We have a client who has a part-time yacht chartering business, his main job being managing director of his own trading company. We have submitted accounts for the yacht chartering business for the last four years, claiming 25% capital allowances (no first-year allowances) on the cost of the yachts. Because of the cost of the yachts (and the allowances), our client has made losses for these years which have been relieved against his other income producing approximately £10,000 of tax repayments.
We have a client who has a part-time yacht chartering business, his main job being managing director of his own trading company. We have submitted accounts for the yacht chartering business for the last four years, claiming 25% capital allowances (no first-year allowances) on the cost of the yachts. Because of the cost of the yachts (and the allowances), our client has made losses for these years which have been relieved against his other income producing approximately £10,000 of tax repayments.
We have recently received an enquiry notice from the Inspector dealing with our client's affairs stating that the yacht chartering activities amount to leasing and fall within TA 1988, s 384(6), which prevents capital allowances creating or augmenting a loss so that the excess capital allowances can only be carried forward. Furthermore, leasing is defined within the scope of CAA 1990, Ch V
Pt II and the Inspector quotes CAA 1990, s 50(2). This states that 'for the purposes of this chapter letting a ship on charter or any other asset on hire shall be regarded as leasing'.
Do readers support our argument that a yacht is not a ship (defined in the dictionary as a large sea-going vessel) and that chartering is not hiring, in that leasing in generally regarded as a long-term hire, not just for one day or one week? There is no private use of the yachts to complicate matters.
If the Inspector is correct, presumably this will affect other businesses which charter/hire assets, e.g. aircraft, plant hire, etc., where the taxpayer does not devote substantially all of his time in running the business.
(Query T16,570) — Unjolly Sailor.
It is unclear from Unjolly Sailor's letter, whether the Inspector is attempting to reopen all four earlier years on the basis of making a 'discovery', if so, this should be resisted. The yacht owner is also managing director of his own business, salary from which will be reported on his return, as well as the fact that he is a close company director. Inspectors are instructed (Capital Allowances Manual at CA2972) not to accept that the TA 1988, s 384(6)(b) requirement for an individual to 'devote substantially the whole of his time' is satisfied in any case where he is in full-time employment or runs another business. Before Langham v Veltema, might one have argued that a reasonably competent Inspector should have previously been aware of this problem?
The Inspector is indeed correct in asserting that a yacht is a ship. In the absence of a statutory definition, the Revenue regards any vessel capable of 'manoeuvring under direct or indirect power' as a ship and this is supported by the Merchant Shipping Act 1894, s 742 which (for CGT purposes) includes, as ships, 'every vessel used in navigation not propelled by oars'.
However, the Inspector's assertion that Unjolly Sailor's client's activities amount to leasing are less watertight than his citation of the superceded CA 1990 might initially suggest. If this assertion can be rebutted then the problem can be resolved.
There are differing forms of charter — straight-forward hire to clients, who sail the ship themselves, is known as 'bareboat charter'. This is a leasing transaction, in which case, the Inspector is correct in his conclusion that loss relief restriction under TA 1988, s 384(6) applies.
However, private yacht charter may also involve the provision of additional services such as owner's trip management, navigation, the provision of crew and often lavish on-board entertainment. In this case it may be possible to refute the Inspector's argument as follows:
First; for post-2001 periods for the purposes of TA 1988, s 384(6), reference should be made to CAA 2001, Part 2. Although CAA 2001, s 46 states. 'For this purpose, the letting of a ship on charter, or any other asset on hire, is to be regarded as leasing (whether or not it would otherwise be so regarded)', the following points should be made to the Inspector:
- CAA 2001 automatically defines the letting of a ship on charter as leasing only in the context of the obtaining of first year allowances.
- Both CAA 1990, s 50(2) and CAA 2001, s 46 include the phrase '(whether or not it would otherwise be so regarded)', i.e. inferring that ship chartering is not always automatically regarded as leasing.
- The distinction between bareboat and other types of charter is recognised in the statutes. FA 2000, Sch 22 specifically points out that 'the meaning of operating a ship ... refers to bareboat charter'.
- In the non-tax case, Baldwins Industrial Services plc v Barr Ltd (referred to in the Inland Revenue's Tax Bulletin 65), it was held that the hire of a crane to assist in building a football stadium did not amount to leasing because of the concurrent provision of a crane driver. Following this, the Inland Revenue now accepts that the supply of plant and machinery with an operator is the provision of a service as opposed to plant hire and is therefore not leasing.
- The section quoted by the Inspector of Taxes refers to 'letting a ship on charter'. The dictionary definition of letting in this context is 'to allow someone the use of'. In circumstances other than bareboat chartering the ship's owners are actively providing a seagoing service and not simply allowing their clients to use the boat as they wish. If it accepted that this phrase refers only to bareboat chartering, then the section becomes logical and no longer contradicts the Inland Revenue's conclusions following the above Baldwin Industrial Services case.
Given the above, the Inspector's conclusion — that CAA 1990, s 50(2) means that ships are to be treated differently from any other asset, so that ship chartering always constitutes leasing whatever the circumstances — is unreasonable. If it can be successfully argued that the ship is not being leased then TA 1988, s 380/s 381 loss relief will be due, provided the usual considerations concerning commercial viability are met. — Lifeboat.
Unjolly Sailor reports the Inspector as referring to CAA 1990, s 50(2) and it would therefore appear that the enquiry is relating to a tax year earlier than 2001-02. I shall assume that this is indeed the case and will consider the legislation that applied before the Capital Allowances Act 2001 came into force. However, the result will be the same under both Acts.
TA 1988, s 384(6), as Unjolly Sailor correctly states, prevents TA 1988, s 380 and s 381 from applying in respect of losses that relate solely to capital allowances made in respect of the provision of machinery or plant for leasing where the trader is not working full-time in the trade.
The second limb of s 384(10) provides that s 384(6) is to be regarded as forming part of Chapter V of Part II of CAA 1990.
This has the effect of allowing the interpretative provisions of CAA 1990, s 50 to apply to s 384(6). In particular, s 50(2) provides that letting a ship on charter or any other asset on hire shall be regarded as leasing.
Unjolly Sailor is correct that most yachts would not be regarded as ships. However, he is incorrect to suppose that the charter of the yachts will not constitute the hire of other assets. S 50(2) is intended to be widely drafted and it is my view that the courts would so construe it. Consequently, it would appear that excessive loss relief has been claimed.
