20229

ZERO-RATING – Replica Dutch barge – Built for the Appellant and his wife to live in and for use as his office – Whether a `qualifying ship’ – Whether it is designed or used for recreation or pleasure – No – VATA 1994 Schedule 8 Group 8 item 1 and Note (A1)(a)

LONDON TRIBUNAL CENTRE

	LT CMDR COLIN STONE & “THE KEI”	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	MISS J C GORT  (Chairman)
						MISS S WONG CHONG FRICS

Sitting in public in London on 3 and 4 May 2007

Mr E McNicholas of counsel for the Appellant 

Mr Matthew Barnes of counsel for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This is an appeal against a decision of the Respondents not to treat a ship imported by the Appellant from Holland into the United Kingdom as zero-rated for the purposes of VAT.  The Commissioners decided that the ship in question was not a `qualifying ship’ within item 1, Group 8, of Schedule 8 of the VAT Act 1994 and accordingly they taxed the Appellant in the sum of £26,861 pursuant to the New Means of Transport Scheme.  The Appellant was informed of the decision by a letter dated 6 December 2005, and the decision was confirmed after a formal reconsideration by a letter dated 7 March 2006.

2.	The initial ground of appeal was that “Previous VAT Tribunal rulings and HMCE policy has accepted that barges for residential use are treated as Qualifying Ships and zero-rated”.  Subsequently very lengthy Amended Grounds of Appeal were served which amplified the above and served in part as the Appellant’s skeleton argument.

The Background

3.	At all material times the Appellant, Mr Stone, was, for purposes of this appeal, a private individual living in Oxford; his occupation was that of a seaman officer in the Royal Navy.  Between approximately July 2001 and August 2005, Mr Stone entered into discussions and correspondence with the Respondents as to whether or not his purchase of the Kei, a newly made replica Dutch barge that would have a gross tonnage of over 15 tons, would be a qualifying ship and zero-rated pursuant to item 1, Group 8, Schedule 8 of the VAT Act 1994.  

4.	On 10 August 2005 Mr Stone completed form VAT 415 entitled “new means of transport: notification of acquisition”, by which he informed the Respondents that he had purchased a Triton Jachten 22 M Luxemotor Barge, registration mark SSR 116350 for the sum of Є220,969.12 on 8 July 2005, and that it had arrived in the UK on 10 August 2005, having completed a journey with a travelling time of 65 hours.  The VAT 415 was sent with various items of correspondence setting out Mr Stone’s request that this replica Dutch barge be treated as a qualifying ship, and therefore zero-rated.

The law

5.	Item 1, Group 8 of the VAT Act 1994 (“VATA”) provides that the supply, repair or maintenance of a qualifying ship, or the modification or conversion of any such ship provided that when so modified or converted it will remain a qualifying ship, will be zero-rated for the purposes of VAT.  

6.	The Note in relation to Item 1 sets out:

“A1 - In this Group – 

a `qualifying ship’ is any ship of a gross tonnage of not less than 15 tons which is neither designed nor adapted for use for recreation or pleasure …”

7.	Item 2 of Group 9 of VATA provides that “Houseboats being boats … designed or adapted for use solely as places of permanent habitation and not having means of, or capable of being readily adapted for, self-propulsion” shall be zero-rated.	
8.	The Tribunal was also referred to Hansard of 11 May 1972 cols. 1635 to 1646 and to extracts from the Finance Act 1972, Schedule 4, which provides:

Group 10 – transport
Item No.

1.	The supply, repair or maintenance of any ship which is neither –

(a)	a ship of a gross tonnage of less than 15 tons; nor
(b)	a ship designed or adapted for use for recreation or pleasure.

Group 11 –   caravans and houseboats

Item No.

1.	…

2.	Houseboats being boats or other floating decked structures designed or adapted for use solely as places of permanent habitation and not having means of, or capable of being readily adapted for, self-propulsion.

Article 15 of the Sixth Directive (77/388/EEC) deals with the exemption of export from the Community and like transactions and international transport.  Article 15(5) provides that the following shall be exempt:

“The supply, modification, repair, maintenance, chartering and hiring of the sea-going vessels referred to in paragraph 4(a) and 4(b) and the supply, hiring, repair, and maintenance of equipment – including fishing equipment – incorporated or used therein.”

Article 15(4)(a) refers to vessels used in navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities.  Article 15(4)(b) is not relevant.  

The Tribunal was referred to the following cases:

Brutus v Cozens [1972] 2 AER 1297, HL
Cirdan Sailing Trust (VTD) 18865 (2004)
DG Everett and London Tideway Harbour Co Ltd VTD 11736 (1994)
Customs v Fenwood Developments Ltd [2006] STC 644, Ch.D
Customs v P&O Steam Navigation Co (No.2) [1996] STC 698, QBD
QED Marine (VTD) 17336 (2001), [2001] VATDR 534
Pepper (HMIT) v Hart [1992] STC 898, HL
Piddington v Co-operative Insurance Society Ltd [1934] 2 KB 237
Case C-106/89

The Evidence

9.	Prior to the case being opened to the Tribunal, or any proper indications from either party as to the matters to be observed or the reasons for it, we were invited to go on a site visit to inspect the ship in question.  The Tribunal was initially unwilling to do this, but for various reasons which it is not necessary to set down here, this unsatisfactory procedure was, in the end, the one that was adopted.  Subsequent to the visit the appeal was opened to the Tribunal and we heard evidence from Mr Stone on his own behalf.  There was no oral evidence on behalf of the Respondents. An agreed bundle of documents was produced.

10.	The issues to be decided by the Tribunal are:

(i)	What was the Kei designed for?
(ii)	Was the Kei, an original design or was it the adaptation of a design?
(iii)	The proper meaning of “recreation or pleasure”.

11.	Mr Stone, as a naval officer, was used to, and enjoyed, living in ships, as did his wife.  They had at some stage lived in Holland where they had seen Dutch barges.  In anticipation of his retirement, which will be in about 2009, Mr Stone decided that he would like to spend his retirement living in a suitable boat which would be principally moored in the United Kingdom, but which he would be able to take to the canals of Europe from where he would be able to practise as a marine surveyor of small crafts.  He had spent some time prior to the Tribunal hearing qualifying as a marine surveyor, and he intended to use the ship as the basis for his practice.  The Kei was therefore intended for use both as living accommodation and as an office.  Having seen Dutch barges when he lived in Holland, Mr Stone considered that one would provide sufficient room for his purposes, as they were practical and attractive ships.

12.	Mr Stone and his wife lived in a Victorian terraced house in Oxford.  In order to establish that there would be sufficient living accommodation on any ship they might acquire, they measured out the space which they were currently occupying and arrived at their minimum space requirements. This did involve downsizing some areas.  

13	Mr Stone approached a Dutch designer named Kees Cornelissen, who was a naval architect and vessel builder in Holland.  Mr Cornelissen usually made ships to a stock design of 19 metres. Mr Stone based the Kei on that standard design, but enlarged it to 22 metres and made various other alterations. The Tribunal was shown a plan dated 4 November 2003 which showed the revisions made by Mr Stone to that original design. These included incorporating a large galley under the wheelhouse where the original had a cabin of stock design with only 4 foot headroom and little standing space. The galley in the Kei is quite sizeable with good headroom and incorporates a fridge, a deep freeze (which is below deck), a four-hob cooker and a double sink inter alia. The original design had two double cabins and further accommodation for four other people i.e. it slept eight people.  The Kei sleeps five in three cabins.  In addition, what on the original design is a forward double cabin, on the Kei is a study with a capacity for a single berth.

14.	It was acknowledged by Mr Stone that the 19 metre ship was marketed as a vehicle for recreation and pleasure, and it was his evidence that the furniture in the 19 metre vessel tended to be fixed, so that the owners would not have to be concerned with tying everything down in bad weather. The Kei was not designed for major sea journeys, but Mr Stone acknowledged that any major move made by him in the Kei would require securing all the furniture, which it was intended should be free-standing when the ship was moored, which would be for the majority of the time.  

15.	The Kei had a domestic central heating boiler which was oil-fired.  It also had an airing cupboard and a clothes dryer which necessitated a steel tube being welded into a cartridge on the deck. When the Kei was built insulation was sprayed in by the builder in order that in winter it would not be too cold and also that it should be kept cool in the summer.  The wheelhouse was based on a 1920 standard design and would fold down if necessary for going under low bridges.  

16.	When Mr Stone brought the Kei to the United Kingdom in 2005 it was in what he termed a `sail away’ condition.  It had had the rear cabin fitted out and a shower put in, but the wheelhouse was open, and the forward space was effectively a large hold and contained considerable amounts of cabling and plywood intended for use in the work still to be done on the Kei, and stones for ballast. Even when the Tribunal saw the Kei in 2007 it was not in a readily habitable condition, but work was still being done.

17.	Mr Stone gave evidence of his opinion of the meaning of `pleasure craft’, based on his experience training as a marine surveyor.  He told the Tribunal that in the previous two years he had probably looked at some 30 to 40 small craft, that is craft of less than 24 metres, a definition which was based on worldwide tonnage regulations.  Some of the main indicia, and where they differed from the Kei, were that pleasure craft would perhaps either have no hot water or would use the engine to generate heat, whereas the Kei had a boiler capable of providing a full domestic facility when the engine was not in use; the boiler was not linked to the engine.  In addition, pleasure craft frequently were designed for speed, and were `semi-displacement’ vessels, i.e. the hulls were designed so that water would be deflected down, which would provide lift at speed, whereas 99% of merchant vessels were, as was the Kei, displacement vessels, i.e. they did not change their trim when they went through the water.  For its size the Kei’s engine was low-powered, with a limiting speed of 9 to 10 knots.  It was expected that a pleasure craft would have a large number of bunks in relation to its size, however Mr Stone acknowledged that this was not always the case and other Dutch barges, particulars of which appeared on an extract from a report of the London Boat Show, were designed as dual purpose vessels.  Whilst Mr Stone was examined, and cross-examined, at some length about the nature of pleasure craft, his opinion is not something we can properly take into account, although the features to which he pointed in the Kei are.

18.	In his initial application letter of 7 October 2001 Mr Stone wrote to the Commissioners saying inter alia:

“I am about to sign a contract for the construction of a replica Dutch barge as a permanent residence which will have a gross tonnage of over 15 tons as calculated …” 

He asked for confirmation that it would be eligible for zero-rating.  By a letter dated 22 October 2001 a Mrs J L Collett of the Commissioners replied stating:

“I would agree in principle that Houseboats/Barges with engines, which are used as living accommodation, are accepted as qualifying ships providing they are of a gross tonnage of not less than 15 tons.  As you point out following the D G Everett/London Tideway Harbour Company Tribunal ruling, we do not regard Houseboats as being designed or adapted for pleasure or recreation.”

Mr Stone wrote again on 29 September 2003 in which he set out the dimensions of the vessel stating it had the gross tonnage of 46.50 tons.  He again requested confirmation that it would be treated as a qualifying ship.  A Mr T Brading, Administrative Officer Written Enquiries of the Commissioners replied by a letter dated 2 October 2003 in which he said:

“I can confirm that as long as the vessel meets the requirements in Public Notice 728 sections 2.2 it can be treated as a qualifying vessel and zero-rated …”

Other correspondence followed, including correspondence with the Barge Association in which it was said inter alia by a letter dated 28 April 2005 by a Ms Lara Pritchard, Policy Manager of the Commissioners:

“We accept that Customs guidance in respect of qualifying ships has not always been comprehensive or strictly accurate.  We have had problems with both taxpayers and our own officers interpreting the guidance in different ways and producing different results, with the consequence that taxation was causing competitive distortion.”

19.	In the decision letter of 6 December 2005 Mrs K Bruce, the decision-making officer, set out the reasons for the Kei not qualifying in the following terms:

“This decision was made based on the facts that your vessel was actually built from new, and was not a true Dutch barge that has been converted (which was the case with the DG Everett tribunal case) … your vessel appears to have been built with no cargo hold, and has been designed and built as a residential vessel with an engine that is capable of cruising, therefore it has been designed for recreation or pleasure so it does not fit the definition of a `qualifying ship’.”

In the review letter of 7 March 2006 the Commissioners distinguished the case of Everett on the basis that in that case the barges in question were genuine working barges that had been converted into homes or places of permanent habitation, whereas the Kei was newly built.  The letter continued by making reference to a guidance of HM Revenue & Customs contained in Business Brief 35/04 which was said to be a clarification of existing policy.   The writer continues:

“In this guidance, … it is clearly stated that a true Dutch barge with a hold specifically designed for carrying cargo would be a qualifying ship, whereas a replica Dutch barge without such a hold and that is suitable for private cruising would not.  The Luxemotor Kei is certainly suitable for cruising and, whilst it may have a hold of some kind, I do not accept that it has a hold specifically designed for carrying cargo.  On top of this, the Business Brief made it very clear that only ships with qualifying status at the time of manufacture can be zero-rated, regardless of whether they are intended to be used as places of habitation.”

The writer then goes on to point out that any question of Mr Stone having been misdirected about the liability of the Kei would be dealt with by a different department.

20.	Customs Business Brief 35/04 which was issued on 31 December 2004 states under the heading `Customs policy’ as follows:

“Following a tribunal case, D G Everett (LON/92/1911A), Customs accepted that the terms “recreation” and “pleasure” do not include use as a home or place of permanent habitation.  However, we are aware that some have incorrectly taking this to mean that all boats used or intended to be used for residential purposes can be zero-rated.

Customs maintains that use or intended use does not affect qualifying status.  It is the nature of the original design and any subsequent alterations that is the key to determining the VAT liability of a ship or boat.  For example, a true Dutch barge with a hold specifically designed for carrying cargo would be a qualifying ship, also a replica Dutch barge without such a hold and that is suitable for private cruising would not.  Both could be used as residential accommodation, but this does not affect qualifying status.  Only ships with qualifying status at the time of manufacture can be zero-rated, regardless of whether they are now used, or are intended to be used, as place of habitation.”

21.	Business Brief 03/05, which was issued on 21 February 2005 deals with the case of Cirdan Sailing Trust (Decision 18865) in which Customs had ruled that the supplies by Cirdan, which was a registered charity providing training and instruction in the art and craft of sailing, were VAT-exempt sport or education, but the charity appealed arguing it supplied zero-rated passenger transport.  Cirdan further argued that any supplies of repairs and maintenance to the vessels were also liable to the zero-rate because, as commercial enterprises, their sailing vessels were neither designed nor adapted for use for recreational pleasure and therefore fell into the definition of a `qualifying ship’. The Tribunal found for the Appellants on both points with one reservation on a particular vessel that did not fulfil the exact criteria for passenger transport, making that part a standard-rated supply.  In the Business Brief Customs notified that they intended to appeal the matter of whether or not the sailing vessels were qualifying ships.  No such appeal appears to have been made.

The Respondents’ case

22.	The Commissioners did not attempt to resile from the decision letter, but accepted that the Kei was designed so that Mr Stone could live comfortably on it.  It was also the Commissioners’ decision that, even if Mr Stone were able to show that the Commissioners’ approach to the question of whether or not the barge was a qualifying ship was flawed, the Tribunal may nevertheless uphold their conclusion that the barge was not a qualifying ship as being correct as a matter of law.  

23.	It was further the Respondents’ case that the barge was not a qualifying ship within the meaning of item 1 of Group 8 as it had been constructed or adapted for use for recreation or pleasure.  The Respondents relied on two arguments in particular:

1.	The case of D G Everett and London Tideway Harbour Co Ltd decision 11736, was wrongly decided, and the words “recreation or pleasure” encompass a home or place of permanent habitation.

2.	The Commissioners’ alternative case was that, if Everett was correctly decided, it should be limited to its own facts, so that whilst the words recreation or pleasure do encompass a home of place of permanent habitation, it only applies to barges such as those in Everett, which could not be used for cruising, but could only be used as a home or place of habitation because of their particular characteristics.  The Kei has no such limiting characteristics, and to the extent that it is established that the barge is designed as a home, or place of permanent habitation, it has also been designed for recreation or pleasure, and is therefore not a qualifying ship.

24.	Whilst the Commissioners had incorporated the decision in Everett into their policy guidance (the Business Brief 35/04, and Notice 744C) it was now the Commissioners’ position that Everett was wrongly decided.  Three arguments were relied on:

(a)	Any uncertainty as to the meaning of the words recreation or pleasure should be resolved to give effect to the wording or purpose of the provisions of the Sixth Directive.

(b)	For the barge to be used for recreational purposes it will be used as the means of an activity or pastime pursued for the pleasure or interest it gives, and for the barge to be used for pleasure, it will be used as something that gives an experience of something viewed as good or desirable, of enjoyment, or delight.  The use that the barges were adapted for in Everett clearly fitted within that definition.

(c)	Further or alternatively, if pleasure is looked at in a narrow sense, so as to exclude use solely as a home or place of habitation, the words `recreation or pleasure’ are tautological, as there is no significant difference between them. If pleasure is given a broader meaning so as to mean purposes that are not commercial or business, this tautology is avoided. The Tribunal was referred to the case of Piddington v Cooperative Insurance Society Ltd (supra).

(d)	Further or alternatively, if it had been intended by the draftsman to zero-rate vessels with engines designed or adapted solely for use as homes or places of permanent habitation, they would have been listed in item 2, Group 9 which deals with houseboats, and specifically limits them to those boats that do not have means of self propulsion.  They would not be under the heading “transport”.  

Alternatively it was the Respondents’ position that Everett should be limited to its own rather unusual facts.  

25.	In submitting that the Kei was clearly designed or adapted for use for recreation or pleasure, the Respondents relied on the following:

1.	The barge was not a true Dutch barge in the sense of a working Dutch barge designed and built for commercial purposes with a hold for carrying cargo.  It was a replica, designed and built for private cruising, with residential capacity.

2.	The barge has a functioning engine, it is capable of navigation and so is equipped for cruising.  It has a folding wheelhouse to allow it to be navigated under low bridges found on inland waterways.

3.	There is no evidence that the barge is not capable of being independent of water, electricity or telephone lines, and in the circumstances it is not designed or adapted to be moored in one place, but to be moved around.

4.	Whilst the barge may have sleeping accommodation and a kitchen, this is a feature of most boats other than a small dingy.

26.	The Respondents did not consider that the Kei had been adapted, but that the changes which had occurred had all been part of the design process and had taken place at the design stage. They relied on Article 15 of the Sixth Directive which at Article 15(4)(a), referred to vessels used in navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities. It was therefore clear that the exemption was intended to impact on commercial vessels. In addition Schedule 8 of VATA provides that various goods and services are to be zero-rated for the purposes of VAT.  It deals with transport.  It would be illogical to zero-rate a vessel under “transport” because it was to be used as a home.  If Mr Stone tried to sell Kei, it would not be sold just as a home.  

27.	Finally it was submitted that there was nothing in the statutory provisions that say that the sole purpose had to be recreation or pleasure, this particular vessel had more than one purpose, and the dominant purpose in its design was navigation.  The Respondents relied on the clear evidence that the Kei was similar in design to the 19 metre barge which it was accepted was designed for recreation or pleasure.  

The Appellant’s case

28.	Mr McNicholas set out extensive grounds of appeal in the Amended Notice of Appeal. He suggested that the words “recreation” and “pleasure” should be given their normal meaning, and that “designed” was not a technical word. He submitted that it was important to take account of the fact that the test to be applied by Group 8 item 1 is an exclusionary one, and that any ship over 15 tons was zero-rated except for one which falls within the recreation and/or pleasure categories. It would be erroneous to think of item 1 as applying a “commercial” or “non-private” test, and he gave as an example of this a royal navy warship which would not be a commercial vessel, but was obviously a qualifying ship, as would be a customs cutter.

29.	Mr McNicholas submitted that the “designed” test applied to the ship as it is presently, not as it was or might become.  Any subsidiary or incidental uses for which a ship may be put are irrelevant, as are any purposes to which it might be put for which it was not designed.  Mr McNicholas gave as an example a warship which might have built into it and designed into it, facilities for the recreation or pleasure of the crew, but these would be subsidiary to its main function as a warship.  Similarly a large passenger liner carrying hundreds or more passengers on essentially a floating holiday was still a qualifying ship because it was primarily designed for business purposes, albeit the business of recreation and pleasure. Again, a ferry could be used without any modification or conversion for pleasure, for example for a floating party, but would remain a qualifying ship whilst its basic design stayed the same and it remained unmodified.  It was submitted that Group 9 of Schedule 8 of the VATA was useful in interpreting the meaning of `qualifying ship’ under Group 8.  Item 2 of Group 9 zero-rates houseboats, defined as a boat or floating decked structure without propulsion designed for habitation.  Because a houseboat was not a “ship” it would fail the qualifying ship test in Group 8, but, as Schedule 8 Group 5 zero-rates dwellings, it would create distortions and be discriminatory not also to zero-rate floating dwellings under Group 9.  Similarly it would also create distortions and be discriminatory to tax a qualifying ship under Group 8 merely because it was, fully in accordance with Group 8, used as a dwelling.  

30.	The factors which the Appellant relied on as pointing to the Kei being a qualifying ship are:

1.	Both the Appellant and his wife had considerable input into the design of the Kei specifically as a dwelling for permanent habitation.

2.	The Kei has five bunks and three cabins whereas an equivalent-sized pleasure craft designed and used for recreation or pleasure, would have anything up to 14 bunks and smaller cabins which were neither designed nor capable of supporting permanent habitation.

3.	The layout of the galley was comparable to that of a domestic kitchen. 

4.	The existence of the airing cupboard.

5.	The clothes dryer.

6.	The domestic water heating system

7.	The internal and external appearance which showed clearly that it was designed as a permanent dwelling not for occasional use or recreation or pleasure

8.	The design of the hull which was based on a 1920 commercial Dutch motor barge used for transporting cargo on Dutch waterways; it has a flat bottom whereas a pleasure craft would usually have a “V” shaped hull bottom to minimise final displacement and was not designed for, nor suitable for, carrying cargo.

9.	The design of the engine followed commercial engine practice of a single relatively low-powered engine of 160hp, which was one frequently found in commercial ships or trawlers.  A similar sized pleasure craft usually had twin engines of 1000hp each to drive higher speeds.

10.	The folding wheelhouse

31.	Mr McNicholas took issue with the Respondents’ reasoning contained in the decision letter in the following respects:

(a)	Building a ship from new does not disqualify it from being a qualifying ship.  

(b)	The phrase “not being true Dutch barge” was not only wrong, but was also muddled. The Kei is a barge made in the Netherlands and so is demonstrably a Dutch barge. “True” is by inference contrasted to “replica”, but neither term has any place in the legal definition of a qualifying ship.  

(c)	The phrase “appears … built with no cargo hold” was wrong both factually and because it imported an erroneous commercial test to a qualifying ship.  

(d)	The words “designed and built as a residential vessel” showed that the writer had misconstrued the correct test for a qualifying ship which does not exclude residential use. 

(e)	Likewise that the Kei has an “engine that is capable of cruising” which implied that it was thus designed for recreation or pleasure was a non-sequitur and a distortion of language. It was a non-sequitur because the presence of any sized engine merely denote that, for VAT purposes, a vessel is a ship as against a boat (see Schedule 8 Group 9 and Houseboats), the size of the engine per se is not determinative.  Customs phrase is a distortion, the use of “cruising” improperly seeks to link it to the concept of a pleasure-cruiser as a recreational or pleasure craft.

32.	With regard to the review letter of 7 March 2006, it was submitted that it was not in itself a fresh decision.  The reasons it does give are flawed in that the writer applied Business Brief 35/04 instead of the statutory test in the VATA. Secondly, it wrongly viewed “cruising” as disqualifying qualifying ship status. Thirdly the writer misconstrued the relevant fact of the design with the irrelevance of intention for use.  Fourthly it wrongly stated that a hold has to be specifically designed for cargo.

33.	Mr McNicholas criticised the Commissioners in their skeleton argument for claiming that “recreation” and “pleasure” were tautological, there being no significant difference between them.  It was submitted that whilst the words may overlap, they were both clear and distinct words.  Also in the amended statement of case para 21(b) the Commissioners had taken the term “cruising” to mean disqualification from the qualifying ship test. With regard to the Commissioners’ reliance on European law, it was not the vires for the United Kingdom’s zero-rating which was in issue, and it had not been pleaded as such by the Commissioners. He submitted that it is trite European law that a Member State cannot rely as against an individual on the Member State’s misapplication of a European directive into domestic law and pray the Directive in aid in such circumstances.  The Appellant was entitled to rely on the words of the Act.  It was not open to the Respondents to use article 15 to read in a commercial test.

34.	The Appellant relied on the case of Mrs D G Everett (VAT Decision 11736) which, it was submitted, remained good law.  In that case the chairman of the tribunal had said at page 10:

“To my mind it stretches the ordinary meaning of the words recreation or pleasure well beyond their natural meaning to say that this encompasses a home or place of permanent habitation such as the Amethyst Atoll and Jadi (the houseboats under consideration) have now become.  I am satisfied that they are not ships designed or adapted for use for recreation or pleasure.”

35.	It is the Appellant’s case that residential accommodation is zero-rated, and houseboats are also zero-rated, there would therefore be a distortion of the tax régime if ships adapted for residential use were not qualifying ships.  Mr McNicholas prayed in aid the houseboat legislation.  The Tribunal was referred to Hansard and the passage in the debate on the Finance Bill where John Nott, the then Minister of State, had referred to the fact that some craft under 15 tons would be liable to VAT, although they were not used for recreation or pleasure, for example some inshore fishing boats which illustrated that the test was not a simple one of a pleasure boat versus one that had a commercial purpose.

36.	With regard to the case of Piddington (supra) relied on by the Respondents, it was submitted that this was a case on the construction of an insurance policy, and          concerned the test of design as against use in that context.  It would be possible to find a secondary use for any object and, if Parliament had intended, it could have incorporated the words “wholly” or “solely” in the text.  There was no element of cruising in the legislative test, although the Respondents had tried to incorporate that by saying that since the Kei has an engine, and therefore can cruise, therefore it must be designed for pleasure purposes.  

37.	The Tribunal was referred to the case of QED Marine (supra) where the chairman  followed the decision in Everett (supra) and said at paragraph 24:

“So when does the ship become a qualifying ship?  In my view … a ship qualifies from the time when it is seaworthy or, if it is not designed to go to sea, when it is fit to navigate the water-ways for which it is designed.”

Mr McNicholas pointed out that in the present case that time was when the Kei was brought into the United Kingdom, it was irrelevant that the Kei could subsequently be used for other purposes.  The Tribunal was referred to the case of the Cirdan Sailing Trust (supra) in which the President of  the Tribunal, in deciding whether a yacht chartered out to schools and youth organisations was a qualifying ship, said at paragraph 59:

“That the young people may, and one hopes will, derive pleasure and recreation from the experience is beside the point.  The point is that Queen Galadirel’s function, and the use to which it is put by both Cirdan and the school organisation, is to secure the therapeutic and remedial objective sought by them from a week’s sea trip by disadvantaged young person.”

Reasons for decision

38.	Both parties agreed that the Kei had not been adapted. Whilst we have considerable reservations about that, it appears to us that the design on which the Kei was built was that of a traditional Dutch barge which in its original manifestation was a commercial vehicle and was not in any respect designed for pleasure or recreation and would therefore be a qualifying ship.  It was also agreed by both parties that the 19 metre Dutch barge upon which the Kei’s design was based, was itself designed for recreation or pleasure.  However that design in itself was also based on an original Dutch barge.  We will return to these matters later.

39.	We accept Mr McNicholas’ argument that it is not open to the Respondents to rely in this particular case on the Sixth Directive.  The Tribunal must look first at the United Kingdom legislation and only if it is unclear on its face, then should it seek clarification from the Sixth Directive.  In the present case in our opinion the wording of Schedule 8 of the VATA is perfectly clear and it seems to us that, as a matter of plain English, it is impossible to say that the Kei has been designed or adapted for recreation or pleasure, if one accepts the Respondents’ position which is that the relevant stage is when it was designed by the Dutch builder in accordance with Mr Stone’s plans.  In that case, whether the boat has been designed or adapted becomes irrelevant, since Mr Stone’s purpose was, as the Commissioners accepted, that it should be able to be used as a residence.  It would not be a ship at all if it were not capable of being navigated, and therefore the fact that it is a seaworthy, sea-going vessel, cannot be sufficient to exclude it, although it does distinguish it from the vessels under consideration in Everett.

40.	We do not accept the Respondents’ argument that it is sufficient to take the Kei outside the exemption that a secondary purpose was that it could be used for recreation or pleasure. We were surprised by Mr Barnes submitting that “recreation” and “pleasure” could be deemed inter-changeable. It was no part of Mr Stone’s purpose that the Kei should be used for recreation.  That recreation might take place on board the Kei, as it would, one hopes, inside any habitation, is irrelevant.  It does not make sense to say that a house which is someone’s home is designed for recreation or pleasure.  Indeed some houses have a specific recreation room, and no doubt pleasure may be obtained in any room in any house, however it does not accord with common sense to say that therefore a house is designed for pleasure.  We adopt the logic, if not the words, of the President of the Tribunal in the case of the Cirdan Sailing Trust cited to us by Mr McNicholas, with the appropriate substitutions.

41.	With regard to the question of the time at which the Kei became a qualifying ship, this would in our view depend to some extent upon whether it is considered to have been adapted or not.  In the case of Cirdan (supra), the President of the Tribunal stated at paragraph 66 that:

“It seems to us therefore that the draftsman of the definition of “qualifying ship” was postulating different criteria for different situation. There is one question to determine the state of the adapted vessel … and a different question for the non-adapted vessel … both require the vessel to be taken as found, i.e. in its current state.”

If the parties are right, and in this case the Kei was designed, and not adapted, then the reasoning in the case of QED Marine referred to by Mr McNicholas, namely that the relevant time is when a ship becomes seaworthy, becomes irrelevant. We note with interest, however, that at the time the Kei was sailed over to the United Kingdom it was in an extremely primitive state, it did have a large hold which was capable of carrying cargo, and to some extent did, in that it was carrying on it the material for completion of the building of the Kei.  Under the test in QED Marine it would be considered a qualifying ship.  However, we consider that the Kei is an adaptation.  The design on which it was based was itself an adaptation of a Dutch barge, and this design was in its turn adapted by Mr and Mrs Stone to create something that would be both their home and Mr Stone’s office. We do not consider it sufficient to take it outside the definition of a qualifying ship that when being used as a habitation it may be used for recreation or pleasure, nor that, in order to perform his work, Mr Stone may take it to the high seas or on the inland waterways, nor even that it may be used to take the Stones on holiday.  The Kei was designed with multiple purpose use in mind, and we do not consider it open to the Commissioners to select one of those purposes alone and thereby to exclude it.

42.	Although the present case may indeed be distinguished from the case of Everett in that in the present case there is a continuing intention to take the Kei to sea, which was never so in the case of Everett where the engines were only retained as items of interest, however, the purpose for which Mr Stone intends taking the Kei to sea is to carry out his business in Europe and to use it as his office.  We do not see how that purpose can be classified as either recreation or pleasure.  

43.	In all the circumstances this appeal is allowed.  The Appellant’s costs of an incidental to this appeal, in the absence of agreement between the parties then liberty to apply to the Tribunal.

MISS J C GORT
CHAIRMAN

RELEASED: 29 June 2007

LON 2006/382