19242
INPUT TAX – Exclusion of credit for input tax – Motorcars – Taxable person a company – Company purchasing cars for directors’ use - Whether exception to exclusion unavailable on basis that the cars were available for use for private purposes – Appeal dismissed – Value Added Tax (Input Tax) Order 1992, SI 1992/3222, Article 7(2)(a)(iii), 7(2G)(b)

LONDON TRIBUNAL CENTRE

McKAY DEMOLITIONS (LONDON) LIMITED	Appellant

-	and –

HER MAJESTY’S  REVENUE AND CUSTOMS 	Respondents

			Tribunal:	STEPHEN OLIVER QC (Chairman)
					JOHN BROWN CBE FCA CTA

Sitting in public in London on 30 August 2005

G F R Squibb, director, for the Appellant 

M Barnes, counsel, instructed by the acting legal counsel and solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	In this appeal McKay Demolitions (London) Limited (McKay Demolitions) appeals against an assessment to tax in the sum of  £20,335 plus interest, notified to it on 21 September 2000.  Of that assessment, £2,315 has been agreed, leaving the sum of £18,020 in dispute.

Facts
2.	McKay Demolitions, registered for VAT since 1982, is a family company.  In 1998 it had three directors.  Mr John Squibb was a director until his recent death.  Mrs R Squibb, his wife, remains a director.  Mr G F R Squibb, their son, has been a director throughout; but, unlike his parents, he was not actually involved in the affairs of McKay Demolition in 1998 and for a few years after that.

3.	Mr G F R Squibb presented McKay Demolition’s case and gave evidence.
4.	During the three month accounting period 8/98, McKay Demolitions purchased a Rolls Royce Silver Spur III Saloon (registration number JS 6176).  In the same period McKay Demolitions purchased a Mercedes SLK 23OK (registration number S 789 TEV).  We refer to those two vehicles as “the cars”.  McKay Demolitions claimed input tax relief for the VAT charged on the supplies of both cars in the periods 8/98 and 11/98.

5.	The Mercedes was registered in Mr J Squibb’s name on 17 August 1998; it is not in dispute that it belonged to McKay Demolitions.

6.	At the times relevant to this appeal Mr J Squibb owned and kept for his own use another Rolls Royce and a Bentley.  Mrs R Squibb had another Mercedes. 

7.	The cars were rarely used.  Over the five years following purchase the Rolls Royce (JS 6176) had covered less than 12,000 miles and the Mercedes SLK 230K less than 5,000.  We accept the evidence of Mr G F R Squibb that Mr J Squibb did not use that Rolls Royce for his private use.  He had the other Rolls Royce and the Bentley and used those for his private use.  Mrs R Squibb did not use that Mercedes (save, it appears, on rare occasions); the Mercedes did not suit her because her forward vision was restricted due to her small stature and the length of the bonnet.  She was, however, actively involved in the business at all times and when she needed a car she used a “4 x 4”.

8.	The cars were, for the first few years, kept at old farm premises owned by McKay Demolitions.  Following a theft of two other vehicles from those premises, the cars were kept at McKay Demolitions’ headquarters, about 500 yards away.  The headquarters (known as Orangetree Kennels) were adjacent to the house belonging to Mr J Squibb and Mrs R Squibb.  The cars and the other motorcars owned by Mr and Mrs Squibb were garaged in a shed.

9.	The keys to the cars were kept in a locked box in an unlocked desk drawer in a portacabin that served as McKay Demolitions’ offices.  Mr J Squibb and others involved in the business, such as Mrs R Squibb, their daughter and son-in-law and Mr G F R Squibb, had access to the keys and to the cars.

10.	There was no evidence of any resolution or rule of McKay Demolitions that in terms prohibited the use of the cars for private purposes.

11.	We were provided with insurance documentation relating to both cars.  We will take each car in turn.

12.	For the Rolls Royce (JS 6176) the first certificate included in the evidence covered the twelve months to 23 August 2000.  This names Mr J Squibb as the policyholder.  Only the policyholder (Mr J Squibb) is entitled to drive.  The use to which the Rolls Royce may be put is limited to “Social, Domestic and Pleasure purposes only”.

13.	The second certificate for the Rolls Royce covers the period from 27 April 2000 until 23 August 2000.  Three individuals (J Squibb, A Squibb [sic] and Linda Wright) are now permitted to drive it.  Permitted use remains limited to “Social, Domestic and Pleasure purposes only”.  The third certificate for that Rolls Royce covers the period 3 May 2000 until 23 August 2000.  The three individuals (Mr J Squibb, Linda Wright and Mr Gary Squibb) are permitted to drive it.  The permitted use is again limited to “Social, Domestic and Pleasure purposes only”.  The fourth certificate for that Rolls Royce covers the period from 25 August 2000 until 24 August 2001.  The permitted drivers are Messrs J Squibb and Gary Squibb.  Permitted use is again limited to “Social, Domestic and Pleasure purposes only”.

14.	The fifth certificate for that Rolls Royce covers the period from 24 April 2001 until 24 August 2001.  The policyholder is named as Mr J Squibb (t/a McKay Demo).  The permitted drivers are Messrs J Squibb and Gary Squibb.  Permitted use is now “Social, domestic and pleasure purposes and for the business of the Policyholder or the Policyholder’s Employer or Partner”.  The sixth certificate covers the period 25 August 2001 to 24 August 2002.  Messrs J Squibb and Gary Squibb are the permitted drivers.  Permitted use is as in the fifth certificate.  The seventh certificate covers the period 25 August 2002 until 24 August 2003.  The permitted drivers and the permitted use are the same as in the fifth and the sixth certificates.

15.	For the Mercedes SLK 230K the first insurance certificate is for the period from 11 August 1998 until 10 August 1999.  The policyholder is Mr J Squibb.  Only Mr J Squibb is a permitted driver and permitted use is limited to “Social, Domestic and Pleasure purposes only”.  A second insurance certificate for that Mercedes covers the period 13 December 1999 until 13 December 2000.  Permitted drivers are Mr J Squibb and Mrs R Squibb.  Permitted use is “social, domestic and pleasure purposes” and in connection with the businesses of the policyholder or spouse.  The third and fourth insurance certificates for that Mercedes cover the periods to 13 December 2001 and 13 December 2002 and contain the same provisions regarding permitted drivers and permitted uses as the second.  The fifth insurance certificate for that Mercedes permits only Mr J Squibb, Mr G Squibb and P Squibb to drive and then only for “social, domestic and pleasure purposes”.

16.	A visit by officers of Customs and Excise to McKay Demolitions’ premises in September 2000 revealed that input tax totalling £18,021 had been claimed on the purchase of the cars.  On 11 September 2000 the Commissioners wrote to McKay Demolitions indicating that the input tax claimed on the purchase of the cars was to be disallowed.

17.	An assessment was issued on 21 September 2000 relating to underdeclared tax for the 8/98 and the 11/98 periods.  McKay Demolitions appealed.  A lengthy “review” period then ensued and on 11 September 2004 the Commissioners confirmed the original assessment.

The Law
18.	Section 25(2) of the Value Added Tax Act 1994 (“VATA”) provides that a taxable person “… is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under Section 26, and then to deduct that amount from any output tax that is due from him.”  If no output tax is due from him, or if the amount of the credit exceeds the amount of the output tax due, then pursuant to Section 25(3) VATA the amount of the excess should be paid to the taxable person by the Commissioners.

19.	Article 7(1) of the Value Added Tax (Input Tax) Order 1992 (“the 1992 Order”) provides for an exclusion, in respect of motor cars, from the general right of a taxable person to deduct input tax in respect of a supply to him.  However, pursuant to Article 7(2)(a), Article 7(1) does not apply where (i) the car is a qualifying motor car (ii) the car is supplied to a taxable person and (iii) “the relevant condition” is satisfied.  Accordingly, where the three conditions are satisfied, a taxable person can avail himself of the right to deduct input tax. 

20.	Pursuant to Article 7(2E) the “relevant condition”, insofar as it is material, is that the supply is:

“… to a taxable person who intends to use the motor car … 

(a) 	exclusively for the purposes of a business carried on by him, but this is subject to paragraph (2G) below …”

21.	Article 7(2G) so far as material, provides:
“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”.  

22.	The critical time for determining whether the “relevant condition” in Article 7(2E) of the 1992 Order is satisfied is the time of purchase of the car in question; see the judgments of Neuberger J in paragraph 44 of the decision of the Court of Appeal in Customs and Excise Commissioners v Upton [2002] STC 640 and of Park J in Customs and Excise Commissioners v Elm Milk Limited [2005] 776 paragraph 30.  The condition will not therefore be satisfied if, at the time when the employer or the employer company (such as McKay Demolitions) purchases the car, he or it intends to make it available to “any person” for “private use”.

23.	In Upton, a sole trader case, Newberger J pointed out the difference between the situation of the sole trader and the case where, as here, a car is acquired by one person and made available to another.  In paragraph 44 he said:

“… given that one is required to consider the taxpayer’s intention at the time of purchase the motorcar, it appears to me that, where a company acquires a motorcar with a view to providing it to, say, a director, with no legal or physical impediment on private use, the company would be intending to make the motorcar “available … for private use.”

Conclusions
24.	Mr G F R Squibb presented the case carefully and persuasively.  Essentially his case was that neither car had been purchased with the intention of it being made available for private use.  Mr J Squibb had other cars available for his private use.  The same went for Mrs R Squibb.  The Rolls Royce in question had in fact been used exclusively for business purposes.  The low mileages of both cars and the fact that the Mercedes was not a suitable vehicle for Mrs R Squibb to use show that they were not used and not intended to be made available for private use.

25.	We have to determine, as regards both cars, whether they were available in fact for the private use of Mr J Squibb, Mrs R Squibb or any other member of the Squibb family.  In approaching this we took account of the passage from Upton, set out in paragraph 23 above.  We mention in this connection that we heard no evidence of anything done by McKay Demolitions, either through its Board of Directors or through its shareholders, that in any way prohibited the private use of either car by Mr J Squibb, Mrs R Squibb or anyone else.  

26.	It is significant that the initial insurance cover for both cars was limited to “Social, Domestic and Pleasure purposes only”.  This was the position when the input tax was incurred and remained so until April 2001.  Moreover it was not until 13 December 1999 that Mrs R Squibb even became a permitted driver of the Mercedes.  Until then the Mercedes was insured to be driven by Mr J Squibb alone and only for non-business purposes.  It was not suggested that those had been mistakes.  We are therefore left with evidence that the two cars were, at the critical time, intended to be available for private use.  There was no other use that was permitted under the insurance policies.

27.	The cars were kept near the home of Mr J Squibb and Mrs R Squibb.  Initially they were at the farm and later they were kept at Orangetree Kennels.  There was no physical impediment to Mr J Squibb, Mrs R Squibb, Mr G F R Squibb or any other members of the family getting hold of the keys and using one or other of the cars for his or her own purpose, whether for business or not, provided that the insurance cover extended to the individual at the time.

28.	In all the circumstances we are driven to the conclusion that both cars were available in fact for the private use of Mr J Squibb at the outset and, so far as this is relevant, to other members of the family in later years.  McKay Demolitions has failed to satisfy us that the “relevant condition” in Article 7(2E) of the 1992 Order is satisfied in respect of the Rolls Royce Silver Spur 111 Saloon and the Mercedes SLK 300K supplied to it.  We therefore dismiss the appeal.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 13 September 2005

LON/05/14