Corporate ownership of valuable assets
For obvious reasons, HMRC scrutinises the ownership of valuable assets such as racehorses, racing cars, and yachts. Numerous Tribunal cases established some basic rules in the early years of VAT.
A company must demonstrate a solid business reason for investing in the asset, such as that the rally vehicle or boat will publicise the company to potential consumers. Input tax is not prohibited just because the judgement was not sound. Tribunals, on the other hand, have tended to side with HMRC when the evidence demonstrated that the expenditure was unlikely to benefit the company.
Evidence of the desire to promote the business at the time of purchase, such as minutes documenting the context around the decision to incur the costs, should be included. A business should also 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 firm that manufactures plastic bags used in supermarkets won its claim to recover more than £250,000 in input tax on the purchase of six racehorses. Six horses may seem like a lot, but the appellant was able to show the Tribunal that the upper management of the supermarkets was interested in racing. Indeed, some of them were horse owners themselves. Bingley’s ownership of horses provided talking points for its salesmen, allowing them to land interviews in which they could make sales pitches. As plastic bags were a low value, routine commodity, getting in to see the consumer was difficult. Getting the interview was the critical first step and the horse owning facilities were invaluable.
When the (then named) Inland Revenue raided and detained the proprietor of KPL Contracts Ltd (LON/04/1605 No 19629), he was naturally concerned about the negative publicity this might bring. As a means of overcoming this and also advertising the company to a wider audience, he chose to participate in motor-cross rallying. Following success in the 2003/04 season, as demonstrated by 80 newspaper clippings, KPL purchased a number of used motor-cross cars during a two-year period.
The minutes submitted to the Tribunal revealed no genuine inquiry into the anticipated costs of participating in motor rallying, nor was there any professional guidance on the tax implications of this venture. Despite having previously devised a marketing strategy with a marketing consultant, KPL did not use one for this venture.
The case was not closed by the Inland Revenue until 2005, after which the owner then opted to withdraw from the sport, partly driven by his achievement in rehabilitating both himself and KPL. There was no personal gain to be had by continuing in the sport, no matter how successful it was.
The Tribunal acknowledged the absence of logical action required to maximise the possible value to the corporation, but concluded in its favour on balance.
On balance, KPL was fortunate; not because of the owner, who had undoubtedly repaired his own reputation rather than that of the company, but because there appeared to be little proof of how the company profited. KPL did have real commercial motive but its case would have been stronger if it had handled the problem more professionally.
HMRC is likely to regard a personal number plate as being for the individual’s personal enjoyment rather than for company objectives. To claim input tax on costs like this, a company must demonstrate that it is promoting the business in some way. In Sunner and Sons (MAN/91/1205 No. 8857), a Tribunal found that the number plate ‘7 SUN’ was purchased to advertise the SUN name on own label items sold in a Sun supermarket. Sunner was therefore allowed the input tax on this item. It is, however, a rare victory on this particular asset class.
If you wish to promote your company with a race car, yacht, or personalised number plate, you must demonstrate a true business objective and adequately document the decision and the results. Help and advice available from us here