INPUT TAX – disallowed claim for credit for input tax on acquisition of company car – whether Appellant intended to make car available to any person for private use – regulation 7(2G) of Value Added Tax (Input Tax) Order 1992 , SI 1992/3222 – CCE v Upton (t/a Fagomatic) (2002) STC 640 applied – whether Value Added Tax (Input Tax) Order within scope of derogation permitted by Article 17(6) of EC Sixth Council Directive – appeal dismissed

LONDON TRIBUNAL CENTRE

	KAY QUALITY MANAGEMENT LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	MR A E SADLER	  (Chairman)
						MR P D DAVDA  FCA 

Sitting in public in London on 29 August 2003

Miss Nicola Shaw of Counsel, instructed by the Solicitor for the Customs & Excise, for the Respondents

Appeal heard in the absence of the Appellant under Rule 26 (2) of the Value Added Tax Tribunals Rules 1986

© CROWN COPYRIGHT 2003

DECISION

	The Appeal and the Decision

1	This is an appeal by Kay Quality Management Limited (“the Appellant”) against a determination by the Commissioners of Customs & Excise (“the Commissioners”) dated 13 July 2000 that the Appellant is not entitled to reclaim input tax in the sum of £981.30 paid by the Appellant on the purchase of a Hyundai Accent motor car in January 2000.  

2	In summary, the Commissioners contend that it was the intention of the Appellant to make the car available to a person for private use, within the terms of Regulation 7 of the Value Added Tax (Input Tax) Order 1992 (SI 1992/3222) (“the Input Tax Order”), and that accordingly the input tax paid on the purchase of the car is not recoverable.  The Appellant argues that the car was never intended for use other than for the purposes of its business and that it has only ever been used for such business purposes.  The Commissioners claim that the circumstances fall fairly and squarely within the scope of the decision (in their favour) in the case of Commissioners of Customs & Excise v Upton (trading as Fagomatic) (2002) STC 640 (“the Upton case”).  The Appellant argues that there are material differences of fact which distinguish its case from the Upton case.

3	Our decision is that we dismiss the Appellant’s appeal.  We reach our decision on the grounds (set out in further detail in paras. 27 to 41 below) that, regardless of any intention on the part of the Appellant that the car should be used only for the business purposes of the Appellant, the car was in fact available for the private use of the director of the Appellant, and the Appellant must be regarded as having the intention to make it so available.  We agree with the Commissioners that the decision in the Upton case applies to the Appellant’s circumstances.  Therefore Regulation 7 of the Input Tax Order has effect to deny the Appellant the right to claim as input tax the value added tax paid on the Appellant’s purchase of the car.

Hearing the Appeal in the absence of the Appellant 

4	By way of a preliminary matter we need to mention that the Appellant’s appeal was heard by us in the absence of the Appellant.  Throughout the conduct of the dispute with the Commissioners over this matter the Appellant has acted through its managing (and sole) director, Mr. Jeffrey Kay.  On the day before the date set for the hearing of the appeal Mr. Kay applied for a postponement of the hearing on the grounds that he was sick and would be unable to appear to represent the Appellant at the hearing.  In support of this he supplied a copy of a medical certificate.  The Tribunal (Stephen Oliver, QC) considered the application, and directed that the hearing of the appeal should not at that late stage be postponed:  there was extensive correspondence available setting out the essential facts and the Appellant’s case (in particular a letter from Mr. Kay dated 16 July 2002 setting out at length his arguments for distinguishing the Appellant’s case from the decision in the Upton case) such that the Tribunal hearing the appeal was likely to be in a position whereby it would be able to ascertain to its reasonable satisfaction the facts and the grounds of appeal.  Mr. Kay, on receiving this direction, submitted by fax on the morning of the hearing further comments on the Commissioners’ Statement of Case and also comments on the Skeleton Argument prepared by Miss Shaw (appearing for the Commissioners), a copy of which had been sent to him.  Some further written comments on the Commissioners’ principal case were made by Mr. Kay when he replied to certain written submissions by the Commissioners on the EC Directive point made after the hearing (see para. 6 below).  

5	Although, as we mention below, certain matters of fact could not be determined conclusively in the absence of Mr. Kay, these ultimately were not matters which were material to our decision.  It was our view that we had sufficient information before us to find the material facts and to understand the case which the Appellant wished to put before the Tribunal, so as to enable us properly to reach a decision in this appeal.  We therefore proceeded to consider the appeal in the absence of the Appellant, under Rule 26(2) of the Value Added Tax Tribunals Rules 1986.  The Appellant has the right, under Rule 26(3) of those Rules, to apply to the Tribunal to set aside our decision, provided such application is served at the London tribunal centre within 14 days after the date when our decision is released.

6	For completeness we should mention one other procedural matter: as discussed in more detail below, Mr. Kay for the Appellant put forward in correspondence an argument that the Input Tax Order, at least to the extent which the Commissioners contend it applies to cars not acquired exclusively for business use, is ultra vires in that it is not within the scope of the derogation permitted by the relevant provision of the applicable EC Directive.  Since the Commissioners had not prepared their argument on this point for the hearing (and in consequence had not dealt with the point in the Skeleton Argument sent to Mr. Kay), at the conclusion of the hearing we requested written submissions on the point from the Commissioners.  We have received written submissions on this point made by the Commissioners:  the Appellant has seen those submissions and has made written comments on them.  Our decision on this point therefore takes into account those submissions by the Commissioners and the comments on those submissions by the Appellant.

The relevant facts

7	As mentioned, in the absence of the Appellant and of Mr. Kay at the hearing we found the facts relevant to this appeal from the correspondence between the Appellant and the Commissioners.  The facts are straightforward and, save as to two matters as mentioned below, were not disputed by the Commissioners.

8	The Appellant is a limited company providing quality, safety and environmental management services.  The managing director of the Appellant is Mr. Jeffrey Kay, and there are no other directors.  Mrs. Kay is the company secretary.  We had no evidence as to the shareholdings in the Appellant, but Mr. Kay referred to the Appellant as being in the category of “one-man” companies, and so we assume that he was the sole, or at least the principal, shareholder.  There was no evidence to suggest that the Appellant has any employees apart from Mr. and Mrs. Kay.

9	The Appellant’s principal place of business is at 14 Lowry Close, College Farm, Camberley in Surrey.  This is also the home address of Mr. Kay.  At this address, in Mr. Kay’s home, the Appellant maintains an office, from which Mr. Kay conducts the Appellant’s business, and from where he travels to meet the Appellant’s clients when circumstances require.  The car, whose purchase is the subject of this appeal, was parked at these premises whenever it was not in use.

10	Mr. Kay states that on 16 January 2000 the Appellant purchased a Hyundai Accent 1.3L model motor car, registration number V857 MDP, and paid value added tax on the purchase of £981.30.  It is necessary to note at this stage that we had before us at the hearing (faxed to us that morning by Mr. Kay) a copy (of poor quality) of the purchase agreement relating to the car, from which it appears that the purchaser is Mr. Kay, rather than the Appellant itself.  The certificate of motor insurance relating to the car (also faxed to us on the morning of the hearing and referred to below) shows Mr. Kay as the policyholder.  We had no other evidence as to the true ownership of the car.  It is possible that Mr. Kay entered into the agreement to purchase the car as agent for the Appellant, or that the Appellant satisfied the purchaser’s obligations under that agreement by paying the purchase price and then took delivery of the car.  Miss Shaw for the Commissioners rightly observed that if the car were not in fact purchased by the Appellant, or the Appellant had not paid the purchase price, then the Appellant’s appeal must be dismissed on the grounds that there is no supply of goods to the Appellant in relation to the car, and/or no payment of input value added tax for which credit can be claimed.  We make no finding of fact as to the purchase and ownership of the car:  for the purposes of the hearing we were prepared to assume that the car was purchased by the Appellant and that in principle (but subject to the terms of the Input Tax Order – the main point at issue between the parties) the Appellant is in a position to claim credit for the input tax.  Since it is our decision to dismiss the appeal on the grounds that the terms of the Input Tax Order deny the Appellant the right to claim credit for input tax on the purchase of the car, a finding of fact as to the purchase and ownership of the car is not required for our decision – we can reach that decision on the same assumption.  Should the appeal be re-heard if the Appellant exercises its rights under rule 26(3) of the Tribunals Rules as referred to in para. 5 above then the Tribunal will have the opportunity to require the Appellant to provide evidence to enable it to make findings of fact in relation to these matters.  Should the Appellant appeal this decision, and should such appeal be allowed, the court will be able to refer the case back to the Tribunal for the purpose of making such findings of fact.

11	The Hyundai car was purchased to replace a Ford Sierra car previously used by the Appellant in its business.  The Ford car was retained after the purchase of the Hyundai car, and was also kept at the premises in Lowry Close.  The insurance cover for the Ford car was transferred to the Hyundai car upon its purchase, and thereafter the Ford car was not insured, although short term insurance cover would have been readily and speedily available if the Appellant had wished to use the Ford car.  Similarly, at the time of purchase of the Hyundai car, the road fund licence for the Ford car was “traded in” for the licence required for the Hyundai car, and thereafter the Ford car was not licensed.  The Ford car had an MOT certificate which expired on 10 August 2000.

12	Mrs. Kay has at all material times owned a car.  Mr. Kay has at all material times been a named driver on his wife’s car insurance.  Mrs. Kay’s car is available to Mr. Kay at week-ends and outside his working hours during the week, subject to the relatively minor usage which Mrs. Kay makes of her car during those periods.

13	The copy certificate of motor insurance provided to us by Mr. Kay covers the period 31 July 2001 to 27 November 2001.  It therefore does not cover the initial period of ownership of the Hyundai car, but it is the earliest certificate available to Mr. Kay.  As mentioned above, it shows the policyholder to be Mr. J. Kay (and not the Appellant), and the persons entitled to drive the car are the policyholder and “any person named below who is driving on the Policyholder’s order or with the Policyholder’s permission”:  the only person so named is “F Kay” (we take that to be Mrs. Kay).  There is no reference in the certificate of motor insurance to the Appellant or to any interest of the Appellant in the car or in the policy.

14	The certificate of motor insurance states as follows, under the heading “Limitations as to use”:  “The Policy covers:  use for social, domestic and pleasure purposes; use by the Policyholder or by the Policyholder’s spouse each in person in connection with the businesses of the Policyholder or spouse.  The Policy does not cover:  use for racing, competitions, rallies or trials;  use for hiring;  use for any purpose in connection with the motor trade”.

15	On the purchase of the Hyundai car Mr. Kay (acting, we must assume, on behalf of the Appellant) arranged to transfer the insurance cover then provided for the Ford car, as this was the cheapest option.  This cover included both business use and social and domestic (i.e. “private”) use.  Mr. Kay’s intention at that time was to obtain the cheapest car insurance for business use, but he found that cover restricted to business use would cost more than maintaining the existing business and private use cover.  When the transferred insurance policy expired Mr. Kay found that the cheapest cover was available through an insurer which provided insurance only on the basis of both private and business use.  At all times, therefore, the Hyundai car was insured on terms which permitted its use for both the Appellant’s business purposes and for the social, domestic and pleasure purposes of Mr. and Mrs. Kay.

16	Mr. Kay states that the Hyundai car has been used exclusively for the business purposes of the Appellant, and that at no time has it been used for any other purpose (in particular, at no time has it been used by either Mr. or Mrs. Kay for private purposes).  Originally these assertions, supported by certain mileage data, were made to the Commissioners in the context of an assessment made on the Appellant relating to the motor road fuel scale charge.  The Commissioners were prepared to withdraw that assessment in view of the data provided, but in their letter of 4 September 2000 to Mr. Kay they stated:  “I think it is fair to say that we did this [i.e. withdrew the assessment] even though your records were not completely satisfactory.”

17	At the hearing of this appeal, Miss Shaw, noting this reservation on the part of the Commissioners in the context of the motor scale charge assessment, was not prepared to concede, without the opportunity to cross-examine Mr. Kay on the point, that in the different context of this appeal the car was used exclusively for the business purposes of the Appellant.  We had no evidence before us other than the statements made by Mr. Kay in his correspondence with the Commissioners relating to the motor car scale charge assessment, and so we make no finding as to the actual use of the car in relation to the subject of this appeal.  As will appear, the question of actual use of the car is not pertinent to those terms of the Input Tax Order which are relevant to this appeal, and so the absence of any finding of fact on this matter does not affect out decision in any way.

18	There was no evidence before us that any action was taken, or any restraint was imposed, by the Appellant to prevent the Hyundai car from being used by Mr. Kay (or, indeed, Mrs. Kay) for a private, or non-business, purpose.  All the circumstances (including the parking of the car at Mr. Kay’s home address and the identification of Mr. Kay as the holder of the insurance policy) suggest that the car was at all times under the control of Mr. Kay, and that, had he chosen to do so, he could at any time have used the car for any purpose, including his private purpose (subject only to the limited restrictions on use specified in the insurance cover referred to in para. 14 above).  Mr. Kay implicitly confirms this, since part of his case for the Appellant is that, for sole traders and “one-man” companies there are practical difficulties in putting in place effective restrictions on the use of a company car.  In the circumstances of this appeal the burden is on the Appellant to demonstrate that it has not made the car available to any person for private use.  That burden has not been discharged:  there is nothing to indicate that there was either some legal impediment or some physical restraint imposed by the Appellant which prevented the car being used for a private purpose, and we therefore find that the car was available to Mr. Kay for his use, including his private use, and that the Appellant made it so available.

19	Distinct from the question of whether the Hyundai car was in fact made available for private use is the question of the intentions of the Appellant.  In the correspondence before us, and in his subsequent written submissions, Mr. Kay states that it was the intention throughout that the car should be used only for the Appellant’s business purposes.  We are prepared to accept that this was so, although for the reasons set out below (see paras. 29 to 36) this does not assist the Appellant’s case.  Separately, Mr. Kay states that he (and we take this to mean him acting for the Appellant) did not intend to make the Hyundai car available for his personal or private use.  This is a point which is critical to the application of Regulation 7 of the Input Tax Order and is therefore at the heart of the issue in this appeal.  We therefore deal with the point below in the grounds for our decision (see paras. 33 to 36).  Here it is sufficient to say that we do not accept Mr. Kay’s assertion.  Since the Appellant did in fact make the car available to Mr. Kay for his use, including his private use (and this is the case notwithstanding that the Appellant intended that the car should be used only for the Appellant’s business purposes), and since the Appellant must be presumed to have intended the consequences of its actions, our finding is that the Appellant intended that the car should be made available to Mr. Kay for his private use. 

The applicable law

20	The general provisions in the UK domestic legislation setting out the entitlement of a taxable person to claim credit for input tax (that is, value added tax charged on the supply to him of goods or services used for the purposes of his business) are well-known and are set out in sections 25 and 26 of the Value Added Tax Act 1994.  Nothing in this appeal turns on those sections.  The general rule is that the taxpayer is entitled to claim credit in full for input tax, so that in normal circumstances input tax is not a cost to the taxpayer.  However, section 25(7) of the Value Added Tax Act 1994 permits regulations to be made which have effect to exclude specified input tax from credit (so that such input tax thereby becomes a cost to the taxpayer).  The Input Tax Order is made under this provision (or, strictly, it’s statutory predecessor).

21	Before turning to the Input Tax Order it is necessary to mention the provisions relating to credit for input tax in the European law, namely Article 17 of the EC Sixth Council Directive, since the Appellant has argued that the Input Tax Order, at least as it relates to cars not acquired exclusively for business use, is not in accordance with the European law.  Article 17 sets out the right for a taxable person to deduct tax on goods and services used for the purposes of his taxable transactions.  In implementing the provisions of Article 17, Member States are permitted to operate certain derogations from the requirement that a taxable person must have such right to deduct input tax.  In the context of this appeal, the derogation right in Article 17(6) is relevant.  Article 17(6) provides as follows:

“Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of value added tax.  Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all exclusions provided for under national laws when this Directive comes into force.”

The Sixth Directive is dated 17 May 1977, and Member States are required to implement its terms by 1 January 1978 at the latest.  Although Article 17(6) envisages that rules will be made within a specified four year period by the Council dealing with disallowance of a deduction or credit for input tax, no such rules have yet been made, notwithstanding that the four year period has long expired.  The UK legislation which denies credit for input tax in relation to motor cars dates from 1972 (namely, the Value Added Tax (Cars) Order, 1972), and thus comprises an exclusion from the general entitlement to credit or deduction for input tax provided for under the national law of the UK when the Sixth Directive came into force.

22	As for the Input Tax Order, the provisions relevant to this appeal are found in Regulation 7(1) and (2), and are as follows:-

“(1)	Subject to paragraph (2) to (2H) below tax charged on –
(a)	the supply…to a taxable person;

of a motor car shall be excluded from any credit under section 25 of the Act.

(2) 	Paragraph (1) above does not apply where – 
(a)	the motor car is – 
(i)	a qualifying motor car;
(ii)	supplied…to…a taxable person; and
(iii)	the relevant condition is satisfied;”

(It may be noted here that it is common ground in this appeal that the Hyundai car is a “qualifying motor car”, and that the Appellant is a “taxable person” for these purposes.)

(2E)	For the purposes of paragraph (2)(a) above the relevant condition is that the … supply … is to a taxable person who intends to use the motor car either – 
(a)	exclusively for the purposes of a business carried on by him, but this is subject to paragraph (2G) below; or
(b)	primarily for a relevant purpose.

(It is common ground in this appeal that the Hyundai car was not intended to be used for a “relevant purpose”, as defined.)

(2G)	A taxable person shall not be taken to intend to use a motor car exclusively for the purposes of a business carried on by him if he intends to –
…
(b)	make it available (otherwise than by letting it on hire) to any person (including, where the taxable person is an individual, himself, or where the taxable person is a partnership, a partner) for private use, whether or not for a consideration.

23	The scheme of the legislation comprised in the Input Tax Order in the context of this appeal is therefore quite clear:  the general rule is that input tax charged on the acquisition of a car cannot be recovered by the taxpayer.  An exception to this general rule permits the taxpayer to recover such input tax if both the car is a “qualifying motor car” (as in this case) and the taxpayer satisfies the “relevant condition”.  To satisfy “the relevant condition”, the taxpayer, when he acquires the car, must intend to use it exclusively for the purposes of his business, but he cannot be regarded as having that intention if he intends to make it available to any person for private use.

24	These provisions of the Input Tax Order were examined in detail by the Court of Appeal in the Upton case.  Miss Shaw referred us also to two Tribunal decisions subsequent to the Upton case, namely Squibb & Davies (Demolition) Ltd v The Commissioners of Customs & Excise (Decision 17829) and Christopher Leonard Cherry t/a Country Taverns of Oxford v The Commissioners of Customs & Excise (Decision 17995).

The submissions by the parties

25	From the correspondence before us, and the faxed comments we received from Mr. Kay in response to Miss Shaw’s Skeleton Argument and subsequently, we can summarise the Appellant’s case as follows:-

(a)	When the Appellant acquired the Hyundai car it was the intention that the car should be used only for the business purposes of the Appellant, and in particular there was no intention that it should be used for the private purposes of Mr. Kay, Mrs. Kay, or indeed any other person.  Not only was this the intention, but in fact the car was never used for any purpose other than the Appellant’s business purpose.  In relation to intention and the facts as to use, the Appellant’s case can be distinguished from that of the taxpayer in the Upton case on the following bases:-
(i)	Mrs. Kay had no need to use the Hyundai car for her private purposes (she has her own car), and Mr. Kay has no need to use the Hyundai for his private purposes (Mrs. Kay’s car is available to him for his use, and he had retained the previous car, the Ford car, which could have been taxed and insured and thereby made available to him at short notice and minor cost);
(ii)	Consistent with the intention that the car should be used only for business use, the Appellant considered obtaining insurance cover restricted to business use, and it was for cost-saving reasons only that the insurance cover obtained extended to private use – if the Appellant had appreciated that its right to recover VAT was so dependent on this single issue, it would have borne the additional cost of “business only use” insurance cover.
(b)	The interpretation which the Commissioners give to the Input Tax Order following the Upton case is unfair in that it places a particular burden on “one-man” companies in terms of the requirement that the car must be beyond the private use of the employee of such a company.  In particular, it is more expensive to obtain “business only use” insurance cover for a car in these circumstances than cover for mixed social, domestic and business use; and in practical terms it is well-nigh impossible to put in place realistic physical impediments to the sole director of such a company having unrestricted access to the car – arrangements such as “pooled” cars, cars garaged overnight at the company’s premises, car keys retained by a designated person at the company’s premises and so forth which are feasible for a large company are not available, on any realistic base, to a “one-man” company.
(c)	The Input Tax Order, at least as applied by the Commissioners in relation to cars, is contrary to EC law.  Article 17 of the Sixth Directive establishes the general rule that, to preserve neutrality, a taxable person must be in a position to claim credit for input tax, and although there is a derogation right for Member States to deny credit in certain circumstances, the terms of the Input Tax Order as it relates to cars and as applied to the Appellant’s circumstances go beyond the permitted scope of the derogation right.  At best, the derogation permitted by Article 17 can extend only to cars acquired exclusively for business use, and therefore to the extent that the Input Tax Order denies credit for input tax in the case of cars acquired for business and non-business use, it is outside the scope of the permitted derogation.

26	For the Commissioners Miss Shaw made the following submissions:-

(a)	The decision of the Court of Appeal in the Upton case is determinative of this appeal, and there are no features of the Appellant’s case which distinguish it from that decision.
(b)	The car was in fact at the time of acquisition and thereafter available for the private use of Mr. Kay, and therefore was made available by the Appellant to him for such use.  Private use was not restricted by legal impediment (for example by the terms of insurance cover) nor by physical impediment (for example by putting the keys of the car beyond Mr. Kay’s control, or by modifying the car for a particular business use which effectively prevented it from being used for any other purpose).  
(c)	As is made clear in the Upton case, in applying the relevant provisions of the Input Tax Order, it is not relevant that the Appellant intended that the car should be used only for the Appellant’s business purposes;  nor is it relevant that the car was in fact only ever used for such business purposes (although the Commissioners do not necessarily concede that this was the factual position).  The relevant issue is whether the Appellant, when it acquired the car, intended to make the car available to Mr. Kay (or any other person) for private use.  Since the car was so available, and since the Appellant must be taken to have intended the natural consequences of its actions, the Appellant must have intended to make it available for such private use, and therefore, applying Regulation 7 (2G) of the Input Tax Order, the Appellant cannot show that the “relevant condition” is satisfied and accordingly is not entitled to claim credit for the input tax paid on the acquisition of the car.
(d)	Even if it is the case that it is more difficult for “one-man” companies (or sole traders), as compared with larger companies, to show that there are legal or physical impediments that prevent a car from being used for private purposes, or even if it is more costly for such impediments to by put in place (as with obtaining  “business only use” insurance cover), that is not a basis for straining the interpretation of the legislation beyond its natural meaning, as the Court of Appeal noted in applying the Regulations to the circumstances of Mr. Upton, a sole trader, who faced the same or similar difficulties in this regard as the Appellant.
(e)	The terms of the Input Tax Order, as applicable in this appeal in the light of the Upton case, are consistent with European law.  Prior to the coming into force of Article 17 of the EC Sixth Directive the UK had enacted provisions which are now found in Regulation 7 of the Input Tax Order which restricted the right of a taxable person to claim credit as input tax for tax paid on the acquisition of cars in certain circumstances.  Article 17(6) permits the UK to retain those provisions until such time as the Council introduces its own rules on restricting input tax, and although Article 17(6) anticipates that such rules will be introduced within four years at the latest of the date on which the Sixth Directive comes into force, the UK domestic provisions remain effective (and are compatible with the derogation permitted by the terms of Article 17(6)) notwithstanding that the four year period has elapsed without such rules having been introduced:  Royscott Leasing Ltd v Commissioners of Customs & Excise [1996] STC 898.  The scheme of the Input Tax Order is to exclude as a general rule credit for input tax on all cars supplied to taxable persons, but, by exception to this general rule, to allow credit for input tax where it is intended to make the car available exclusively for business use.  There is nothing in this scheme which is outside the scope of the derogation permitted by Article 17(6).

The grounds for our decision

27	As stated above, it is our decision that the Appellant’s appeal fails and is dismissed.
  
28	At first sight, reading the provisions of Regulation 7(2) of the Input Tax Order, it seems that the taxpayer can satisfy the “relevant condition” (and thereby recover the input tax on the acquisition of a car) if he can show that (as at the time of acquisition) he intends to use the car exclusively for the purposes of his business, as set out in Regulation 7(2E).  If matters rested there, the Appellant would succeed, for on the evidence before us we are prepared to find that the Appellant, acting by Mr. Kay, had such an intention.  But the Regulation proceeds to give a special meaning to the notion of the taxpayer’s intentions as to the use of the car: if the taxpayer intends to make the car available to any person for private use, then he is not to be taken as intending to use the car exclusively for the purposes of his business – Regulation 7(G).

29	It is clear from all the judgements in the Upton case that the correct question is not whether the taxpayer intended to use the car for private purposes, but, rather, whether the taxpayer intended to make the car available for private use. To answer this latter question we need to consider, first, whether on the evidence the car was made available by the Appellant to any person for private use, and if it was, secondly, whether the Appellant intended that it should be so made available.  If both issues are answered affirmatively, then the Appellant is precluded by the terms of the Input Tax Order from claiming a credit for the input tax on the supply to it of the car.

30	As to the first of these issues (whether the car was made available by the Appellant to any person for private use), we are required to look at the situation at the moment of acquisition of the car – was the car then made available to any person (in this instance, realistically, Mr. or Mrs. Kay) for private use?  As Buxton LJ makes clear in his judgement in the Upton case (2002) STC 640 at 647 para.28) the expression “make available for use” is distinct from “use”:  

“An object can be available for use without there being any present intention of actually using it;  just as, for instance, a person can be available for, say, military service without there being any intention that he should serve or be asked to serve.”

31	It is our finding that, at the relevant time, the Hyundai car purchased by the Appellant was made available to Mr. Kay for private use.  This was so, notwithstanding the Appellant’s intention that the car would not in fact be used for such private use.  The car was made available to Mr. Kay for private use because although the Appellant intended that he should use the car for business use (and the car was, of course, made available to him for that purpose too), he was free to use the car as he wished at any time when he was not required to use the car on the Appellant’s business – he may never have wished or intended to use the car for private purposes, but if the relevant question is simply:  “Is the car at this time [i.e. when not being used on the Appellant’s business] available to Mr. Kay for private use?”, the answer has to be on the facts that it is.  There was nothing, whether by way of legal impediment or physical restriction, which prevented Mr. Kay from using the car for private use and so nothing which rendered it unavailable to him for such use. 

32	Thus the car was insured for private use, and so could legally have been used for private use.  It may indeed be the case, as Mr. Kay has contended, that the intention was to have “business only use” insurance cover, and that the cover actually obtained, which permitted domestic and social use also, was the only practical option at a reasonable price, but in looking objectively at whether the car was available for private use, we must look simply at the situation as it was, not at what may have been an earlier intention nor at the reason why a particular course of action was decided upon.

33	The use of the car by Mr. Kay was not physically restricted in any way:  Mr. Kay had at all times access to and control of the car and custody of the car keys.  Unlike the directors in the Squibb & Davies (Demolition) Ltd case, Mr. Kay was not precluded by the terms of any employment contract from using the car for his private purposes.  Nor, as in that case, was the car modified so that in reality it could be used only for the specific and technical purposes of the taxpayer’s business.

34	It seems to us, therefore, that the situation is exactly as set out by Neuberger J in his decision in the Court of Appeal in the Upton case, where he is describing the case of a car acquired by a company for the use of a director ((2002 STC 640 at 650 at para. 47):-

“For the reasons discussed above, it seems to me that if the company simply makes the motor car available to a director, without imposing any legal or physical restriction on its use, then, while the company’s only concern and interest may be that the motor car is used by the director in connection with the company’s business, that would not alter the fact that the motor car was made available to the director for private use, within paragraph 7(2G)(b).”

35	As to the second issue (namely, whether the Appellant intended that the car should be made available to Mr. Kay for private use), that can be dealt with quite shortly.  As we have decided, the Appellant made the car available to Mr. Kay for his private use.  The Appellant must have intended to take that action and therefore must have intended to make the car available to Mr. Kay for private use – and this is so even if the Appellant intended that the car (notwithstanding that it was in fact available for any kind of use) should be used only for its business purposes.

36	We therefore conclude that the Appellant intended to make the Hyundai car available to Mr. Kay for private use, and therefore, for the purposes of Regulation 7(2) of the Input Tax Order does not satisfy the “relevant condition” that the acquisition of the car is to a taxable person who intends to use it exclusively for the purposes of a business carried on by him within the specific meaning which must be given to these terms.

37	Mr. Kay sought to distinguish the Appellant’s case from that of the taxpayer in the Upton case by arguing that in the Appellant’s case there are good grounds to support the contention that the car was intended for business use only, since other vehicles were available to Mr. Kay for his private use.  That may be so, but it is important to emphasise once more that the question is not whether the Appellant intended that the car should be used for a particular purpose, but whether, in fact, it was made available to a person for private use:  a car may be available for a particular use (i.e. private use) notwithstanding that it is intended that it should be used only for some other purpose (i.e. business use).  It does not assist the Appellant’s case, therefore, that there is supporting evidence that the car was intended for business use only.  No more would it assist the Appellant’s case if the Appellant had been able to prove that in fact there was no private use of the car – that also would not be pertinent to the relevant question of whether the car was made available for a private purpose.

38	Mr. Kay points out that, when the car was purchased, the Appellant intended to acquire insurance restricted to business use, and that only when it became apparent that the normal domestic/business use cover was a cheaper and more readily-available option did the Appellant decide to take insurance cover permitting private use.  Even if this is so, it is no more than further evidence that the Appellant intended that the car should be used for business purposes only:  but as we have stated, if (notwithstanding such intention) the car was in fact made available to Mr. or Mrs. Kay for private use, then that determines the matter, because the Appellant must have intended that it should be available for their private use, and that is the test required by the Input Tax Order.  Whatever the original intention, the actual insurance cover obtained permitted such private use, and so at the time that the insurance was obtained the Appellant must have intended that the cover should permit private use.  There is no point to be made here that there may have been a different intention when the Appellant agreed to purchase the car and when it (on a later occasion) took out the insurance cover (presumably on or before acquiring ownership by paying the balance of the purchase price and taking delivery of the car):  these matters of intention as to use and availability relate to the acquisition of the car (see Peter Gibson LJ in the Upton case (2002 STC 640 at 645 at para.21), which we consider for these purposes to be when ownership is acquired.  We note in passing that Mr. Upton also considered obtaining “business only use” insurance cover, but (perhaps for the same reasons as the Appellant) the cover actually obtained, as in the present appeal, extended to both private and business use (the Upton case, (2002) STC 640 at 646 at para.24), and so this factor does not distinguish in any way the Appellant’s case from the decision in the Upton case.

39	In his comments on the Input Tax Order as applied by the Upton case Mr. Kay complains that it impacts harshly upon “one-man” companies, since such companies cannot sensibly put in place the kind of physical restraints (such as “pooling” cars, or garaging them on separate premises, or putting the keys in the custody of another employee) which a larger company can impose in order to demonstrate that the car is not available for private use.  That may be so, but it provides no basis for a different construction of the terms of the legislation.  Nor can it be argued that the legislation should be applied in some other way in relation to such companies.  The point was recognised in the Upton case itself (which concerned a sole trader, who, if anything, is in this respect in an even more difficult position in trying to demonstrate that there is physical impediment to private use of the car), where Buxton LJ said as follows ((2002) STC 640 at 648 at para. 35):

“I readily recognise that it will be difficult for a man who purchases a car for business use as a sole trader to demonstrate that he did not thereby make the car available to himself for private use also.  The cases suggested by the Commissioners in which that might be achieved lacked conviction.  I do not, however, think that we should seek to alleviate the position of the sole trader by allowing ourselves to be driven to a construction of the Regulation that it does not otherwise bear.  A sole trader such as Mr Upton does have difficulty in establishing that he has not made available to himself for private use, and therefore did not intend to make available to himself for private use, a vehicle that he intended on purchase to have immediately available to him for business use.  That however demonstrates, not the unreasonableness of the Regulation, but rather the unusual nature of the arrangements made by Mr Upton….”

40	As to Mr. Kay’s point that the Input Tax Order, if it has the effect for which the Commissioners contend, is outside the scope of the derogation permitted by Article 17(6) of the Sixth Directive, we agree with the submissions made on this point by the Commissioners.  The scheme of the Input Tax Order is to deny a credit for input tax in the case of all cars acquired by a taxable person, as provided in Regulation 7(1), regardless of use;  there is then an exception to this general rule so that input tax can be recovered in certain specified cases (notably, in the case of cars intended to be made available solely for business use) :  this was the position under UK national law when the Sixth Directive came into force, and as such is within the scope of the derogation permitted by the Sixth Directive.  Mr. Kay makes the point, if we have understood it correctly, that Article 17 is directed at recovery of VAT on goods and services used for the purposes of the taxpayer’s taxable transactions, and therefore a derogation which purports to deny recovery of VAT in the case of a taxable person’s acquisition of a car made available or used for private purposes cannot be a derogation contemplated by Article 17.  That is to take too narrow a view of Article 17:  its scope is not restricted to goods and services used exclusively for the purposes of the taxable person’s taxable transactions, but only to the extent that they are used for such purposes.  Thus a derogation which denies recovery of input tax where a car is used for business purposes because it is nevertheless available for private use is a derogation from the rules which Article 17 sets out.

41	In conclusion, Mr. Kay fairly makes the point that had the Appellant known of the significance of obtaining “business only use” insurance cover, the Appellant would have pursued its original objective of obtaining such cover, notwithstanding the additional cost of doing so, since that cost would have been worth incurring had it resulted in recovery of the (far more substantial) input tax paid on the purchase of the car.  He also points out that this factor is not given due emphasis in the guidance notes published by the Commissioners on this topic.  That may be so, and if the Appellant has a justifiable grievance on this point it must be pursued elsewhere than before this Tribunal.  We simply observe that any guidance notes should fairly reflect the terms of the Input Tax Order having regard to the scope and consequences of the decision in the Upton case (whilst noting that any guidance notes upon which the Appellant may have relied would, of course, have pre-dated that decision).  Our jurisdiction in this appeal is limited to applying the terms of the Input Tax Order to the facts and circumstances of the acquisition of the car by the Appellant as they are, and not as they might have been had the Appellant arranged things differently in the light of a better knowledge of the relevant law; for the reasons given, on the facts of this case the Input Tax Order applies so that the Appellant is not entitled to a credit for the input tax on the acquisition of the car

42	No order is made as to costs in this appeal.

A E SADLER
CHAIRMAN

RELEASED:

LON/2001/0939