recoverable, namely an additional 35 per cent beyond the 10 per cent agreed by Customs, and have found that the majority, 55 per cent, is not recoverable, we consider that the most appropriate way of dealing with costs is to make no order.

JOHN CLARK

CHAIRMAN
RELEASE DATE: 10 April 2006

LON/05/0136