QUALIFYING SHIPS AND VAT
I took HMRC to a VAT and Duties Tribunal in May 07 and my appeal was allowed. The article below was published in Blue Flag 66 - Sep 07. As expected HMRC appealed to the High Court in Apr 08 and their appeal was dismissed. VAT Wars Part Deux is here.
I have also been made aware of an extraordinary VAT Tribunal that concerned the calculation of narrow boats Gross Tonnage in attempting to meet the 15 ton QS requirement. Amazingly the VAT Tribunal Appeal was successful. More details are here.
TRIBULATION, TRIBUNAL AND TRIUMPH
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 pleasure”. 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 after 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 decision making process.
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 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 ships 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. By this I collected the HMRC bundle and incorporated 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 2 counsel's 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.
VAT WARS PART DEUX
This follows on from where I left you last year in BF 66 (Sep 07).
At 3.30 pm on 5 June 08 Judge Sir Andrew Park handed down his judgment following a High Court hearing at the end of April at which HMRC were appealing against my successful VAT Tribunal decision in May 07. He dismissed the HMRC appeal. Of note my counsel was present, as was HMRC's and also HMRC policy gonks. Whether they were trying psychological warfare to get a last minute change of judgement, I do not know! The full judgment is at http://www.bailii.org/ew/cases/EWHC/Ch/2008/1249.html
After a washed out summer which saw KEI floating well above the fields in Oxfordshire, HMRC submitted their Notice of Appeal at the Chancery Division, High Court in Aug 07. Most of the points from my previous article still apply, but there are a couple of exceptions. Unlike the VAT Tribunal, I could not represent myself at High Court so if I did not have a counsel, I would now have had to instruct one. As I had already had a counsel, I just had to issue new instructions. We needed do nothing and our evidence submitted at Tribunal would have been taken forward to the High Court, but just like the expression “for evil to triumph, good men need do nothing”, we decided to amplify our case to cover all bases and submitted a “Respondents Notice” which importantly outlined that the UK legal vires of VATA 1994 Sch 8 Gp 8 derives from the EC 6th Directive Art 28.2, not Art 15.5. Seriously legal speak which means nothing to most of us.
As I had prepared the “Bundle” for the VAT tribunal, I had an email exchange with HMRC solicitors and firmly suggested that it was now their turn to prepare the bundle. We then had a an exchange of quoting various passages from the Civil Procedure Rules (CPR) and Practice Directions (PD) until HMRC finally buckled and agreed to do it. There would be 2 bundles – Part A would be the skeleton arguments and documents for the High Court appeal. Part B would be those documents that I deemed necessary from the VAT Tribunal. So quite an easy task just to delete a few items rather than assembling the bundles as well.
In October both counsels' clerks trotted off to the High Court to negotiate suitable dates and end Apr 08 was fixed. There was then little to do apart from preparing our skeleton argument in amplification of the Respondents Notice.
The hearing was again a fascinating time. On our side there were 3 of us and HMRC had a team including the policy gonks. One HMRC staffer laboriously transcribed every word long hand. HMRC had changed counsel from the VAT Tribunal and looking at his CV he had some impressive stats and certainly appeared to be a bit of an EU law expert. It was clear from the outset that Sir Andrew Park had no problem with the VAT Tribunal verdict and it became abundantly clear after the first few minutes of the HMRC submission that he did have considerable problems with HMRC's legal arguments. We were soon into principles established by a couple of cases – Marleasing and IDT Card Services. Both these cases established the precedent of construing national law in line with EU Directives. We had no problem with Marleasing – but whereas HRMC argued that the Judge should turn to the 1977 EU VAT 6th Directive Art 15.5, which is Transport, we argued that he should turn to Art 28.2 – which allowed nations to retain transition arrangements for zero rating – and this originally came from Art 17 of the EU 2nd Directive in 1967. The case really turned on the historical time line of EU and national legislation. The UK law derives from 1972 VAT Act and has not been changed since. It predates the 6th Directive by 5 years, so we argued that is was a transition zero rating under Art 28.2. The EU also took UK to court in 1981 over the number of zero rating categories they were unhappy with, but the Qualifying Ships was not one of them. HMRC also tried a really surreal argument based on a “Positive Policy Decision”, claiming that the transition arrangements were only valid if there had been a positive political decision to maintain them. The Judge found this really hard to believe and at one stage said to HMRC “what you have just said leaves me dumbstruck – but clearly I am not”.
The hearing lasted a day and a half and at the end I thought we had done a pretty good job. If scored on points then I reckoned it was about 5 – 1 in our favour. Counsel reckoned a 3 week wait until the judgement was handed down.
3 weeks later and it was still all quiet on the bearing. A week later and an email from counsel. The judge had been asking for supplementary info on several issues – Art 28.2, the EC/UK case in 1981 and a very recent Court of Appeal case in May 08 – HMRC vs EB Central Services. HMRC drew the judge's attention to this case and on the face of it appeared to support the HMRC position. It was on a transport zero rating topic – in this case left luggage at airports and both art 28.2 and Art 15.5 were being argued by the taxpayer and HMRC respectively. Crucially national legislation had changed after 6th Directive and specifically referenced Art 15.5. So Art 28.2 prayed by the taxpayer was inappropriate and HMRC won that CoA case. The judges also commented that if national legislation had pre dated the EU Directive then Art 28.2 would be appropriate, exactly my position. So I thank HMRC for bringing up that case which reinforced our arguments, and it turned out to have been a bit of an own goal.
Finally, I got a phone call from counsel on 3 Jun and the new good news and an email with the embargoed judgement for proof reading. A scary paragraph at the top warned heavily of contempt of court if divulged.
So what do the court cases actually mean and what does it mean for barge owners? The VAT Tribunal decided that KEI was “neither designed nor adapted for use for recreation and pleasure”, and so was a “Qualifying Ship”.
The High Court Judge agreed that KEI was not designed for use for recreation and pleasure and that the VAT Tribunal had been correctly decided. The judge did trace the legal “family trees” of both UK and EC law. He also decided that the Grieve Tribunal had been incorrectly decided on the application of EC law. He also commented on the Everett tribunal and HMCE letters at the time incorrectly linking UK legislation to Art 15.5. This will mean that owners can rely on current UK law and not worry about EC influence, as UK law predates the EC Directive. However, I think we are still somewhat in a lock without a paddle. For putative new build owners, HMRC will still have to be convinced that a vessel is “neither designed nor adapted for use for R&P”. I think that they are unlikely to roll over and stick their legs in the air as they did after Everett and I would expect that each case will be decided on a case by case basis. The only way ahead I can suggest for those contemplating a new build is to write to HMRC Written Enquiries Centre in Newcastle and put all the details to them. I think it is unwise to rely on any advice from local HMRC offices as they have been inconsistent in the past and even HMRC have admitted that their advice has been variable. For a cast iron response follow the procedure in VAT Notice 700/6 and ask for a “ruling”. For those with ex-commercial vessels, I think the solution is simpler. In one of many letters from HMRC, they did inform me that VAT is by “self assessment”. So assess yourself and apply the guidance in 744C as appropriate – probably as is at the moment, so no change.
How will HMRC react to this? They may try to appeal to the Court of Appeal but this is not automatic and the CoA only take on cases that have an important point of principle or practice; or there is some other compelling reason. The point of principle in this case was examined in the CoA case in May 08 – EB Central Services Ltd which HMRC won as the UK law had changed after the EU Directive. I think it is unlikely that it will go to CoA, but HMRC may try it – and I will consider it to be vexatious litigation. The Judge also made heavy comments about UK law not keeping up with EU Directives, and this may be the way ahead for HMRC to revise the zero rating provision – along the lines of Art 15.5 – which they could only do by new legislation. The current advice in BB 35/04 and 744C may not last for long.
Interestingly, there is no 15 ton requirement in Art 15.5. So arguably there could be, for example, an inshore fishing vessel of less than 15 tons which is not a QS under UK law but is entitled by EU Directive to be zero rated. A possible case to watch out for!
Even if there is not another appeal, it will not be finally over until the HMRC cashier sings and coughs up the costs and fees.
On reflection after the last few days, I wonder why it has taken a private individual to take on HMRC and why the UK barge builders have not done so with a properly legally represented campaign?. Going round the boat shows in the last couple of years there seems to have been considerable angst in the industry about the VAT issue, but no one really stepped up to the plate to do anything about it. There must be around a dozen UK barge builders in whose interest, and their customers, it would have been worth a legal challenge. No doubt they now welcome the courts outcome; and I look forward to tokens of their appreciation!
I'll also mention that HMRC actually refunded the VAT paid in Sep 06 as the result of a “policy review” of my case. Coincidentally this was very shortly after I had notified them that I had instructed counsel. HMRC were unable to come up with a satisfactory VATA 1994 S 85 agreement, so I continued with the VAT Tribunal to correct the VAT Assessment and obtain Qualifying Ship status for KEI, and of course then the HMRC Appeal. It was a matter of principle and therefore quite a risky strategy and I did think once or twice that I had lost the plot and had been suckered into a litigious incident pit. A positive outcome of all this is that I do have a very genuine HMRC VAT receipt which I shall frame for when continental officials and others wish to inspect it!
I suppose after such a crushing legal victory I should do the soppy bit and do an “Oscars” thanks. Firstly, to the long suffering Ali, who has had to put up with loads of legal bollards over the last few years and chipped in with some interesting legal points which were very much outside the box and helped with the initial VAT Tribunal.
Secondly, to counsel, Eamon McNicholas for taking on the case with such interest. Ever since my first exploratory phone call with him in early 2006, which lasted a very generous pro bono hour and a half as we chatted about the VAT business and struck up an instant accord about the whole case, he was most content to accept my instructions and our relationship was very much on an informal and friendship basis rather than business. I also asked him to do it on a “no win, no fee” basis. This was not quite achieved but it was done under a Conditional Fee Arrangement (CFA). If you will allow me to blow my own trumpet, Eamon reckoned that the research, service and assistance than I provided to him was better than many instructing solicitors.
Finally, thanks to Richard Tilson, ALCHEMIST, who I called in early 2006 for any tips from his experience of VAT Tribunals (he went to a VAT Tribunal as QED Marine in 2001). His strongest tip was “get a barrister”. I am mighty glad that I did.
Addendum. Since the article above was written for Blue Flag in early June, the 21 day deadline for HMRC to apply for leave to Appeal to the Court of Appeal passed on 26 June. HMRC Solicitors Office have informed me that they do not intend to appeal. On further reflection it is clear that the EB Central Services Ltd Court of Appeal judgement, which was handed down on 10 May 08, was a critical stroke of luck and completely reinforced our already winning position on the same point of law. Even more helpful was that it was HMRC that informed the Judge of the case. Had this case not taken place, I am sure that HMRC would have applied to appeal to CoA. The judgment is here - www.bailii.org/ew/cases/EWCA/Civ/2008/486.html
VAT TRIBUNAL - NARROW BOAT 15 TON
The full Tribunal judgement is here - www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=3637
In summary the Tribunal was an appeal on the calculation of Gross Tonnage of narrow boats and quite amazingly the appeal was successful. The Apellants successfully argued that the cabin roof of a narrow boat could be considered the "upper deck" when considering the measurement of depth of a hull, and possibly that the superstructure could be counted as a "break". It is not clear from the judgement exactly how they are calculating GT. Also, quite amazingly HMRC accepted that these vessels were not "designed or adapted for for use for recreation and pleasure", although they reserved a position to contend later. I find this position somewhat difficult to believe when they have hounded me over the R&P point since Dec 2005, despite stating in their VAT Assessment "your vessel has been designed and built as a residential vessel".
To recap on the facts. VAT Notice 744C lays down the calculation for Gross Tonnage when determining QS criteria. The calculation is taken directly from Statutory Instrument 1997/1510 - Merchant Tonnage Regulations. The equation for a vessel less than 24m is very simple:
GT = Length x Breadth x Depth x 0.16. For hull breaks above the upper deck there is an add on of L x B x D of the break x 0.235. To be a QS, GT must be over 15. In the drawing below Length and Breadth are quite straighforward.
It is the interpretation of Depth A and Depth B and/or whether the superstructure counted as a "break", Depth C, that was the subject of this Tribunal. Depth A is keel to underside of sidedeck, Depth B is keel to underside of cabin roof and Depth C is the depth of a "break". It is worth having a look at the definition in the relevant SI, and in particular Depth. This was apparently missed by the HMRC and their expert MCA witness as the judgement records that they were unable to find a definition for a deck, or even tried to look for a definition of "upper deck". This is despite the Tribunal referring to the same SI 1997/1510 during the hearing.
Some definitions from SI 1997/1510:
"break" means the space bounded longitudinally by a side to side upward step in the lowest line of the upper deck and another such step or the end of the ship, transversely by the sides of the ship and vertically by the higher part of the deck and the lowest line of the upper deck continued parallel thereto;
"length overall" means the distance between the foreside of the foremost fixed permanent structure and the afterside of the aftermost permanent structure;
"moulded depth", and in the case of a ship of less than 24 metres "depth", means the vertical distance measured from the top of the keel of a metal ship, or in wood and composite ships from the lower edge of the keel rabbet, to the underside of the upper deck at side, or, in the case of a ship which is not fully decked, to the top of the upper strake or gunwale, provided that -
(a) where the form at the lower part of the midship section is of a
hollow character, or where thick garboards are fitted, the distance is
measured from the point where the line of the flat of the bottom
continued inwards cuts the side of the keel;
(b) in the case of a glass reinforced plastic ship where no keel member is fitted and the keel is of open trough construction, the distance is measured from the top of the keel filling, if any, or the level at which the inside breadth of the trough is 100 millimetres, whichever gives the lesser depth;
(c) in ships having rounded gunwales, the distance is measured to the point of intersection of the moulded lines of the deck and side shell plating, the lines extending as though the gunwales were of angular design; and
(d) where the upper deck is stepped and the raised part of the deck extends over the point at which the moulded depth is measured, the distance is measured to a line of reference extending from the lower part of the deck along a line parallel with the raised part; and for the purposes of this definition -
And the tonnage calculation:
The tonnage of a ship shall be the sum of -
(a) the product of multiplying together its length overall, extreme breadth over the outside hull and depth in metres and multiplying the resultant figure by 0.16; and
(b) the tonnage of any break or breaks, calculated for each break by multiplying together its mean length, mean breadth and mean height in metres and multiplying the resultant figure by 0.35.
The Tribunal decided that the small side decks of a narrow boat were not considered to be the "upper deck", despite the fact that they link a clear fore and aft deck, and that the cabin roof was the upper deck to determine the depth, probably as a "break". This is despite the fact that the SI has extremely clear instructions on the definition of upper deck. For the structure to be considered part of the hull, the openings in it must be watertight, and whether the structure is considered part of the hull or a break, it is not. To my almost certain knowledge, the vent mushrooms , windows and doors in a narrow boat structure are not watertight, they are only at best weathertight. Arguably the hull of a narrow boat is not particularly wateright as most have an engine room air intake in the hull side. I am not saying that the superstructure top is not a deck; it most certainly is and on all ships one levels "ceiling" or more accurately "deckhead" is the next levels deck. However, the superstructure roof is most certainly not the "upper deck". To almost all the complete untrained eye, the upper deck is the deck linking the fore and aft decks, albeit the side decks are rather narrow although there are plenty of vessels around with narrow side decks - a Royal Navy whaler for example. Without the superstructure in place, it is clear that the narrow steps are in fact the side decks of the upper deck. Indeed such a hull loooks remarkably similar to open working barges seen on canals and rivers.
How does all this work out in paractice? A 21m x 2.1m narrow boat with a hull depth of 1.2m has a GT of 21mL x 2.042mB x 1.2mD x 0.16 = 8.23 GT. With the cabin roof claimed as the upper deck, the calculation could become 21mL x 2.042mB x 2.285mD x 0.16 = 15.67 GT and just scrapes over the 15 tons to be a QS. If the superstructure is claimed to be a "break", then the ton GT is also achieved. The hull has the same GT of 8.23. If the "break" is 16mL x 1.8mB x 1.085mD x 0.35 = 10.94. Total 19.17.
Even more amazingly HMRC have not appealed this Tribunal decision, when it is clear to the layman that plain english has been completely misconstrued and the decsion is just plain wrong.
I wonder why HMRC have let this lie like this. The only reason I can think of goes back to the media claims that Labour are deliberately injecting more money into their northern heartlands. The VAT Tribunal was held in Manchester and the appellant company is also from the north. This judgement is a sham and I rank it alongside the VAT scam on disability adapted cars where people are purchasing luxury cars adapted for disabled drivers at zero rate VAT and then immediately reselling them have removed the simple bolt on adaption. It is certainly apparent that there is a North/South split in HMRC and they appear to be 2 different organisations.
I am all for taxpayers winning cases against HMRC, but not when it is a blatant "fiddle".