For obvious reasons, HMRC looks carefully at the ownership of such desirable assets as racehorses and yachts. In the earlier years of VAT, numerous Tribunal cases established some ground rules.
A business must show a credible business purpose for incurring the expenditure, for example, that the rally car or yacht will advertise the business to potential customers. Input tax is not disallowed merely because the decision was not a wise one. On the other hand, Tribunals have been inclined to support HMRC where the evidence showed that it was unlikely that the expenditure could have benefited the company.
There should be evidence of the intention to promote the business at the time of purchase, such as minutes recording the background to the decision to incur the costs.
A business should record the subsequent use of the asset, noting publicity received, sales leads obtained or other benefits.
In AJ Bingley Ltd (LON/83/333 No 1597), a company making plastic bags used in supermarkets won its claim to recover input tax of more than £250,000 on the cost of six racehorses. Six horses sounded rather a lot but the Appellant was able to produce evidence to the Tribunal that the senior management of the supermarkets tended to be interested in racing. Some of them owned horses. Bingley’s ownership of horses provided talking points which enabled its salesmen to obtain interviews at which they could make sales pitches. As plastic bags were a low-value routine product, it was not easy to get in to see the buyer. Getting the interview was the crucial first stage, and the horse ownership facilitated this.
In the case of KPL Contracts Ltd (LON/04/1605 No 19629) the owner was worried about the adverse publicity when his business was raided by the then Inland Revenue and he was arrested. He decided to drive in motor-cross rallying as a method of promoting the company. KPL bought a number of second-hand motor-cross cars over 2 years following success in the 2003/04 season evidenced by 80 newspaper clippings.
The minutes produced to the Tribunal showed no real investigation into the likely cost of involvement in motor rallying; nor was there professional advice on the tax consequences. KPL did not use marketing consultants, despite having developed a marketing strategy with one on a previous occasion.
The Inland Revenue did not close its case until two years later in 2005. The owner then decided to retire from the sport, the decision being motivated in part by the success in rehabilitating both himself and KPL. No personal advantage was to be secured by continuing in the sport, however successful.
The Tribunal noted the lack of logical action required to maximise the potential benefit to the company but, on balance, decided in its favour.
On balance KPL was a little lucky—not because of the owner, having arguably rehabilitated his reputation, as opposed to that of the company, but because there was seemingly no evidence of how the company benefited. KPL did establish a genuine business intent, but its case would have been stronger if it had handled the situation in a more businesslike manner.
HMRC is bound to see a personal number plate as being for the private satisfaction of the individual, rather than for the purposes of the business. To claim for input tax on the cost, a business must show that it is in some way promoting the business. In Sunner and Sons (MAN/91/1205 No. 8857), a Tribunal accepted that the number plate ‘7 SUN’ was bought to promote the SUN name on own label goods sold in a supermarket called Sun.
Practical Tip :
If you want to promote your business with a racing car, yacht or personalised number plate you have to show a genuine business purpose and document the decision properly.
Andrew Needham
