In Gravel Road Records Ltd v HMRC [2017] UKFTT 080 the First-Tier Tribunal (FTT) concluded that VAT incurred on construction of a recording studio was recoverable as it related to a commercial business activity not a hobby.
- The company had a corporate investor and two individual shareholders (one investor and the main Director).
- The company’s intention was to offer production and sound recording services and it needed to construct a recording studio to do so.
- Rent, rates, electricity, phone, software, stationery, and construction costs were incurred.
- There were equipment lease agreements and advertisement costs.
- Two prospective large clients had expressed interest in using the recording studio, one of which had accepted a quote.
- The building work was delayed and by the time it was completed and the studio fully equipped, both customers had gone elsewhere.
- Having struggled to replace the two prospective clients, the corporate investor decided to cease funding the venture, causing the company to cease trading.
HMRC backdated VAT deregistration of the business and refused to repay the VAT. In their argument HMRC went through the criteria established in previous case law:
- The activity was not “a serious undertaking earnestly pursued”: there was only two emails from prospective clients expressing an interest in using the studio and this was not enough to evidence any earnest pursuit of a recording studio business.
- The activity was not “an occupation or function, which is actively pursued with reasonable or recognisable continuity”: there had been no frequency to the business activities, no sales were made, and there was minimal evidence of advertising. None of the building work illustrated a definite intention to pursue a business activity with the aim of making taxable supplies.
- The activity does not “have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made (bearing in mind exempt supplies can also be business)”: no supplies had been made and the suggested turnover in VAT registration application had no real basis.
- The activity is not “conducted in a regular manner and on sound and recognised business principles”: there was no evidence that the activity was supported by a sound or commercial business plan and there was nothing ‘regular’ in the activity.
- The activity is not “predominantly concerned with the making of taxable supplies for a consideration”: again, no taxable supplies had been made and there was no evidence that the taxpayer had tried to resolve the issues that caused the loss of two prospective clients such that taxable supplies could be made in the future.
- As no taxable supplies were made it could not be said that “the taxable supplies that are being made are of a king which are commonly made by those who seek to profit from them”.
The FTT agreed with the taxpayer that the evidence provided, although not entirely satisfactory, supported the taxpayer’s view:
- The scale of investment in construction and equipment points to an intention to pursue a commercial business activity and does not appear to be a ‘hobby’.
- It was financed by a third party and there was nothing to contradict the taxpayer’s claim it was an investment designed to make a commercial return.
- There was no reason to doubt the taxpayer’s claim that a downturn and bleak period suffered by the industry contributed to the business failure.
The taxpayer was entitled to be VAT registered and was entitled to recover VAT.
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Case reference Gravel Road Records Ltd v HMRC [2017] UKFTT 080
