[2011] UKFTT 469 (TC)
TC01319
Appeal number: TC/2010/05584
VALUE
ADDED TAX — bed and breakfast carried on from farmhouse by one appellant, and a
farming business carried on by that appellant, her husband and son in
partnership — direction to treat appellants as a single taxable person — VATA 1994
Sch 1 paras 1A, 2 – s 84(7) —whether direction reasonably made — no— appeal allowed
FIRST-TIER TRIBUNAL
TAX
A,
D AND J FORSTER Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
Judge Aleksander (Chairman)
Mike
Bell ACA CTA
Sitting in public at 45 Bedford Square, London WC1 on 10 June 2011
Glyn Edwards of Wolters Kluwer
(UK) Ltd for the Appellants
Lynne Ratnett of the Appeals Unit,
HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT
2011
DECISION
1. The
Appellants appeal against a decision of HM Revenue and Customs to make a
direction dated 18 January 2010 under paragraph 1A, Schedule 1, Value Added Tax
Act 1994 that two businesses should be jointly registered for VAT.
2. Mr
Andrew Forster (“Mr Forster”) and Mrs Daniele Forster (“Mrs Forster”) are
husband and wife, and live at the farmhouse at Parsonage Farm. Mr John Forster
(“John”) is their son, and lives at a house in the village. The two businesses
are (i) Mrs Forster’s sole proprietorship which trades as a bed and breakfast
from the farmhouse (“the B&B”); and (ii) a farming partnership in which all
three appellants are partners.
3. The
Appellants were represented by Mr Glyn Edwards of Wolters Kluwer (UK) Ltd, and
HMRC were represented by Lynn Ratnett of their Appeals Unit. In addition to
witness statements of Mr and Mrs Forster and Mr Derek Taylor (the HMRC officer
who made the direction) being produced, they each gave oral evidence. We also
had before us an agreed bundle of documents.
The law
4. The
legislation governing the giving of directions is contained in Schedule 1, VAT
Act 1994. The provisions relevant to this appeal are as follows:
1A(1) Paragraph 2 below is for the purpose of
preventing the maintenance or creation of any artificial separation of business
activities carried on by two or more persons from resulting in an avoidance of
VAT.
(2) In determining for the purposes of
sub-paragraph (1) above whether any separation of business activities is
artificial, regard shall be had to the extent to which the different persons
carrying on those activities are closely bound to one another by financial,
economic and organisational links.
2(1) Without prejudice to paragraph 1 above, if
the Commissioners make a direction under this paragraph, the persons named in
the direction shall be treated as a single taxable person carrying on the
activities of a business described in the direction and that taxable person
shall be liable to be registered under this Schedule with effect from the date
of the direction or, if the direction so provides, from such later date as may
be specified therein.
(2) The Commissioners shall not make a
direction under this paragraph naming any person unless they are satisfied—
(a) that he is
making or has made taxable supplies; and
(b) that the
activities in the course of which he makes or made those taxable supplies form
only part of certain activities, the other activities being carried on
concurrently or previously (or both) by one or more other persons; and
(c) that, if all
the taxable supplies the business described in the direction were taken into
account, a person carrying on that business would at the time of the direction
be liable to be registered by virtue of paragraph 1 above;
[…]
5. This
appeal is made under section 83(1)(u) VAT Act 1994. The Tribunal’s
jurisdiction is limited by section 84(7) as follows:
(7) Where there is an appeal against a decision
to make such a direction as is mentioned in section 83(1)(u), the tribunal
shall not allow the appeal unless it considers that HMRC could not reasonably
have been satisfied that there were grounds for making the direction
6. Accordingly,
we can only allow the appeal if we are satisfied that Mr Taylor, acting as a
representative of HMRC, could not reasonably have concluded that it was
appropriate to make a direction; it is not sufficient that we might ourselves,
considering the matter at large, have reached a different conclusion (see Associated
Provincial Picture Houses v Wednesbury Corporation [1947] 1 KB 223).
Background Facts
7. The
background facts were not in dispute and we find them to be as follows:
8. Parsonage
Farm has been owned by the Forster family since 1936. The farm comprises 150
hectares and is wholly arable. It was originally owned and run by Mr Forster’s
father, but is currently a partnership between Mr and Mrs Forster and John.
Mrs Forster takes no active part in the farming business and is a “sleeping
partner”. Mr Forster is over seventy and has largely retired from an active
role in the farming business – which is now principally carried on by John.
The farming partnership is registered for VAT, and the farming business has
been VAT registered since the inception of VAT in 1973.
9. Mr
and Mrs Forster moved into the farmhouse in 1971. Mrs Forster started the
B&B in 1975 as she wanted to earn some money working from home
independently from the farm – and at that time her parents-in-law were the main
partners in the farm. The B&B has always traded below the VAT registration
threshold, and has never been VAT registered. The annual turnover of the
B&B for the last five or six years has been approximately £6000 to £8000.
The farming partnership and the B&B maintain separate books of account.
Mrs Forster has her own bank account, which she uses for the B&B business.
The B&B covers the costs of window cleaning, laundry, and maintenance of
the AGA. The B&B pays for soft furnishings, carpets, pillows, blankets,
mattresses etc. The B&B used to engage and pay for a cleaner, but she has
recently retired and will not be replaced, and Mrs Forster will undertake the
cleaning herself. The B&B also pays for a gardener who works in the spring
and summer for approximately three hours each week. Neither Mr Forster nor
John are involved in running the B&B, and if Mrs Forster is ill or goes on
holiday, then the B&B closes. Mrs Forster pays the costs of her accountant
and the costs of advertising the B&B.
10. The farmhouse is
on two floors. On the first floor are four bedrooms (one of which has an
en-suite bathroom) and a “family” bathroom. One of the bedrooms is used by Mr
and Mrs Forster, and the other three are used for the B&B. When they are
not in use for the B&B, the bedrooms are used by Mr and Mrs Forster’s
personal guests (such as their grandchildren). On the ground floor is a dining
room (which is used by the B&B to serve breakfasts – when not in use for
the B&B, it is used privately by Mr and Mrs Forster), a sitting room (used
privately), a kitchen/conservatory (used privately as well as for preparing
breakfasts for the B&B), a sewing room (used privately) and a “summer” room
(used privately). There are also a back kitchen and pantry. In the immediate
grounds of the farmhouse are an annex and the “Finn” cabin. The annex includes
a garage, two bedrooms and an upstairs room used for storage of farm records
and for Mr Forster’s hobbies. Although the two bedrooms in the annex have been
used in the past by the B&B to supplement the bedrooms in the farmhouse,
they are no longer so used. The Finn cabin has a desk and is used for farm
business (although the management of the farm is now largely carried on from
John’s house in the village). The Finn cabin is also used to store fishing
tackle.
11. The farmhouse
forms part of the farming partnership’s assets. An adjustment is made in the
books of the farming partnership for the private use of the farmhouse. 85% of
the costs of electricity, heating oil, water, general rates and insurance are
adjusted as private use in the accounts and charged to Mr Forster’s current
account in the partnership books. 25% of telephone costs are similarly
adjusted.
12. On 25 June 2009
Mr Taylor telephoned Mr Forster to arrange a visit to Parsonage Farm as part of
HMRC’s “Rural diversification project”. The visit took place on 24 August
2009. Mr Taylor met both Mr and Mrs Forster on that day and reviewed the books
of the farming partnership and the B&B. The meeting took place in the Finn
cabin – Mr Taylor did not inspect the farmhouse. Mr Taylor spoke to John by
phone on 3 September 2009, when John confirmed that he had no involvement in
the B&B.
13. Following his
visit to Parsonage Farm, Mr Taylor considered that there were sufficient
financial, economic and organisational links between the farm and the B&B
to justify issuing a notice of direction. Notices of direction were issued to
the Appellants by HMRC on 18 January 2010, and the combined registration took
effect from 18 February 2010.
HMRC’s reasons for making a direction
14. HMRC content
that the activities at Parsonage Farm are farming and the provision of bed and
breakfast accommodation, and that these are closely bound by financial,
economic and organisational links:
(1)
The farm pays for electricity used by the farm and the B&B
(2)
The farm pays for domestic fuel used by the farm and the B&B
(3)
The farm pays the rates bill
(4)
The single telephone line used by the farm and the B&B is paid for
by the farm
(5)
The farm pays for the insurance
(6)
There are no cross-charges between the two businesses for rent or a
share of utility or other bills
(7)
The B&B operates from the farmhouse using three bedrooms as guest
accommodation
(8)
The farmhouse kitchen is shared by the farm and the B&B which is
used to cook and serve breakfasts for the guests. It is also used for the
domestic use of the appellants
(9)
The B&B operation is too small to be viable without use of the
farmhouse. The B&B does not have premises of its own and is dependent on
the use of the farmhouse. If it had to rent a farmhouse in its own right, then
the business would not be viable.
(10)
Advertising on the internet for the B&B show the name “Parsonage
Farm Bed and Breakfast”. The accommodation binds itself to the farm and
depends upon the farm for its appeal.
15. In summary, HMRC
contend that the farm and the B&B are not sufficiently at arm’s length from
each other, and that they do not have a normal commercial relationship with
each other – and that the reality is that there is one business – being the
business of farming activities and the bed and breakfast.
16. Ms Ratnett cited
a number of cases in support of HMRC’s position.
17. Smith
(trading as “The Salmon Tail”) (1999) VAT Tribunal Decision 16190 concerned
a husband and wife partnership which carried on a pub business. Food was
served at the pub, and in addition bedrooms above the pub were let. The
Appellants’ contention was that the food and accommodation operations were a
separate business run by Mrs Smith. Customs raised a VAT assessment on the
basis that the food and accommodation was part of the pub partnership. The
Tribunal upheld the assessment. Important factors taken into account by the
Tribunal in considering whether there was one business or two were: the fact
that the premises were rented by the partnership, utility and insurance bills
were paid by the partnership, yet Mrs Smith did not make any payment to the
partnership for her use of the premises. As there was no arrangement in place
between the partnership and Mrs Smith to separate the catering and
accommodation activities from the rest of the activities of the public house,
as a matter of general English partnership law, they were part of the
partnership, and the assessment was justified.
18. Trippitt
(2001) VAT Tribunal Decision 17340 also related to a public house. The lease
of the pub was taken by Mr Trippitt, and he ran the pub together with the
ancillary catering activities. Mrs Trippitt ran a bed and breakfast business
using the accommodation above the pub. Mr Trippitt rented the premises and paid
the utility and insurance costs. However, in contrast to Smith, there
was an oral agreement between Mr and Mrs Trippitt, and Mrs Trippitt contributed
35% of her income from the bed and breakfast business to Mr Trippitt as payment
for the use of the premises and her share of the overheads. Mrs Trippitt
engaged her own staff to service the bed and breakfast business, and the bed
and breakfast had a separate entrance from the pub. Although the bed and
breakfast utilised the pub’s kitchen and lounge for breakfast service, this was
before the pub opened, and there was no time when the two businesses share the
kitchen and lounge at the same time. Customs issued a direction requiring the
two businesses to register as a single business on the basis that they were
closely bound by financial, economic and organisational links. The Tribunal
allowed the appeal against the direction, holding that the factors in favour of
the Appellants’ contention that the businesses were not closely bound, more
than outweighed the factors which favoured Customs’ contention. The Tribunal
took particular note of the fact that the 35% contribution from bed and
breakfast was a realistic and commercial and arm’s length contribution, that
the two businesses were run separately with separate bank accounts and with
separate accounting records, and that the two businesses had separate staff.
19. Hundsdoerfer
(1990) VAT Tribunal Decision 5450 concerned a bed and breakfast business
conducted on a farm. Mr Hundsdoerfer was the tenant of the farm and carried on
a farming business. Mrs Hundsdoerfer carried on a bed and breakfast business
using a converted cattle shed. She paid rent to Mr Hundsdoerfer for the use of
the premises. Customs issued a direction requiring the two businesses to
register as a single business on the basis that they were closely bound by
financial, economic and organisational links. The Tribunal allowed the appeal
against the direction, taking into account (amongst other things) the
arrangements for the payment of rent were an arm’s length arrangement.
20. In her submissions,
Ms Ratnett placed great emphasis on the fact that the B&B business made no
contribution to the farming partnership towards overheads. Unlike the
circumstances in both Trippitt and Hundsdoerfer, but like
Smith, there was no contribution by the B&B to the “other”
business. This demonstrated, in Ms Ratnett’s view, the close links between the
two businesses. Indeed in giving evidence, Mr Taylor told us that the absence
of cross-charges for the use of premises and utilities was a strong indication
in his view that there was not an arm’s length relationship between the two
businesses.
Submissions by the Appellants
21. The Appellants’
submissions fell into two categories. The first was that paragraph 1A(1) of
Schedule 1 had to be read in priority to paragraph 1A(2). In other words
before considering whether persons are closely bound to one another by “financial,
economic and organisational links”, you first had to consider whether the
businesses carried on by those persons were “artificially separated”. If the
businesses were not “artificially separated”, then there was no need to
consider whether there were any financial, economic or organisational links,
and no notice of direction could be issued.
22. We disagree.
Paragraph 1A(2) states that “in determining … whether any separation of
business activities is artificial, regard shall be had to the extent to which
the different persons … are closely bound to one another by financial, economic
and organisational links.” Thus it is clear from the drafting that in reaching
any decision as to whether businesses have been artificially separated, HMRC
must take into account any financial, economic or organisational links.
However we would note that the mere fact that there may be financial, economic
or organisational links between two persons is not of itself sufficient to
allow for a notice of direction to be issued. HMRC must have determined that
there is an artificial separation of the businesses having taken due regard of
the various links.
23. The Appellants
other submissions were that the B&B and the farm were two separate
businesses operating at arm’s length.
24. During the
course of cross-examination, Mr Taylor was referred to his visit notes which
listed fourteen factors which he considered when reaching his decision to make
a direction (these are also summarised in HMRC’s Statement of Case). Mr
Edwards asked Mr Taylor to review each of these factors and state whether they
weighed in favour or against the giving of a direction. Mr Taylor’s responses
were as follows:
|
|
Factor
|
Weight given by Mr Taylor
|
|
i
|
B&B run from farmhouse
by Mrs Forster with 3 bedrooms as guest rooms
|
In favour of direction –
premises used both for farm and B&B
|
|
ii
|
Mrs Forster has own
records, bank account, and annual accounts, and considers the B&B to be
her own separate business which she has operated since the 1970s
|
Against direction
|
|
iii
|
Mrs Forster takes
bookings, cooks the breakfasts, and cleans the rooms herself with the help of
a part-time cleaner that is paid for by the B&B
|
Against direction
|
|
iv
|
In the case of absence or
illness, bookings are cancelled
|
Against direction
|
|
v
|
Mr Forster plays no part
in the B&B
|
Against direction
|
|
vi
|
The current turnover of
the B&B business is about £8000 which Mrs Forster does not intend to
expand as she is 67 yrs old
|
Neutral
|
|
vii
|
There has been no DEFRA
grant
|
Neutral
|
|
viii
|
The only refurbishment
costs have been a new carpet which was bought by the B&B
|
Against direction
|
|
ix
|
The kitchen is shared for
domestic use and for cooking and serving breakfasts for the guests
|
In favour of direction-
because of shared use of kitchen
|
|
x
|
Direct costs of B&B
such as furnishings, part-time cleaner, food and cleaning materials are all
paid for by the B&B
|
Against direction
|
|
xi
|
Mrs Forster is responsible
for any profits or losses of the B&B and declares the income on her own
tax return
|
Against direction
|
|
xii
|
The farm pays for rates,
domestic fuel, electricity, insurance and phone
|
In favour of direction
|
|
xiii
|
There are no cross-charges
from the farm to the B&B for rent or a share of the utility bills
|
In favour of direction
|
|
xiv
|
John has nothing to do
with the B&B which he understands is run by his mother
|
Neutral
|
25. Mr Edwards noted
that of these fourteen factors, the overwhelming majority were either neutral
or weighed in favour of the B&B being treated as a separate business.
26. The only factors
weighing in favour of a direction were that the B&B shared the use of the
farmhouse, and that there was no cross-charge for the use of the shared
facilities or the utilities. There was no evidence that the farmhouse was used
by the farming business – indeed the evidence was that the farm was now run
from John’s home and the Finn cabin. An adjustment was made in the books of
the farming partnership for the private use of the farmhouse by Mr and Mrs
Forster. 85% of the costs of electricity, heating oil, water, general rates
and insurance are adjusted as private use in the farm’s books and charged to Mr
Forster’s current account in the partnership books. 25% of telephone costs are
similarly adjusted. Ms Ratnett commented that the adjustment had been charged
to Mr Forster and not Mrs Forster – but Mr Edwards submitted that the point was
that Mrs Forster made use of “private” expenditure – and whether it was
recharged to her or to Mr Forster was irrelevant. By analogy, if Mrs Edwards
had set up a B&B in Mr Edwards’ home, and Mr Edwards paid for the utilities
and did not recharge the cost to Mrs Edwards, that was a private matter between
the spouses. The key issue in this case was that the costs associated with the
private use of the farmhouse by Mr and Mrs Forster (including Mrs Forster’s
B&B) were not carried by the farming partnership as they were recharged to
Mr Forster’s current account in the partnership books.
Conclusions
27. We determine unanimously
that HMRC could not have been reasonably satisfied that there was an artificial
separation of the farming and B&B businesses, having regard to the extent
to which Mrs Forster and the farming partnership were closely bound to each
other by financial, economic and organisational links.
28. In reaching this
decision we note that HMRC did not take into consideration the fact that the
B&B business had been started by Mrs Forster in the 1975, when her
parents-in-law were the main partners in the farm. The B&B had been
started by Mrs Forster independently of the farming business for entirely
legitimate and understandable reasons.
29. We note that Mrs
Forster runs the business herself separately from the farm, with her own bank
account and books of account. She meets the direct costs of the business
herself. If for any reason she is not available (for example because of
illness or holidays), the business closes.
30. We also note
that the B&B is carried on from the farmhouse, which is no longer used by
the farming partnership for its farming business, and the partnership recharges
Mr Forster for the private use of the farmhouse by Mr and Mrs Forster
(including the B&B) through the partnership books.
31. We therefore
conclude that the B&B is not closely bound to the farming business by
financial, economic or organisational links.
32. We also note
that Mr Taylor did not seek to inspect the farmhouse premises where the B&B
business was conducted.
33. We are satisfied
that Mr Taylor, acting as a representative of HMRC, could not reasonably have
concluded that it was appropriate to make a direction. We therefore allow the
appeal, and the direction of 18 January 2010 has no effect.
34. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
NICHOLAS ALEKSANDER
TRIBUNAL JUDGE
RELEASE DATE: 13 July 2011
Cases referred to in argument but
not mentioned in the decision:
Burrell v CCE [1997] STC
1413
Allen (1995) VAT Tribunal
Decision 12,209
Amended pursuant to rule 37 of
the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 on 19
July 2011.
