Briefing Note - VAT Registration and Recovery of VAT

It is a little-known fact that a business which carries out economic activities which involve making taxable supplies, Revenue and Customs cannot refuse an application to register for VAT.

However, they do have the right to refuse a registration where they conclude that the activity does not constitute a business and where the purpose of the registration is primarily to obtain recovery of input VAT. This argument typically arises when an application to register for VAT is made for a ‘hobby-business’ and it has been applied with vigour as well as success by the Customs, especially in cases involving the chartering of yachts by their owners using yacht-chartering agencies.

In one such case, a yacht was bought from a company which then agreed to manage it for the purchaser for a long period, effectively leasing it back. The owner made an application for repayment of the VAT incurred on the purchase of the yacht but this was refused by the VAT Tribunal on the grounds that the owner was not carrying out a business. In the Tribunal's view, the letting of the yacht was an isolated transaction which did not constitute economic activity. Furthermore, they concluded that such economic activity as was carried on was carried on by the management company, not the owner.

That was the position until a recent case, which involved a man who had been VAT registered but who had de-registered. He intended to add yacht-chartering to his business activities and therefore applied to re-register for VAT purposes. His intention was to charter the yacht out, using it himself only during periods when charter clients could not be found. He planned to deal with the actual business activity of chartering (raising invoices, management and so on) himself. Customs refused his repayment claim relating to the input tax on the yacht. The VAT Tribunal, however, agreed with the boat owner. He was clearly carrying on a business activity and appeared to have a long-term commitment to the business. The input tax was therefore recoverable.

This case has implications for anyone wishing to carry out a business on a small scale, which overlaps with a hobby activity, who intends to reclaim a significant amount of VAT. The ability to recover input tax will depend on how much the proposed business looks like a genuine economic activity and the extent of the involvement of the claimant in that activity.