20884

VAT assessment – input tax – whether deductible – whether goods or services used for the purpose of a business – input tax on expenditure incurred on re-fitting a yacht – business of trader comprised consultancy in development of thinking skills – yacht provided stimulation to creative thinking – expenditure not directly referable to the purpose of the business – input tax deduction not available – appeal dismissed – VATA 1994 ss24 and 26

LONDON TRIBUNAL CENTRE

	INDEPENDENT THINKING LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	Edward Sadler (Chairman)
					Sandi O’Neill

Sitting in public in London on 30 October 2008

John Esling, consultant, for the Appellant

David Manknell, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction
1.	This case is an appeal by Independent Thinking Limited (“the Appellant”) against an assessment to VAT raised by the Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) dated 3 December 2007 for the amount of £17,233 together with interest of £3,391.48 in respect of periods from October 2004 to May 2006.  The Commissioners also raised an alternative assessment for the amount of £15,588 of VAT, against which the Appellant also appeals.  The assessments were made as a result of a determination made by the Commissioners in their letter of 28 November 2007 to the Appellant.  This determination was, at the Appellant’s request, reconsidered by the Commissioners, but in their letter of 17 March 2008 the Commissioners upheld their original determination.
2.	In summary, the Appellant carries on the business of educational training and consultancy, providing “thinking skills” courses primarily to schools.  In 2002 the Appellant purchased a yacht.  Substantial repair and refurbishment work was carried out to the yacht during the period February 2003 to December 2004 on which the Appellant paid VAT, for which it is claiming a deduction as input tax.  The Commissioners deny that the VAT in question can be claimed as creditable input tax under section 26 Value Added Tax Act 1994 (“VATA 1994”), on the grounds that the expenditure incurred on repairs to the yacht has not been incurred by the Appellant for the purpose of its business.  By its notice of appeal to the tribunal of 4 April 2008 the Appellant contends that the yacht, whilst not directly generating income for the Appellant, nevertheless has contributed to its business in terms of providing intellectual capital and creative inspiration to a business which depends for its success on developing thinking skills and lateral and creative approaches to ideas, and that therefore the yacht should properly be regarded as employed in the business carried on by the Appellant and, in consequence, the VAT paid on repair work to the yacht is validly allowable as input tax.
3.	We dismiss the appeal.  We do not consider that the Appellant has established that nexus between the expenditure on the goods and services on which the VAT was paid and the purpose of its business which is required if, under the relevant VAT legislation, the VAT is to be allowed as input tax credited against the output tax paid on the supplies made in the course of the business.
The evidence and the facts
4.	We had in documentary evidence before us correspondence between the Appellant and the Commissioners; various documents (invoices, correspondence, thinking skills books and other material) relating to the Appellant’s business; and various documents (press articles, website material, advertising invoices, correspondence) relating to the “Around Deeply” project formulated by the Appellant.  
5.	As to witnesses, we heard evidence from Mr Ian Gilbert, managing director and principal shareholder of the Appellant.  Mr Gilbert’s evidence related to the nature and scope of the business of the Appellant; the purchase and refurbishment of the yacht; the “Around Deeply” voyage undertaken on the yacht and the project formulated by the Appellant as a result of that voyage, including plans for further cruises; the plans made by the Appellant to use the yacht and the actual use made; the attempts to charter the yacht to third parties and the attempts to sell the yacht.  Mr Gilbert was cross-examined by Mr Manknell on behalf of the Commissioners as to the use made of the yacht and its relation to the Appellant’s business.
6.	For the Commissioners we had a witness statement setting out the evidence of Roma Whiteley (the officer of the Commissioners with responsibility for the assessments made on the Appellant) with exhibits setting out the factual background to the case and the chronology of events (as agreed in correspondence with the Appellant).  Miss Whiteley was cross-examined by Mr Esling, on behalf of the Appellant, as to her conclusions and the basis of her determination leading to the assessments.
7.	In this case the facts are for the most part not in dispute.  What is in dispute is the nature and extent of the relationship between the use of the yacht and the Appellant’s business and the relevance of that use to the business.  The agreed facts can be summarised as follows:
(1)	The Appellant was registered for VAT on 1 March 1996, giving its business activities as educational training and consultancy.  More particularly, the business of the Appellant is to provide consultancy skills in relation to techniques of thinking and creativity, principally to schools, but also to businesses and other organisations.  The Appellant conducts its business through workshop and seminar sessions, through literature it produces, through computer software it has devised and through material delivered over the internet.
(2)	In February 2002 the Appellant purchased, with the aid of a bank loan secured by a charge on the vessel, a vessel named Gallivanter III (“the yacht”), described as a Cuttyhunk class Bermudan ketch built in 1974, having a length of 54 ft and a beam of 14ft 6 ins.  The yacht was capable of ocean sailing.
(3)	No business plan was drawn up for the use of the yacht by the Appellant, either for its own purposes or for the purposes of obtaining the bank loan.
(4)	The yacht was not used to any significant extent during 2002, but was moored at various boatyards and marinas in Suffolk undergoing repair work.  In January 2003 an investigation by a marine engineer showed that the yacht was not seaworthy, and required substantial work to make her seaworthy.  The yacht was taken out of the water in February 2003 and work to strip and re-fit the yacht was undertaken intermittently (depending upon the cash resources of the Appellant) until December 2004.  Successful sea trials were carried out in February 2005.  The VAT claimed as input tax in this appeal is the VAT charged to the Appellant for the work on re-fitting and refurbishing the yacht carried out in the period February 2003 to December 2004.
(5)	In November 2004 the Appellant agreed with Blue Baker Yachts Ltd, a yacht chartering business, to deliver the yacht to them by 1 January 2005 to enable them to charter out the yacht.  No chartering of the yacht was ever made.
(6)	Mr Gilbert had no knowledge of yachts or sailing when the yacht was purchased.  In the summer of 2003 he undertook a three-month round Britain training course to obtain a yachtmaster qualification.
(7)	In June to September 2005 the yacht was used for what is described as the “Around Britain Deeply Expedition”.  This was a voyage around Britain with a crew of six (a skipper, a navigator, a biologist/artist, an environmental scientist, a social historian, and Mr Gilbert as expedition leader).  The crew was made up of persons with whom, in one way or another, Mr Gilbert had a connection, or who learnt of the proposed voyage and contacted him.  None of the crew were persons involved in the business of the Appellant (with the exception of Mr Gilbert himself).  The voyage was not advertised.  Mr Gilbert tried to find sponsorship (he had approached the National Trust and had discussions with the BBC), but none was forthcoming.  The crew shared the expenses of the voyage.  No fee was paid to the Appellant for the voyage by any of the crew.  The yacht was not “coded” according to the Maritime and Coastguard Agency coding standards administered by the Royal Yachting Association, to a standard which permitted commercial use (that is, equipped and inspected to a certain specification related to use).  The expressed purpose of the voyage was “to capture a multi-dimensional snapshot of people, places, nature and history of the coastline”.  In the course of the voyage Mr Gilbert took photographs of the coastline and sea-life to build a library of photographic images for the Appellant.  He also compiled for the Appellant an archive of notes and other written material.  As yet, neither the library of images nor the archive has been exploited by the Appellant in its business (apart from using some of the photographs in the website design of the Appellant’s business).  In September 2007 a publisher indicated an interest in a proposal for a possible book describing the Around Deeply voyage.
(8)	In each of the years 2006, 2007 and 2008 the Appellant attempted to repeat the Around Deeply project in the form of a voyage in the yacht around the coast of Britain with a crew on a commercial basis (that is, with the crew paying a fee, rather than sharing expenses, with the intention of the Appellant realising a profit from the voyage).  Advertisements were taken in certain national newspapers and in yachting journals, and a simple business plan, in the form of a spreadsheet, was prepared to measure commercial viability relative to the number of fee-paying crew.  The yacht was not coded to a commercial use standard – the intention was to use deposits from bookings to carry out the work necessary to achieve such coding.  Some interest was shown, but never sufficient to put together a crew, and so no such voyages were undertaken.
(9)	In August 2006 the yacht was offered for sale, and remained available for sale until the summer of 2007.
(10)	The Appellant was engaged to carry out a consultancy project for the medical school at Liverpool University which required Mr Gilbert and other consultants to be in Liverpool on various occasions during 2007 and early 2008.  The intention was to use the yacht as a base for the Appellant’s staff and consultants for that project.  However, the yacht failed to complete the journey to Liverpool.  Currently the yacht is laid up for further repair work.
(11)	Mr Gilbert and his family used the yacht as holiday accommodation (when moored) on 19-21 May 2005, 29-30 September 2005, 27-29 December 2005, 11-12 February 2006, and ten nights in August 2006.
8.	Mr Gilbert’s evidence (in addition to confirming the facts set out above, which were largely as appeared from the correspondence between the Appellant and the Commissioners) related to his intentions for the yacht, which he explained as follows:
(1)	The rationale for the purchase of the yacht was to find something which would motivate him personally in his work for the Appellant and stimulate his creativity, which was an important part of the success of the business.  He had a personal interest in the sea and in sailing, but until he took the yachtmaster’s certificate course he had no skill or experience in sailing. 
(2)	The yacht is a large vessel designed for ocean-going sailing with an experienced crew.  It is not a family inshore cruising yacht.  It has a cabin with a large table and he had the idea of using the yacht, in different ports, as a venue for courses provided by the Appellant – as such it would be a stimulating environment for spontaneous and creative work.  The yacht was purchased with this business purpose in mind, and it was not purchased for family sailing.  The yacht was never used as a venue for courses.
(3)	 During his round Britain training course in 2003 Mr Gilbert conceived the idea which developed into the Around Britain Deeply project, using the philosophy of travel, and the curiosity prompted by seeing the coast from the sea, as a motivator to creative thinking.  This was the approach underlying the Around Britain Deeply voyage undertaken in 2005: its purpose was to encourage people to look at Britain differently.  
(4)	In early 2005, before the Around Britain Deeply voyage, Mr Gilbert conceived the idea of what he referred to as the multiple intelligence theory he named “8 Ways Thinking”: this was a thinking skill based on approaching a subject through eight frames of reference.  He developed this theory and its practical applications in the course of the Around Britain Deeply voyage.  It has since been used by the Appellant in its business as a training for teachers in strategies to encourage children to think creatively and laterally.  It has also been used as the core for a software program successfully and profitably developed and licensed by the Appellant known as “Cover Bug”.
(5)	The Around Deeply cruises on the yacht which the Appellant marketed (without success) in subsequent years were conceived as “structured thinking” cruises, specifically designed to stimulate the thinking and curiosity of those who undertook the cruises.  The Appellant intended to press ahead with this concept shortly after the success of the original 2005 voyage, but this was delayed as the yacht was moored in St Katherine’s Dock and for a time was effectively stranded there, as a broken lock gate prevented it from leaving.
(6)	As to the chartering of the yacht, this was not the intention when the yacht was purchased nor during the early stages of the refurbishment: when it was clear that the refurbishment would be costly, the idea of chartering out the yacht arose as a means of generating some income from the yacht.
9.	In cross-examination Mr Gilbert was asked about references in the correspondence with the Commissioners to the use of the yacht as a venue for meetings.  He said that his recollection was that when the yacht was moored in Suffolk it was used for one or two meetings, and that it was also used for meetings when it was moored in St Katherine’s Dock in London.  As evidence he referred to an email of 25 October he sent to a prospective collaborator on a project where he states, “I’ll be in London next week at St Kath’s – maybe we can get heads together then?”
The relevant legislation
10.	The principal UK legislation is found in section 26(1) VATA 1994 which, so far as applicable to this case, states:
(1)	The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.
(2)	The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business - 
	(a)	taxable supplies;
	….
11.	Section 24(1) VATA 1994 defines input tax in these terms:
Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say – 
	(a)	VAT on the supply to him of any goods or services;
(b)	…; 
(c)	…,
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.
12.	The regulations referred to in section 26(1) VATA 1994 are the Value Added Tax Regulations 1995 (SI 1995/2518).  The relevant provisions relating to the attribution of input tax to taxable supplies are principally concerned with cases where the taxable person makes both taxable and exempt supplies (which is not the present case).  Two provisions are relevant to this appeal: regulation 101(1) states:
Subject to regulation 102 and 103B, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.
Regulation 101(2) then provides:
In respect of each prescribed accounting period – 
(a)	goods imported or acquired by and goods and services supplied to, the taxable person in the period shall be identified,
(b)	there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,
(c)	…,
(d)	….
Regulation 100 provides:
Nothing in this Part shall be construed as allowing a taxable person to deduct the whole or any part of VAT on the importation or acquisition by him of goods or the supply to him of goods or services where those goods or services are not used by him in making supplies in the course or furtherance of a business carried on by him.
13.	The European provisions which the UK legislation gives effect to are now found in the VAT Directive of 2006 (2006/112/EC), in the section dealing with deductions and the Chapter headed “Origin and Scope of Right to Deduction”.  Article 167 provides:
A right of deduction shall arise at the time the deductible tax becomes chargeable.
Article 168 provides:
In so far as the goods or services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
	(a)	the VAT due or paid in that Member State in respect of supplies to him of goods or services carried out or to be carried out by another taxable person;
….
The parties’ submissions
14.	Mr Esling, for the Appellant, argued as follows:
(1)	The evidence of Mr Gilbert showed that the yacht was not purchased for, or indeed suitable for, family or recreational use.  It was used by Mr Gilbert and his family (as accommodation) very infrequently and opportunistically.  When it was purchased by the Appellant there was no clear or fixed idea as to how it would be used in the business, but generally an idea that it could be used creatively, or as a creative stimulus, for the business.  That it was so used is demonstrated by the “Around Britain Deeply” voyage and project and the business opportunities which flowed from that.
(2)	The recovery of input tax is not dependent on the yacht being a profit centre.  Applying the test in the case of Customs & Excise Commissioners v Rosner [1994] STC 228, that, for the input tax to be deductible, the nexus between the input supply and the business must be that the supply is directly referable to the purpose of the business, that test is satisfied in the Appellant’s case: the Appellant’s business is fluid and dynamic and relies on the development of attitudes to thinking and it carries out its business by training others to apply thinking skills.  The evidence of Mr Gilbert showed that the yacht was a tool used by the Appellant to give it the capacity and means to find new ways of approaching subjects and thinking about things – this was an intangible contribution, as is consistent with the nature of the Appellant’s business, but what is clear is that it furthered and enhanced the core business and purpose of the Appellant.  Thus expenditure on refurbishment of the yacht, which in turn was essential for the yacht to be so used in the business, was directly referable to the purposes of the Appellant’s business.
(3)	When the refurbishment to the yacht was carried out there was a general idea that the yacht would be used as a tool for developing thinking skills, and that general idea was evidenced by subsequent events, in particular the “Around Britain Deeply” voyage.  Therefore, applying the European Court of Justice case of Lennartz v Finanzamt München III (Case C-97/90) [1995] STC 514 the business purpose was evident at the time the input supply was made.
(4)	It is not the Appellant’s case that the yacht was acquired for the purpose of chartering – the attempt to charter it out was simply the case of a yacht owner expediently seeking to achieve some income to defray costs whilst the principal use of the yacht was developed.
(5)	If a profit centre is required for the input tax on the refurbishment supplies to be deductible, then it is fair to look to the attempts to use the yacht for fee-paying “Around Britain Deeply” cruises in 2006, 2007 and 2008 – these were not successful, but they were enterprises entered upon with a degree of seriousness and expense: contrast the position in the tribunal decision City Centre Commercial Limited [2007] 20166.
(6)	In the alternative, the Appellant relies on the European Court of Justice cases of Midland Bank plc v Customs & Excise Commissioners (Case C-98/98) [2000] STC 501 and Belgium v Ghent Coal Terminal NV (Case C-37/95) [1998] STC 260, on the basis that it is entitled to deduct the input tax because circumstances beyond its control resulted in it failing to use the input supplies for purposes of carrying out taxable transactions – the failure to bring the yacht up to specification to obtain “coding” for commercial passenger use, and the period of “detention” in St Katherine’s Dock were such circumstances.
(7)	Finally, although the use of the yacht as an office was opportunistic, such use was clearly for the purpose of the business and (as recognised by the alternative assessment made by the Commissioners) a portion of the input tax on refurbishment costs should be deductible to reflect such use.
15.	For the Commissioners Mr Manknell made the following submissions:
(1)	The UK legislation requires that input tax, to be recoverable, must be attributable to supplies made by the taxable person in the course of their business.  The goods or services on which the input tax is payable must be used for the purpose of the taxable person’s business.  The European jurisprudence specifies that there must be a direct and immediate link between the goods or services and the taxable transactions entered into by the taxable person, such that those goods or services are “cost components” of such taxable transactions: see BLP Group plc v Customs & Excise Commissioners (Case C-4/94) [1995] STC 424; the Midland Bank plc  case.  This is also the position in the domestic case law: see the Rosner case, which holds that the test is not whether the business benefits from the expenditure in question, but whether that expenditure is directly referable to the purpose of the business.
(2)	In the present case the yacht and its refurbishment may have provided a benefit to the Appellant’s business in terms of an inspirational environment, but that is not enough – the expense on the refurbishment must be shown to be directly referable to what the Appellant does by way of carrying on its business such that it is a cost component of the business transactions undertaken by the Appellant.  That was not the case, even in relation to the “Around Deeply” project: the crew members had no relationship (whether as employees, suppliers, clients, or otherwise) to the business, nor were they paying the Appellant for their participation.  Even if one accepts the evidence of Mr Gilbert that the voyage aided him by inspiring his development of creative thinking tools, such as the 8 Way Thinking concept, that does not provide the necessary link between the expense of refurbishment and the business.  As Mr Gilbert admitted, any number of other situations could provide inspiration of that kind.
(3)	The relevant time for discovering a trader’s intention as to the use made of supplies to him is the time such supplies are made: see the Lennartz case.  Here the supplies were made over the period February 2003 to December 2004.  There was no evidence that during that period the Appellant had the intention to use the yacht commercially for what evolved as the proposed “Around Deeply” cruises to fee-paying crew members – there may arguably have been an intention formed during that period to use it for the original (non-commercial) voyage, but the evidence suggested that the idea for the fee-paying voyages came about because of the experience of the original voyage.
(4)	As to the use of the yacht as an office, if it had to any significant extent been so used then corroborative evidence would show that to be the case: see the tribunal decision in Parker Bond Ltd [1995] (13160).  There was no such evidence in this case.
16.	Mr Manknell made further submissions in relation to the attempt to charter the yacht in the winter of 2004/05, but Mr Esling conceded in reply that it was not the Appellant’s case that such chartering was a business purpose of the Appellant, and that accordingly the case for allowing a deduction for the input tax on the refurbishment work was not based to any extent on such chartering.
The decision
17.	In an appeal such as this the burden lies on the Appellant to show that the input tax for which it is claiming a deduction should be so deductible in applying the rules which give credit for input tax against the tax charged on taxable supplies made by a taxable person.  The Appellant has not discharged that burden, and it is our decision that no part of the input tax paid on the supplies comprising the re-fitting and refurbishment of the yacht is claimable as a deduction by the Appellant against the tax charged on the supplies it makes in the course of its business.  Accordingly we dismiss the Appellant’s appeal, and the assessment made by the Commissioners for the amount of £17,233 together with interest of £3,391.48 in respect of periods from October 2004 to May 2006 stands.
18.	The parties are agreed as to what the law provides – their dispute is as to the application of the law to the circumstances of the Appellant.  As to the law, the relevant provisions are set out above.  Input tax (as relevant to this appeal) is the VAT which a taxable person pays on the supply of goods or services made to him where those goods or services are used (or are to be used) for the purpose of any business which that taxable person carries on (or is to carry on).  The entitlement of a taxable person to a deduction or credit for input tax arises to the extent that it is attributable to taxable supplies made (or to be made) by him in the course or furtherance of his business.  The language of the Directive is a little different from the domestic legislation, but the principle in both is clear and consistent.
19.	There is a similar clarity and consistency in the European and domestic case law applying these provisions.  In the Midland Bank plc case the European Court said (at paragraph 24) in relation to the provisions in the Sixth Directive corresponding to those in the VAT Directive of 2006 set out above:
“[these provisions] must be interpreted as meaning that, in principle, the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to entitlement to deduct is necessary before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement.”
The Court expressed this point once more, by reference to its decision in the BLP Group plc case (at paragraphs 29 and 30):
“It should be borne in mind that, according to the fundamental principle which underlies the VAT system, and which follows from [the Directive], VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components….
It follows from that principle as well as from the rule enshrined in the judgment of [the BLP Group plc case], according to which, in order to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with the taxable transactions, that the right to deduct the VAT charged on such goods or services presupposes that the expenditure incurred in obtaining them was part of the cost components of the taxable transactions.  Such expenditure must therefore be part of the costs of the output transactions which utilise the goods and services acquired.  That is why those cost components must generally have arisen before the taxable person carried out the taxable transaction to which they relate.”
20.	In the domestic courts the question of the relationship between the input tax on supplies made to the taxable person and the business carried out by him was examined in the Rosner case.  The facts of that case, concerning as they do VAT paid on legal fees related to the defence of criminal charges, are far removed from those in the present case, but in the course of his judgment Latham J stated the principles to be applied in determining whether supplies to a taxable person bear sufficient relationship to the business as to permit the input tax to be deducted.  He states that the concept that the supplies in some way benefit the business is too wide:
“Benefit, therefore, cannot be the test.  There must be a real connection, a nexus, between the expenditure and the business.  It seems to me that the nexus, if it is not to be benefit, must be directly referable to the purpose of the business.  By the purpose of the business in this context I mean by reference to an analysis of what the business is in fact doing.  It is only by identifying what the nature of the business is in that way that one can determine the extent to which any given expenditure can be said to be for the purposes of that business.” [at 230]
21.	We are therefore required first to identify what the nature of the Appellant’s business is, and then to determine the extent to which the expenditure on refurbishing the yacht can be said to be for the purposes of that business in the sense of being directly referable to such purposes.
22.	The nature of the Appellant’s business is the provision of consultancy services and related material in the field of thinking skills, providing courses and material to schools, businesses and other organisations designed to help them think creatively or to equip teachers or leaders to encourage a creative thinking approach in their pupils or workforce.  In its case before us the Appellant also argued that its business prospectively extended to providing such skills through the “Around Deeply” project, which was a business it seriously attempted to establish, but without success.  We deal with this point below.
23.	We accept that creativity and inspiration are important qualities for the success of the Appellant’s business, and we accept that they are intangible qualities which do not sit comfortably with the concrete world of VAT supplies of goods and services.  We can see that there may be instances where expenditure is incurred to stimulate creativity or inspiration which is directly referable to the purpose of a business such as that carried out by the Appellant – this might be the case, for example, where the owner of such a business sends its employees to a series of lectures on philosophy or on some other less obviously cerebral venture designed to challenge or develop their own thinking skills.  
24.	Expenditure on the refurbishment of a yacht is not, however, expenditure which on any basis can be said to be directly referable to the purposes of the Appellant’s business.  This is so, even if we accept, as we do, that the yacht was not purchased as a recreational facility for Mr Gilbert and his family.  It is not sufficient that the yacht, or a voyage made in the yacht, in itself provides a setting which might inspire Mr Gilbert to have creative thoughts – he was candid enough to tell us that he might have equally creative thoughts “driving a Morris Minor through Leeds”.  The yacht might in this way be beneficial to the Appellant’s business (as could be the hiring of a Morris Minor for a journey that took in Leeds, if that experience were thought likely to prompt a creative thought relative to the business).  But as is clearly set out in the Rosner case, whether or not the expenditure provides a benefit is not the relevant test.  The connection between the expenditure and the purposes of the business must be more direct: in the language of the European cases, the expenditure must have a direct and immediate link with the business, such that it is part of the costs of the supplies made in the course the business.  We had no evidence which supported a case that the expenditure on refurbishing the yacht was a cost of the business supplies made by the Appellant.  Mr Gilbert could point us to nothing that we considered of significance or as having a unique or special quality (whether photographic or other material, or even promotional material) which was derived from the yacht or its use and which could be seen as a direct link with the supplies made by the Appellant in carrying out its business.  He referred us to the development of the 8 Ways Thinking concept, but told us that it was conceived at the time the yacht was laid up, although developed as a concept in the course of the “Around Britain Deeply” voyage in 2005.  He was unable to explain in what way the yacht enabled that concept to be developed other than that it provided a setting conducive to creative thinking.  This exposes the flaw in the Appellant’s primary case – the yacht might provide such a setting, but it is an entirely arbitrary matter as to whether it gives rise to anything which can be used for the purposes of the Appellant’s business.  The direct link, therefore, between the expenditure and the purposes of the business is not present in this case.
25.	The Appellant’s secondary argument was that the Appellant had a wider business in that it made a genuine attempt to run cruises, with fee-paying crews, by way of exploitation of the “Around Britain Deeply” concept, which was related to its thinking skills consultancy business in that the selling point of the cruises was that they encouraged people to look more closely at their surroundings and to reflect creatively on them.  It is accepted that this business failed, but, the Appellant argues, that should not deny it the right to deduct input tax since it was an enterprise which it embarked upon with serious intent and at significant expense, and that in part it failed because it was frustrated by intervening events beyond its control.  There was, it was argued, a direct link between the expenditure on the refurbishment of the yacht and the purposes of this wider business.
26.	The Appellant does not succeed in this argument because it failed to show to our satisfaction that at the time the refurbishment expenditure was incurred (from early 2003 until December 2004) this wider business purpose existed; in consequence that expenditure could not have been intended to be for the purpose of that wider business.  
27.	The language of sections 24 and 26 VATA1994 is such as to recognise that the expenditure on goods or services giving rise to the input tax may be incurred in advance of the use of those goods or services for the purposes of the business or in advance of a business to be carried on by the taxable person.  However, what is clear from the case law is that the taxable person must be able to show that at the time of the supply on which the expenditure is incurred he had the intention to use the goods or services in question for the purposes of the business.  We were referred to the Lennartz case as authority for that proposition, and there are a number of cases in the domestic jurisprudence which decide this point also.  Events which occur subsequent to the time of supply are relevant only if and to the extent that they evidence the intentions of the taxable person at the time of supply.
28.	We can accept from the evidence that the Appellant conceived the 2005 “Around Britain Deeply” voyage whilst part at least of the expenditure on the refurbishment of the yacht was incurred.  That voyage, however, was not a commercial venture, nor was there evidence that it was originally conceived as a commercial venture: it was undertaken by like-minded individuals who came together through personal contacts and who shared between them the costs of the voyage.  As such it cannot be said to be an extension of the business then carried on by the Appellant.  It was this voyage which in turn gave rise to the idea and possibility of organising similar cruises on a commercial basis: in correspondence with the Commissioners Mr Gilbert stated, when describing the benefits of the 2005 “Around Britain Deeply” voyage, “It made sense to exploit the process we had created first by offering it out to paying punters, something I had intended to do the following year.”  No evidence was produced in the form of notes, business plans, correspondence or other material to suggest that cruises on a commercial basis formed part of the intention for the business of the Appellant prior to 2005 – such evidence as there is (the plan to make the yacht available for charter through a chartering agency as soon as the re-fit was completed; the decision not to bring the yacht up to a specification where it could by “coded” for commercial use) points firmly to the conclusion that commercial use of the yacht for cruises based on the “Around Deeply” concept did not form any part of the Appellant’s intentions during the refurbishment period.
29.	Therefore, even if we are prepared to accept that the Appellant’s business expanded in its scope to encompass “Around Deeply” cruises on a commercial basis, the intention to do so did not exist before 2005.  In consequence the expenditure on the refurbishment of the yacht was not made with the intention that it should be used for the purposes of a business carried on or to be carried on by the Appellant, and the VAT charged in relation that expenditure cannot be deducted by the Appellant from the VAT it has charged on the supplies made in the course of its business.
30.	Finally, the Appellant argued that a portion of the input tax should be deductible as the yacht had on occasion been used as an office venue by the Appellant.  The Commissioners made an alternative (reduced) assessment to take account of this.  Again it is for the Appellant to show that such use was made of the yacht, and the extent of such use, so that some proper basis of apportionment can be made.  The Appellant failed in this.  Beyond one vague reference to the possibility of a meeting in an email (quoted above) there was no evidence of any such office use of the yacht.  Quite apart from the lack of anything by way of corroboration, the oral evidence of Mr Gilbert amounted to no more than general assertion, with nothing pointing to specific occasions on which the yacht was used for this purpose.  There is therefore no basis on which to apportion the input tax by reference to office use of the yacht, and therefore no basis on which to reduce the full assessment originally made by the Commissioners.
31.	For these reasons we dismiss the appeal.
32.	The Commissioners indicated in their Statement of Case that they are not seeking to recover their costs in respect of this appeal and therefore we make no order as to costs.

Edward Sadler

CHAIRMAN
RELEASE DATE: 25 November 2008

LON/2008/927

Authorities referred to in skeletons and not referred to in the decision:

Ian Flockton Developments Ltd v Commissioners of Customs and Excise [1987] STC 394
Diesel Generating (Tetbury) Ltd  VAT Tribunal Decision 2702