20489

VAT – zero rate – boats not designed for pleasure or recreation – whether they exceed 15 tons – correct method of calculation of tonnage – appeal allowed.

MANCHESTER TRIBUNAL CENTRE

RICHARD JOHN FEE
T/A SWIFTCRAFT BOATS
								     Appellant

-	and –

THE COMMISSIONERS OF
HER MAJESTY’S REVENUE AND CUSTOMS
                      		                                        Respondents

				Tribunal: Richard Barlow	 (Chairman)
					      Carol Roberts	

Sitting in public in Manchester on 8 June 2007 and 17 September 2007

The Appellant in person.

Jonathan Cannan of counsel for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This appeal is against an assessment of Value Added Tax in the sum of £68,480 issued on 19 January 2005 in respect of periods from 1 October 2001 to 30 September 2003.  The respondents conceded that the first period assessed was out of time and that reduced the amount in dispute by £4,475.  The assessment concerns the tax chargeable on 11 boats manufactured and supplied by the appellant.  The out of time assessment relates to one such boat and the respondents further conceded that in respect of two more of the boats they would not maintain the assessment (in view of their tonnage exceeding 15).  We were told the amount remaining in dispute is £50,496 and we were not asked to confirm the amount remaining in dispute and, in view of the fact that we hold that the appeal should be allowed in full, it will presumably not be necessary to do so but, in case it is necessary for any reason, we give liberty to the parties to apply to the Tribunal for the amount to be calculated.

2.	The boats in question are all narrow boats of 60 feet in length which are suitable for use on most of the canals in the United Kingdom (boats need to be no more than 57 feet long to be suitable for all canals but nothing turns on this).  The issue in the appeal is whether the boats exceed the tonnage for zero rating or whether they do not, in which case the supplies were standard rated.

3.	The relevant legal provision, which provides zero rating for supplies to which it applies, is as follows:

VAT Act 1994 Schedule 8 Group 8

Item 1 “The supply, repair or maintenance of a qualifying ship …

NOTE A1 “In this Group-

(a)	a “qualifying ship” is any ship of a gross tonnage of not less than 15 tons which is neither designed nor adapted for use for recreation or pleasure …” 

4.	The boats in question all have engines for self propulsion and so cannot fall within the zero rating provisions of Group 9.  

5.	Item 1 of Group 8 does not preclude a residential boat with an engine from being zero rated but it does not guarantee that it will be.   There can be cases where the design makes a boat suitable for recreational or pleasure use so that it is precluded from zero rating even if it is used as a residence.

6.	Mr Fee explained that the boats in question are not designed for recreation or pleasure as they omit some features that would normally be incorporated in pleasure boats such as open areas for socialising and extra sleeping accommodation for large parties of holidaymakers.  Also at least some of the boats in question do have features such as workshops or office space as well as residential areas for use by the purchasers (some of whom do what might be, somewhat incorrectly, described as peripatetic work on the canals).

7.	The respondents took no point on whether the boats failed the test of being designed for recreation or pleasure, partly because of a possible misdirection in correspondence, but they contend that the point might be open to them in other similar cases.

8.	The tonnage of a ship is not a measure of its weight or the weight of cargo it can carry.  It is a measure of the space inside the ship (or some of that space) multiplied by a numerical factor which then produces a figure that is expressed as so many tons (as in the VAT Act) or tonnes (in other contexts including, we were told, the law relating to registration of ships).  There is no suggestion that the boats in this case were required to be registered.

9.	The VAT Act 1994 contains no provision about how the gross tonnage might be measured but at the time the relevant supplies were made Public Notice 744C stated:

“Where the gross tonnage of a ship has not been ascertained under the Merchant Shipping Acts it is to be determined for the purposes of VAT only by the following formula:

L (m) x B (m) x D (m) x 0.235”.
	
It should be noted that there is no basis for a contention that the Notice has the force of law.

10.	L means length, B means breadth and D means depth and the (m) references mean meters.

11.	The Notice then defines length, breadth and depth and it is the depth that is in dispute in this case.  If the method of measurement proposed by Mr Fee is correct the boats exceed 15 tons of gross tonnage and if the respondents’ method of measurement is correct they do not.

12.	It might be thought that that ought to make this a simple matter to decide and indeed it would be were it not for the fact, as we have already noted, that the VAT Act does not make it clear how the measurement is to be made. 

13.	It might be argued that where there is a clear definition of something in legislation it should be taken that it applies to other legislation where the same concept is referred to even if there is no actual cross-reference to it in that other legislation.  The argument would certainly be stronger if the two pieces of legislation are in pari materia (in an analogous case) to each other.  

14.	Regulation 14 of the Merchant Shipping (Tonnage) Regulations 1997 (S.I. 1997/1510) made under the Merchant Shipping Act 1995 provides for a calculation similar to the one in Public Notice 744C quoted above except that the factor by which the measurements are multiplied is 0.16 and it only applies to vessels of less than 24 meters in length.  It clearly is not in pari materia with the VAT Act 1994.

15.	At a date later than the making of the supplies in question in this case the Public Notice was changed so that the multiplication factor of 0.235 was reduced to 0.16 which was therefore more in conformity with the 1997 Regulation but that change was described in the Public Notice as having been agreed with a trade organisation rather than being established by law.

16.	Mr Cannan pointed out that the higher factor is to Mr Fee’s benefit as it gives a higher rather than a lower gross tonnage when the same boat is measured.  He described the earlier method of calculation as a concession but we do not regard it as an extra-statutory concession in any technical sense.

17.	The literal application of the Merchant Shipping Regulations calculation cannot resolve the question as to why the gross tonnage of a boat might be measured in all cases in the way the Public Notice describes because some boats that might require to be measured might exceed 24 meters in length and there is a completely different method of measurement for such boats in the regulations.  Although a boat of that length may not be suitable for use on canals in this country it should be recognised that the zero rating provision in question is not in any way limited to canal boats.

18.	We are therefore being asked to apply strictly, in some respects, a method of measurement laid down in the Merchant Shipping legislation but to adapt it in another respect simply because the Commissioners had adopted that adaptation in a Public Notice applicable at the relevant time.  Even now that the Public Notice conforms more closely with the Merchant Shipping legislation it does not follow it precisely.

19.	The situation is not satisfactory but we are conscious of the fact that in enacting the VAT legislation the legislature must have intended that some boats would qualify for zero rating rather than that none would and, given that a supply is standard rated unless it falls within one of the zero rating or exempting provisions, it would not be compatible with the perceived will of the legislature to conclude that as no means of measurement is provided no boats can qualify. 

20.	We therefore conclude that as a matter of law the reference to a gross tonnage exceeding 15 tons must mean a gross tonnage calculated in accordance with the Merchant Shipping Regulations so far as is possible but that at the relevant time the multiplying factor was 0.235.

21.	The facts are not in dispute but in order to understand the conclusion we have reached it is necessary to begin by describing the boats.

22.	They are flat bottomed, or nearly so, and straight sided, or nearly so, and therefore they are basically box shaped, ignoring for the moment what might be termed the lid of the box. The sides of the boats are just under 2.050 meters high measured from above the floor timbers to below the ceiling.  However there is a “step” in the sides of the boats about 1.28 meters above the baseline which reduces the width of the boat above that point by 100 millimetres on each side.  We do not use the term step to define the feature we are describing.  We use it only the better to describe it.  100 millimetres is about four inches.  The steps are not flat.  The outer edges are curved and the curves account for about 30 millimetres of their width so that the flat part of the steps is only about 70 millimetres in width.  That is to say that the flat surface is less than the width of an adult’s foot and, although the steps extend along most of the length of the boats, they do not afford a safe or even a practicable means of moving from one end of a boat to the other.  

23.	The reason this step is important is that the respondents contend that the step forms part of the upper deck of the boats and limits the measurement of the depth in the tonnage calculation.  This is because of Regulation 14(3)(b)(i)(aa) of the Merchant Shipping regulations which reads:

“(3) For the purposes of this Part –

…
(b) the depth of a ship shall be measure vertically at the mid point of the length overall.

(i) The upper terminal point shall be –

(aa) in the case of a decked ship, the underside of the deck on the middle line or if there is no deck on the middle line at the point of measurement, the underside of the deck at the side of the ship plus the full deck camber”.

24.	At this point it will be useful to describe the top of the boats.  For much of the length of the boat the top of the boat is a uniform height and it is slightly cambered so that the mid point is slightly higher than the outer edges.  Near the stern of the boat there is a raised area with a window in the front to form a wheelhouse.  The tops of the boats are of course 200 millimetres less in width than the extreme width because of the steps on either side.  The tops of the boats are designed to be strong enough to walk on and serve as a means of progress from one end to the other for anyone not wishing to walk through the cabins.  The inside edge of the top of the boats is the ceiling of the living areas.

25.	The respondents argue that a deck is “a platform extending from side to side of a ship covering the space below, and also itself serving as a floor” (as defined in the Oxford English Dictionary).  According to the respondents the steps, which the appellant described, no doubt in more correct nautical terms as side sections, are part of the deck.  

26.	They rely on one of the definitions in regulation 2 of the Merchant Shipping regulations which defines the “moulded depth” (which is not relevant here) and, in the case of a ship less than 24 meters in length, “the depth” as being the underside of the upper deck at side.  “Upper deck” is defined as the uppermost complete deck exposed to weather and sea and in the case of a ship having a stepped upper deck “the lowest line of the exposed deck and the continuation of that parallel to the upper part of the deck is taken as the upper deck” (our emphasis in both places)

27.	Their argument is that there is a single deck exposed to weather and sea and that its shape is as follows.  It begins where the step diverges from the vertical line of the lower part of the boat and then continues vertically to the top of the boat where it crosses the boat with a slight camber and then down again on the other side to the outer edge of the step on the opposite side.

28.	The respondents then argue that, as the steps provide the “lowest line” of the upper deck “at side”, the line of that exposed part of the deck is notionally taken across the inside of the boat horizontally to the camber of the top part of the deck and/or that as it is a stepped upper deck the steps determine where the lowest line by which the measurement is to be made falls.  The effect of that, if correct, would be that the space inside the boat consisting of the whole of the inside of the boat above the level of the steps is ignored for the purpose of measuring the tonnage and as it happens that makes the difference between exceeding 15 tons of tonnage and not exceeding it.

29.	The crucial issue therefore becomes whether the “steps” can be said to be part of the deck because there is only one deck and if they are part of it they establish where the measurement should be taken because they are its lowest line.

30.	We heard evidence from Mr Oliver Vardy who is a naval architect and marine surveyor and an assistant policy manager with the Maritime and Coastguard Agency which deals with the calculation of tonnage for the purposes of registration of ships.  His job entails looking after what he termed the day to day policy relating to the tonnage measurement policy.  He was called as an expert witness by the respondents.

31.	He told us that he regarded the deck of the boats in question as being a stepped deck and that what we have called the steps were the lowest line of the deck.

32.	When he was asked for the definition of a deck he said that the term had a multitude of meanings but that in the context of measuring tonnage it was taken to mean a weather tight deck.

33.	When he was asked why he said that the steps were part of the deck he said that was because there is only one deck because that is the only one that goes right from side to side.  He accepted that he could not say how narrow a step would be before it could be ignored though it was clear that he accepted that there must be a limit below which a step would be ignored and would not form part of a deck.  When he was asked about whether a step 30 millimetres wide would be ignored he said he did not know.  He agreed that he thought a deck had to be horizontal.

34.	Mr Vardy is not professionally involved in measuring the tonnage of boats like those in the present appeal and has no experience of doing so.

35.	None of the provisions for the measurement of tonnage, including the definitions, actually defines what a deck is.  They define types of decks and produce consequences for certain varieties of decks.

36.	We find the dictionary definition helpful and emphasise the phrase “serving as a floor” which accords with our understanding of the normal meaning of the word deck in the English language.  As we have already explained, we reject the conclusion that the steps serve as a floor, they are too narrow for that.

37.	It is also relevant to have regard to the fact that the step in the side of the boats serves a purpose and that that purpose is not that of a deck in any ordinary sense.  The boats have portholes or windows which are above the level of the step and in a boat with entirely vertical sides those portholes or windows would be vulnerable to breakage when the boat came into contact with jetties or lock walls and the like.  Some boats have a rubbing bar of some sort attached to the side to ensure that when they come in contact with such features the portholes or windows do not themselves strike the hard surfaces.  In these boats the step serves that purpose and that is why Mr Fee designed them a he did. 

38.	Although the definitions refer to measurement “at side” we by no means agree that that means at the extreme edge of the ship in question and indeed the more natural meaning, in context, is at the side of the deck.  In other words the deck should be identified first and then the measurement taken from there rather than the side of the ship necessarily being taken to define where the deck starts regardless of whether that is a part of the ship that can really be called part of a deck (which is the respondents’ interpretation).  However, even if we are wrong in that Mr Vardy accepted that there could be a step which was too narrow to affect the issue and that a deck must be horizontal.  It is for us to decide how small a step can be ignored applying the de minimis principle (ignoring that which is too small to be considered relevant) and in our view the steps in this case with a usable horizontal surface too narrow to afford a safe footing are not part of the or any deck and the measurement should therefore be taken from the midpoint of the underside of the actual deck which is the top of the boat with the consequence that on the agreed facts that means that the boats in question exceed 15 tons of tonnage and do qualify for zero rating.

39.	We should just add that although we heard a good deal about whether the wheelhouse should be treated as “a break” we do not find it necessary to make any finding about that as breaks are additional spaces above the normal line of measurement which can be added to the rest to determine the tonnage.  As the tonnage exceeds 15 without these additions we do not need to consider whether they should properly be added in fact.

40.	The appeal is allowed and if Mr Fee wishes to apply for an award of costs he is directed to do so within three months of the release of this decision.  The assessment under appeal is discharged.

CHAIRMAN

RELEASED: 30 November 2007

MAN/06/0525