Marinas - an inspector of taxes calls

And most importantly you are re-investing your profits into the future of the business - especially that Leviathan of marina expenditure, pontoons.

For years you have made your investment in the knowledge that the pontoons qualify for taxation relief by way of capital allowances at 25% per annum on a reducing balance basis, and if the Chancellor were feeling generous, a 40% first year allowance.

Year after year, your accountant has submitted your tax returns with pontoons clearly itemised and your local Inspector of Taxes has agreed the computations on the nod.

For added certainty a decade ago, your trade association, The Yacht Harbour Association, had even agreed the treatment of pontoons with the Revenue at the highest level.

Then out of the blue, your accountant receives a letter from the taxman - not your friendly "local" inspector in a remote part of the UK that doubles as a call-centre for out of work shipbuilders - but the London based Inland Revenue Compliance Office. This organisation is located on the 17th floor of Euston Tower, appropriately looking straight across at Orwell's setting for his 1984 Ministry of Truth and Room 101 - the 1930s skyscraper London University Senate building.

A letter from them is as welcome as a local outbreak of Foot & Mouth.

The bad news - there is no good, for this is no joking matter - is that pontoons in the Revenue's view are now structures, even if they float and are moveable. They are not plant and certainly not machinery, and therefore do not qualify for tax relief.

The £85,655 that our Thames marina invested in pontoons in its financial year ended March 31, 2002 is simply disallowable expenditure for tax purposes - so an additional and unforeseen tax charge of some £25,000 will in due course be payable. To clarify the matter, the inspector referred the marina's accountant to Section 22 of the Capital Allowances Act 2001 - the new Act on the block.

Terrifying coldness And then with a terrifying coldness, the inspector went on: "It is my understanding that this legislation reflects the earlier case law precedents that something which functions as part of the premises is not plant except in the rare cases where the premises themselves are plant."

What the inspector was no doubt hinting - but was not exactly saying so much at this stage - was his right to go back six years and reopen all those earlier tax returns and disallow the tax relief claimed on pontoons. The marina could find itself faced with a sixfigure retrospective tax bill and to add to its misery it had already invested a further £59,000 in the year to March 31, 2003, thinking that further capital allowances were due.

The marina's accountant wrote saying that "the Revenue have flatly turned down our arguments", and he really was at a loss as to what to do next, suggesting at best an approach to the Revenue by The Yacht Harbour Association.

So why this change of heart by the Revenue - if you can argue it ever had a heart? There is something Jekyll and Hyde about this one, which is quite mysterious. As one who served his time in taxation matters, and knew the workings of the Revenue mind, I was surprised when I acquired Braunston Marina in 1988 to discover the Revenue's generous treatment of pontoons.

Such was my concern that my accountant actually wrote to the Revenue telling them exactly what we were proposing to do and we obtained clearance. We have been doing things that way ever since, as have the near 200 other marinas in UK - large and small.

Now out of the blue, pontoons are no longer allowable - at least if you have had a letter from Room 101.

You could argue that Section 22 was introduced as just another of 60 odd stealth taxes to help fund Gordon Brown's growing deficit. Conversely you could argue that it is a tightening up of what was already there for the taking - a sort of subtle-stealth tax.

Service economy For years, as the UK has moved into a service economy, with business parks, warehousing and shopping centres replacing the smoke-stack factories of old, accountants have become more and more inventive as to what exactly constitutes "plant and equipment". Time perhaps to put them back in their baskets.

Then there are those who feel that Labour chancellors have always had it in for the boating industry, seeing it as a rich man's sport. And with a sense of history, they have not forgotten that where Nero fiddled whilst Rome burned, Tory Prime Minister Ted Heath went yachting during his disastrous pay freeze.

The avenging angel was Dennis Healey a few years later with his notorious "soak the rich 'til the pips squeak' budget".

VAT was increased to 25% on luxury goods, including boats however small, which did so much damage to the UK boat industry. So why not do it again to marinas, a perceived playground of the rich?

But hang on a minute! Just as the Revenue Red Indians are moving in for the kill, the cavalry arrives on the crest of the hill - except that in this nightmare-scenario for marina operators, the cavalry belongs to the same organisation - the Revenue.

In August, 2002 the Revenue published a splendid tome - Reform of Corporation Tax. A consultation document.

This was a mere year after Section 22 and the document's fine intentions seem to turn that notorious section on its head. What was needed, the document declared, was a tax "regime that is modern and competitive and reflects the realities of the business environment".

Item one on the agenda was "the tax treatment of capital assets", with "all genuine business expenditure to be deductible to tax purposes", including "the relief for depreciation of assets not eligible for capital allowances".

Good intentions These good intentions were repeated exactly a year later in August 2003 in another fine tome - more holiday reading - Corporation tax reform. A consultation document - note the ever so subtle word change, including use of capitals.

It said, "The tax system should not stand in the way of modern, flexible business practices that enhance productivity. The tax system should aim to minimise its impact on the level, timing and composition of investment" . . .

And now on a roll, the Revenue went on to promise to deal with other iniquities of the tax regime affecting businesses including marinas. The present schedular system of different types of income, established in the 18th century, which prevented losses being offset against other profits, would go.

So too would the outdated tax treatment of trading and investment companies - marinas tend to be a bit of both. (The Revenue has been increasingly trying to treat them as the latter, thus denying their owners capital gains and retirement relief. ) And for the bonus ball, the Revenue would give relief for what are called "tax nothings" - like abortive expenditure on trying to buy or develop a new marina.

But before you thought it safe to put pontoons back in the water, the Revenue went on to express its concern at the potential loss of revenues that these reforms might produce - has true tax reform ever done anything else? - and that the legislation would take years to introduce anyway.

Meanwhile since 1997 UK investment has seen its biggest fall in a decade, and back in Room 101, they are unleashing the dogs of war to speed up this decline.

As if our Thames marina had not already suffered enough, the inspector is also denying them relief for the £4,583 they spent on a new suspended ceiling, by Section 23(4) of the Capital Allowances Act 2001 Nice dilemma There is an operetta quality to the Revenue's nice dilemma, with echoes of Gilbert and Sullivan's Mikado - that scene where Ko-Ko, Pitti-Sing and Pooh-Bah have confessed to executing the heir to the throne of Japan by mistake - the young man was after all disguised as a Second Trombone.

However the Act under which they are to be executed made no provision for a mistake. "That, " said the Mikado, "is the slovenly way in which these Acts are always drawn. However, cheer up, it'll be alright. I'll have it altered next session. Now, let's see about your execution - will after luncheon suit you? Can it wait until then?"

Marinas too face that "execution", whilst we wait for things to be "altered next session". The investment-blight that this will cause - with the possibility of tax relief tomorrow, but none today - could be devastating for an industry that increasingly has to compete internationally.

(Cheap flights and governmentsubsidised marinas in the warmer climates of France and Italy are already posing a major threat. ) I have spoken recently to a major UK pontoon manufacturer who complained of a downturn in orders. And this will add to the crisis of new canal moorings - with British Waterways (BW) advising people to find a mooring before they buy a boat.

For every three narrowboats presently being built there is only one marina mooring coming on stream. (Mooring income on the canals has probably become the most taxed income in the UK after drink, cigarettes and motor fuel.

For every pound received, there are VAT, business rates and BW connection fees to pay, besides corporation and income tax, to which is now added no tax relief on pontoons. ) One likes to try and end with a crumb of comfort; and this lies in an obscure internal Revenue publication CA32232 - Industrial Buildings Allowance: Qualifying Trade: Dock Undertaking. It says, "Marinas normally qualify as dock undertakings because they usually consist of harbours where vessels can ship or unship merchandise or passengers". Make of this what you will.

It is not quite what I think a marina is - certainly not the merchandise bit. But if all else fails, and you can persuade your inspector that your marina is an industrial building, then you will be allowed a 4% straight line writing down allowance on your pontoons.

It only takes 25 years to get your tax relief on pontoons that you may well have scrapped 10-15 years earlier.

But then as Mikado said to the aforementioned three condemned, "I'm really sorry for you all, but it's an unjust world, and virtue is triumphant only in theatrical productions."

© Tim Coghlan 2003 Tim Coghlan began his working life in the City of London, where he served articles with accountants Arthur Andersen & Co. He became a Chartered Accountant and an Associate Member of the Institute of Taxation. He then moved to the securities industry becoming a Member of the London Stock Exchange. In 1988 he retired from the City to run Braunston Marina. He is now a Vice Chairman of The Yacht Harbour Association (TYHA) - the trade association of UK marinas - with responsibility for inland marinas. He has always kept up his interest in taxation and remains an active commercial associate member of the Chartered Institute of Taxation, and in this capacity keeps a watching brief on taxation matters affecting TYHA members. The views expressed here are his own.