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Folkestone Harbour

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Back in the 1990s recession, it was often said that firms occupying offices that had fountains in the lobby would go bust, because the fountain denoted a high rent, or clients would assume so, and that the resultant fees would be excessive. The flip side is that fountains are potentially redolent of optimism and arrival, conveying the message that what lies beyond is worth being part of. Office fountains are no longer in vogue, and I have never seen an HMRC office with a fountain.

And that may explain, in part, HMRC’s approach in the tribunal case of Folkestone Harbour (GP) Ltd [2015] UKFTT 0101 (TC). This involved the construction of a fountain, and whether it had sufficient relationship (or ‘nexus’) with the appellant’s building development.

The development was intended to create taxable supplies, by rebuilding a rundown harbour for future rental income. It was a commercial regeneration project. The fountain was part of the grand scheme.

HMRC said that the fountain’s costs were not directly linked to the development’s taxable supplies, as there was insufficient ‘nexus’. It should be observed that, unlike the office fountains mentioned above, this fountain was not situated on the development land itself, but on public land. The developer’s idea was that the fountain would be a ‘place maker’, or focal point for the development. It would be located at a point of access to the harbour. Though on public ground, it would form a gateway to the development. It would be a hand, reached out to the rest of Folkestone. Like the fountain in the lobby, it ushers you into an attractive environment, telling you ‘it is good to be here, and to do business’.

For HMRC, this was insufficient. It said that the fountain was connected with the town, rather than with the development. It was not even on the developer’s land. It had been built at the beginning, rather than the end of the development. HMRC said that: ‘The construction of the fountain was not a prerequisite for the development and therefore it could not be for business purposes … There is no evidence that the fountain is a marketing tool for the development of the site; it was constructed in response to suggestions from the general public … The fountain is not a significant marketing tool because the public perception would not necessarily associate the fountain with the development.’

HMRC seems to be saying what people said in the early 1990s. A fountain is superfluous ‘bling’; it is not a prerequisite and will not work as marketing. So you should not get VAT recovery, because the fountain cannot be for business use.

That is a judgmental viewpoint. As we know from Ian Flockton [1987] STC 394, a business can decide how to spend its money, and cannot be denied VAT recovery merely because HMRC thinks it ought to have spent more wisely.

The appellant is a commercial body, with no other purpose. It would not build a fountain unless it thought that it would enhance the value realisable from the development. Perhaps it also wished to improve the town, but that is a virtuous circle that often applies to landlords who seek to manage their investment for the long term, rather than for short term returns. There is nothing unbusinesslike about this, or about dedication to the locality. This is not ‘charity’, but enlightened self-interest.

HMRC regards the fountain as half empty rather than half full. Why should it exercise that judgment? The simple question was, did the company’s directors incur the expenditure for the purposes of the business, and is that business fully taxable? The tribunal held that they did and it was. The fountain had the required nexus with the development.