VAT - Trials & Tribulations
From Blue Flag September 2007
DBA member Colin Stone has been awarded a VAT and Duties Tribunal decision in his favour. He sets out the salient points of his campaign.
As some of you will now no doubt now be aware, I recently won a VAT and Duties Tribunal which considered whether our new build luxemotor barge KEI was a “Qualifying Ship” in that it was “neither designed nor adapted for recreation and leasure”. In this short article I will endeavour to convey the salient points from our campaign. I do not intend publishing here the Tribunal decision – it is a lengthy 15 pages and would take several Blue Flag issues to serialise! It can be found on the VAT and Duties Tribunal website – it is Decision 20229 dated 29 Jun 07.
Just prior to our Tribunal, the John Grieve Tribunal decision was published and very regrettably their appeal had not succeeded. This was of considerable concern, but we hoped that the decision would not affect our Tribunal.
Our campaign to seek “QS” vessel status for KEI commenced in autumn 2001 with initial correspondence with HMRC before any build had commenced. At this time HMRC confirmed that in principle residential vessels were accepted as Qualifying Ships. In late 2004 HMCE changed their interpretation of the law and published a Business Brief on the subject. In Sep 05 the VAT Notice 744C was republished incorporating the Business Brief. I notified HMRC of my acquisition of KEI under VAT Notice 728 – New Means of Transport in Aug 05.
After some months of consideration, the VAT Assessment in Dec 05 deemed that KEI was not a QS, although the Assessment ruled that “your vessel has been designed and built as a residential vessel”. This assessment was the subject of my challenge which culminated with the favourable decision in June 2007. The first point that comes out of this lengthy period is that one must have total control of and be in complete charge of the project throughout. For most people building in UK, the builder or his accountant will be the point of contact with HMRC – certainly probably in the early stages as the VAT risk lies with the company making the supply. There is no easy way out of this – except by sourcing the vessel in an another EU country and bringing into UK under the New Means of Transport Scheme. You will then be dealing directly with HMRC – apart from a DIY builder probably the only situation in which a non registered VAT person deals directly with HMRC. It is worth noting that Notice 728 only applies to new vessels – less than 3 months old or 100 engine hours. When we arrived at Queenborough we had done 65 hours – so it would be easy to exceed the 100 hours.
The next consideration is ship knowledge. To be a successful appellant it is my view that one must have a thorough knowledge of ship’s types and hull forms and how hulls operate. Linked with ship knowledge is Tribunal decision knowledge and one needs to research as many related previous tribunal decisions as possible. By related, I mean all decisions relating to VAT and zero rating that apply to any form of transport. Other Tribunal decisions, and indeed other areas of law, often throw up innovative trains of thought. I also include with the Decisions research, analysis of any High Court Appeals that can follow a Tribunal decision. I also recommend thinking “outside the box” and searching any related topic to do with Qualifying Ships. The difficult area will be the legal aspects and getting to grips with any legal consideration ranging from not just the relevant UK VAT Act but also records of the relevant parliamentary debates and other legal cases that set precedents and apply legal rulings. One must also not forget to include any EU Directives. For all this I would recommend instructing a barrister. There are 2 ways of going about this – either the traditional way by instructing through a solicitor or an accountant or direct public access. The latter has considerable advantage – it cuts out another possible middle man and hence will reduce costs.
It has a couple of disadvantages – not all barristers are licenced to take instructions direct from the public and one must be prepared to do all the leg work that the solicitor/accountant would do. The combination of a knowledgeable appellant who has researched the ship subject in great detail and a skilled barrister is a powerful one, and one that HMRC are unlikely to be able to match. The barrister will have the detailed legal knowledge, but may not be that conversant with ships. The converse probably applies to the appellant. However, combine the 2 and the synergy is likely to be undoubtedly greater than the parts.
One of the key parts of the Tribunal preparation is the production of the collection of documents known as the “bundle”. The bundle will include all the evidence that one wishes the Tribunal panel to consider. The evidence can include anything that the appellant wishes to have examined and I elected to produce a combined bundle. I collected the HMRC bundle and incorporated it as a section of my bundle. The bundle did not include any legal documents – these were supplied by both my counsel and HMRC counsel at the Tribunal hearing as “Authorities”. The combined bundle of Appellant and Respondent evidence came to around 400 pages and the teo counsels’ authorities were another 60 odd pages each – so much paperwork for the Tribunal panel to consider. Bundle preparation, paginating and indexing took many hours – about a day and a half for 2 people.
HMRC will adopt a case and present it in a Skeleton argument, which will probably change as the Tribunal approaches and it did for us. Formulating one’s course of action against their arguments is a complicated process and a fine balancing act. Whilst one wants to have a robust defence and possible counter attack, I consider that it is most important to find as much common ground as possible with HMRC. If one can be seen to be meeting the HMRC interpretation and rulings, then it is difficult for anyone to find fault and dismiss the appeal. Rather than aiming to have clear blue water between appellant’s and respondent’s respective positions, one should perhaps be aiming to only have a cigarette paper between them. The Tribunal hearing is of course the critical period and one must consider that it will be all over in a matter of hours. We elected to invite the Tribunal Panel to a site visit, which only lasted about an hour. In our view, it was important that the Panel visited KEI before the talking started so that it was crystal clear in their minds what we were talking about. It was also helpful to see KEI in amongst other vessels – particularly the traditional white pleasure craft – and get a good appreciation of what was involved.
The hearing in London was over in a few hours. My counsel opened with his initial statements and comments. At times it was, to the lay person, difficult to comprehend what was being said and both counsels talked in a form of legalese shorthand. I was called as a witness and we walked through the entire process of designing and acquiring KEI. I was then cross examined by HMRC counsel and it was extremely important here to be finding and demonstrating common ground with HMRC, but whilst maintaining a robust defence when required. I managed to get in a couple of really curt put downs during cross examination, which certainly attracted the Tribunal Chair’s attention and importantly demonstrated that I was not trying to pull the wool and had an open and honest case. We did not call any other witnesses. HMRC counsel then gave their account of the case and argument before my counsel wrapped up with a final statement.
During both counsel’s presentations, I was playing the part of the courtroom solicitor, passing scribbled notes forward highlighting items that I consider needed to be mentioned. We left the Tribunal hearing fairly confident and considerably buoyed up by a perceptive comment by the Chair during HMRC’s counsel’s stand. It was then a matter of waiting. However, although the Tribunal decision is in my favour, it may not yet be all over. At the time of writing, HMRC have now lodged a cross appeal to take the case to the High Court. I would also expect HMRC to issue a Business Brief that will give guidance for other barge owners in a similar position. It would not surprise me for HMRC to indicate that each case should be decided on its specific merits, inferring that a Tribunal hearing is the way ahead.
Overall a long and protracted campaign. I’ve spent approx 470 chargeable hours on the case and generated over 300 items of documentation and correspondence. Several lessons have been learnt, but the single most important lesson for the DBA is to drop the word “cruising” and its derivatives. HMRC associate the word “cruising” with Recreational and Pleasure craft. I would strongly recommend that members adopt words based on “navigation”, “underway” and “passage” in any public utterances. Perhaps the DBA should start by changing the name of the Cruising List to Navigation or Passage List?
In summary, deep knowledge, thorough preparation and a confident approach at the Tribunal are the keys to success.
Colin Stone - September 2007.