Inland Revenue and “nature of a trade” and the commerciality of an asset.

[Major&Co]

I have a client company who undertake executive training. Some 6 year ago the company purchased an 80ft sailing yacht to be used for “team building” and when not used for that activity it would be available for chartering. Over the past 6 years the yacht has required a great deal of up-keep in maintenance, including a full-time skipper and 3 crew members.

Due to the business becoming fully engaged in expanding its franchise interest the yacht was not used for “team building” but continued to be advertised for chartering, however due to the impact of 9/11 in 2001 the chartering market dried up leaving the company bearing the revenue costs of the yacht against it executive training income. Using the capital allowances available on the yacht the company has not needed to pay CT over the previous six years.

The company has now become the subject of an enquiry regarding the yacht with the Inspector of Taxes arguing that since the yacht did not fulfil its role of being used for team building” and was only chartered once in the previous 6 years it was not in his opinion in the “nature of a trade”. He is therefore suggesting that all income/expenditure/capital allowances associated with the yacht should be taken out of the accounts. By way of an alternative to deleting the income/expenditure in the accounts the Inspector is suggesting that it may be considered as a “benefit in kind” on the basis that it was made available an employee i.e. the managing director, for private use. The “benefit in kind” calculation would be based upon 25% of the market value when it was made available. The yacht has never been used by either the employees of any Director for private use. The only time a Director visited the yacht was to sack/re-appoint a Captain or to ensure that the vessel was being kept in good order.

I would welcome any information or opinions from fellow accountants who may have come up against a similar situation regarding the commerciality of an asset.

[wamstax]

Unfortunately I am not an accountant so don't know if I'm qualified to answer your question However .... it all seems a bit unlikely that for 6 years somebody would keep a yacht that on the face of it wasn't used by any employee or director (or is it employee of Director as stated in your question and there is more private expenditure of domestics through the company) privately and also if I am interpreting your question correctly only ever gave rise to one charter leasing transaction.

What does the yachts log book maintained by the skipper say that it has done and where it has been in these 6 years. Uncommercial? I'm not sure that is the first word I would think of ... more apt to say unlikely and is this an old yarn for the HMRC inspector.

Alternatively of course the HMRC might be inclined to consider that the Yacht cost and all the subsequent upkeep should have been charged to Director's/participator's loan account with potential S419 duties, old S160 benefits & of course CT into the bargain. I assume that there is no hint that the yacht was actually purchased/mortgaged by the director and how and where were the crew's wages charged through the company accounts.... in wages I trust with appropriate PAYE etc operated. There may be a lot more to come out in this enquiry and perhaps it's a damage limitation exercise that is needed. Alternatively as you say it's just been bad luck that the company (presumably by a decision of the MD) has maintained this large Albatross instead of divesting itself of a continuing bind on its resources.
regards
bill@wamstaxltd.com
http://www.wamstaxltd.com

[King_Maker]

Assuming it was not a long charter, what has the yacht been doing during the 6 years? What are the plans for the yacht?

It seems the company may have 2 trades - executive training and chartering. Have separate accounts been kept?

[CDavey9501@aol.com]

Does the director have any nautical interest?

In fact, did you notice a parrot on his shoulder?

[Cynic]

When you say the intention was to be used for "team building" would this be for the companies employees or for their clients?

How many employees does the company have?

[Taxbar]

I think that there is a compromise approach here that can be adopted.

I think that a good argument can be made for at least some initial years the capital allowances and losses were allowble and then to accept that after a number of years it was clearly not a commercial activity and further ca's and losses should not be allowed.

If the Yacht is not sold, then no balancing charges will arise.

This case needs careful negotiation to resolve and the HMRC will need to be satisfied on the BIK argument which doe not add up with keeping the yacht crewed for so long with no chaterers!!!

Daniel Feingold
STP
info@stratax.co.uk

[wamstax]

Taking up Daniel's "cudgel" you might be more able to convince HMRC if you had contemporaneous business plan papers and/or correspondence suggesting that it was a proper commercial decision to take on the yacht and then retain it for bona fides alternative business reasons when the climate swung
regards
bill@wamstaxltd.com

[drum]

what are the matters of fact that constitute "a nature of trade"? are these listed in the HMRC manual?

is there not an argument that there was an intention to make a profit from the activities at the outset? is there a time limit on achieving the profit?
+

[wamstax]

the following might be of some use to you
http://www.hmrc.gov.uk/manuals/bimmanual/BIM20200.htm

however I think that you need specialist help to consider all the angles and do a damage limitation exercise (or analyse all the relevant facts to get a "best scenario" deal
regards
bill@wamstaxltd.com
http://www.wamstaxltd.com