Rudge v Revenue & Customs [2006] UKVAT V19615 (07 June 2006)

                                                                                                                          19615

INPUT TAX – BMW motor car – taxpayer claiming car purchased and used by him solely for business purposes – taxpayer consequently claming entitlement to credit in respect of input tax – whether at date of supply taxpayer intending to make car available for private use – appeal dismissed – VAT (Input Tax) order 1992 art 7(2E)(a), (2G)(b).

LONDON TRIBUNAL CENTRE

STEPHEN RUDGE
	Appellant

and
		
THE COMMISSIONERS OF HER MAJESTY’S  REVENUE AND CUSTOMS	Respondents	

Tribunal:  Rodney P Huggins (Chairman) 
                                                       Ruth Watts Davies MHCIMA, FCIPD

Sitting in public in London on 27 March 2006

The Appellant appeared in person.

Raymond Hill, Counsel, for the Respondents.

 CROWN COPYRIGHT 2006

DECISION

The appeal

1.   This is an appeal by Mr Stephen Rudge (Mr Rudge) against a decision of the Commissioners (HMRC) contained initially  in a letter dated 29 January 2003 disallowing the Appellant to recover input tax against the purchase of a BMW 325 motor car, registration number LR02 RBY (the BMW) in the sum of £4,731 because the vehicle was being made available for private use and the VAT incurred could not be re-claimed.  This decision was confirmed at later dates on 18 March 2003 and 24 April 2003 after reconsideration by HMRC

The legislation

2.   Article 17(6) of the EC Council Directive 77/388 (the Sixth Directive) permits Member States to retain existing exclusions from the right to deduct input tax on cars acquired exclusively for business use.

3.   The United Kingdom has restricted the right to deduct input tax on motor cars though a series of statutory instruments known as car orders made pursuant to section 25(7) of the Value Added Tax Act 1994 (the 1994 Act).

4.   The current order is the Value Added Tax (Input Tax) Order 1992 (the 1992 Order) as subsequently amended by the Value Added Tax (Input Tax) (Amendment)(No.3.) Order 1995 (the 1995 Order).

5.   Under paragraph 7(1)(a) of the 1992 Order, tax charged on the supply of a motor car to a taxable person is excluded from credit for input tax.  However, this is subject to an exception under paragraph 7(2)(a), where the car is a “qualifying motor car”, supplied to a taxable person and “the relevant condition is satisfied”.

Paragraph 7(2E)(a) states that the “relevant condition” is that the supply is to a taxable person who intends to use the motor car “exclusively for the purposes of a business carried on by him.”

6.   Paragraph 7(2E)(a) is made subject to paragraph 7(2G), the relevant parts of which state :

“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

(a) …..

(b)  make it available …. To any person (including, where the taxable person is an individual, himself,…) for private use, whether or not for a consideration”.

7.   Under Regulation 7(2)(a) of the 1992 Order, one of the conditions for recovery of input tax on a motor car is that the car must be “supplied to … or 
acquired from another Member State or imported by a taxable person”.  Section 3(1) of the 1994 Act states that a person is a “taxable person” for the purposes of the Act “while he is, or is required to be, registered under this Act”.

8.   Nevertheless, VAT charged prior to registration can still be recovered if HMRC authorise the taxpayer to do so pursuant to regulation 111(1)(a) of the VAT Regulations 1995.   Where a trader is partially exempt, HMRC will only authorise recovery of input tax on pre-registration expenditure when it can be directly attributable to taxable supplies.

The issues

9.   The appeal concerns the exclusion from input tax of a car which is not intended to be used exclusively for the purposes of the Appellant’s business.  Mr Rudge maintains that when he bought the BMW in Germany he did not intend to use it except for his business, that he did not need to do so and did not in fact do so.

10.   HMRC contend that the Commissioners have a blocking in force on recovery of input tax in respect of cars.  The BMW is available for private use and could be used for private purposes.  In addition, they assert that when he bought the BMW he was not registered for VAT and since his business as a financial consultant is partially exempt, the BMW could not in any event be attributable solely to Mr Rudge’s taxable supplies.

The evidence

11.   The Appellant gave oral evidence.

12.   A bundle of 83 documents was produced by Mr Hill.  Oral evidence was given on behalf of the Commissioners by Mr Anthony James Bensley (Mr Bensley) an HMRC Officer from the Business Services and Taxes Sussex Division stationed at Redhill, Surrey.

The facts

13.  From the evidence before us, we find the following facts.

14.   Mr Rudge has been self-employed as a financial consultant since 1987 under the name Waterhouse Financial Services.  He has no employees and since the latter half of 2002 has used a dwelling house known as                   1 Blacksmith Cottage, Chiddingstone Hoath, Edenbridge, Kent as his office.  By 2002 he was providing financial advisory services to clients particularly in Essex and East Anglia.  In addition, he has traded again on a self-employed basis as a wine merchant under the name “Chiddingstone Fine 
Wines”.  That represented approximately 45% of his overall turnover.  He did not reveal this other business interest until the tribunal hearing.

15.   He moved to Chiddingstone in the second half of 2002.  Although Number 1 Blacksmith Cottage is a residential property, he used it as his office and slept there usually on week days but not every day.  His main residence was Number 2 Primrose Cottages, The Street, Bredfield, Suffolk (near Woodbridge) which belonged to his partner, Mrs Carolyn Hammond (Mrs Hammond) who was a beauty therapist having her salon in Ipswich.   She did not attend her salon on a daily basis but travelled around seeing clients.

16.  In 2002 Mrs Hammond acquired a Toyota Celica coupé motor car which was insured through Hill House Hammond from 5 December 2002.  The limitations of use were Social, Domestic and Pleasure including Commuting.  Mrs Hammond was the policyholder.  Under the policy Mr Rudge was named as the other driver. The insurance policy was renewed with effect from 12 October 2003.

17.  On or about 12 April 2002, Mr Rudge purchased the BMW from a dealer in Germany for the sterling equivalent of £27.038.38. He drive the BMW back to England and arrived in the United Kingdom on 14 April 2002.  He registered the vehicle with the DVLA on 1 May 2002.  On 6 June 2002 he was notified by the National Unit for Person Transport of HMRC that he had to pay VAT of £4,731 by 6 July 2002 on the BMW which he did.

18.  Mr Rudge applied on 1 August 2002 to be registered for VAT for the first time in his business as a financial services adviser and at that time stated that his principal place of business was 26 Cavendish Road, Chesham, Bucks.

19.  In his VAT return for the period ending 31 October 2002, he reclaimed a total of £14,127 in input tax, as compared with total output tax of £253.75.  Mr Rudge also stated in the box entitled “Total value of all acquisitions and goods and services excluding any VAT from other EC Member States” a figure of £21.645.

20.  The input tax claim was later reduced to £5,150.25 after disallowance of items of pre-registration expenditure (excluding the sum of £4,731 for the VAT on the BMW) by a letter from Mr Bensley dated 29 January 2003.

21.  As a result of a pre-credibility query with regard to the first VAT return discussed with Mr Rudge on the telephone, on 28 January 2003 Mr Bensley visited 1 Blacksmith Cottage and met Mr Rudge in the lounge having observed the BMW parked outside.  He examined his accounting records and was informed by Mr Rudge during the course of the visit that his current insurance policy included both business and private use.  No insurance documents were produced at that time.  Mr Rudge said that he intended to use the car only for business purposes.

22.  Mr Bensley formed an opinion that 1 Blacksmith Cottage was Mr Rudge’s home address as there was no evidence of the property being used as an office available to Mr Bensley from his view of the lounge.  He did not inspect any other rooms and indeed was not invited to do so.  Mr Rudge did not tell him at that time that the property was his office and not his residential address.

23.  Therefore, Mr Bensley concluded that the BMW was being made available for private use because (a) the current vehicle insurance policy at the time of purchase included “social and domestic” cover and (b) the BMW was being kept at Mr Rudge’s home address.  Having decided to disallow the £4,731 input tax being claimed in his first VAT return Mr Bensley wrote to him on 29 and 31 January informing him that the VAT would be disallowed.  The earlier letter formed the decision upon which this appeal is based.

24.  In the second letter dated 31 January 2003 Mr Bensley stated : “The other point I would like to bring to your attention is the fact that because the business is partially exempt (I enclose the relevant leaflet for reference), the revised input tax of £5,150.25 is further reduced because of the restrictions imposed by this application.  The details of the reduction are as follows :

             Total input tax claim after revision       =     	£5150.25	
              VAT on car purchase, disallowed        =     	£4731.00	
                                                                            =     	£419.25	

£419.25 represents input tax against expenditure covering both exempt and taxable income.  Therefore the standard method must apply …”  He amended Mr Rudge’s VAT return for the period 10/02 accordingly so as to show Mr Rudge liable for a net amount of £190.87

25.  Mr Rudge sought a reconsideration by HMRC of that decision on the basis that his car “is used exclusively for business purposes”. The Commissioners rejected this request in two letters dated 18 march 2003 and 24 April 2003 on the basis that the BMW could be put to private use even if it was in fact used for business purposes.  Mr Rudge appealed on 23 May 2003.

26.  There then ensued further correspondence between Mr Rudge and Mr Bensley.  On 1 December 2003, Mr Rudge sent Mr Bensley a copy of a certificate of insurance issued by Tradex Insurance Company Limited for the period 20 June 2003 and 20 June 2004 which stated under the heading “Limitations as to Use” that Mr Rudge was only insured for “use in connection with his/her business or profession.”  In addition, he was the only person entitled to drive the BMW.  In a letter dated 24 February 2004 Mr Bensley asked Mr Rudge for a copy of the certificate for the car and any other relevnt insurance documentation from the date of the purchase of the BMW until 20 June 2003.  He replied on 5 March 2004 to explain that he no 
longer had these documents.  He did supply a letter from Churchill Insurance Company Limited dated 26 July 2004 which read as follows :

“As you have been advised we are ulnae to send out certificates for policies that have been cancelled but I can confirm that you were insured against business use on your policy between the dates of 25 November 2002 until 28 June 2003 inclusive …”

27.  At the tribunal hearing, Mr Rudge told the tribunal and it was accepted as fact that he used to drive the BMW (until it was involved in an accident and eventually sold in June 2004) to see clients in East Anglia and sometimes he would park at his home at Bredfield, Suffolk overnight en route rather than return to Chiddingstone Hoath.  He would then drive to see another client nearby the next morning.  His partner, Mrs Hammond would drive him to his office at 1 Blacksmith Cottage usually on a Monday, stay overnight and then return to Suffolk the next day. She would also collect him on a  Friday. At weekends, they would use her car for travelling.

The Appellant’s Arguments

28.  Mr Rudge relied upon the submissions which he had itemised in his letter to Mr T Williams of HMRC dated 26 February 2003.  He repeated these at the hearing. He said :

“The facts I adduce in support of my claim for a refund of Vat on my car are simple, lucid and common-sensical.

*   My car was purchased as a pure business accessory
*   My car is not used for any other purpose than for travel in a business context
*   My car is and always has been insured solely for business use – it is illegal for me to use the vehicle in any other capacity
*   I have kept and keep a detailed log of every business trip taken in the car showing the on-going mileage from week to week.  This can be checked against Service book records and the milometer
*   I have a second car used for all non-business use.  I am insured to drive this purely for SDP reasons …”

The Arguments for the Respondents

29.  Mr Hill put in a skeleton argument which the tribunal found useful.

30.   He said that the main issue was whether the Appellant had the intention specified in article 7(2E) of the 1992 order that the care should be used exclusively for his business.  The intention was negatived if paragraph (2G) applied.  The Appellant on the evidence before the tribunal cannot establish that he did not intend at the time of acquisition to make the BMW available to himself or others for private use.

31.  The Court of Appeal, he submitted, had considered the correct interpretation of paragraph 7(2G) of the 1992 Order in Customs and Excise Commissioners v Upton [2002] STC 640 (Upton) the facts of which are set out in the judgment of Gibson LJ at paragraphs 6 to 12.

32.  In Upton, the Court of Appeal looked at the paragraph 7(2G) test in two stages.  First, it considered whether Mr Upton’s Lamborghini was available for private use.  Then, it went on to consider whether he intended to make it so available.    Mr Hill submitted the tribunal should follow the same procedure.

33.  Mr Hill furnished the tribunal with a copy of the judgments of the Court of Appeal in Upton and quoted several extracts.  He also referred the tribunal to the following decisions of higher courts :

Customs and Excise Commissioners v C H Skellett (t/a Vidcom Computer Services) CS 2003 [2004] STC 201

H A S Thompson (t/a H A S Thompson & Co) v Customs and Excise Commissioners (No.2.)  Ch D [2005] STC 17777

Customs and Excise Commissioners v P J Robbins [2005] STC 1103 – (Robbins)

Customs and Excise Commissioners v Elm Milk Limited [2005] EWHC 366 (Ch)

34.  Mr Hill also submitted that in any event Mr Rudge could not recover the VAT charged on the BMW as input tax because it was incurred before he was registered for VAT.  He then addressed the tribunal on the situation which arose as Mr Rudge’s business is partially exempt from VAT and therefore the car could not be attributed solely to Mr Rudge’s supplies.

Reasons for decision

35. There are three hurdles which Mr Rudge has to overcome in order to succeed in his appeal and we will deal with each in turn.

Pre-registration input tax

36.  Under regulation 7(2)(a) of the 1992 Order, one of the conditions for recovery of input tax on a motor car is that the car must be “supplied to … or acquired from another Member State or imported by a taxable person”.  Section 3(1) of the 1994 Act states that a person is a “taxable person for the purposes of that Act “while he is, or is required to be, registered under this Act”.   Mr Rudge was not registered for VAT at the time he purchased the car, nor is there any evidence that he was compulsorily registrable prior to    1 August 2002.  Therefore, Mr Rudge was not a taxable person and cannot recover input tax under the 1992 Order.

37. However, Mr Bensley explained in his evidence before the tribunal VAT charged prior to registration can be recovered if HMRC authorise the taxpayer to do so pursuant to Regulation 111(1)(a) of the VAT Regulations 1995.  Where a trader is partially exempt, HMRC will only authorise recovery of input tax on pre-registration expenditure where it can be directly attributable to taxable supplies.  HMRC had not authorised recovery of the tax.

38.  Mr Rudge admitted at the hearing that his financial advisory service is partially exempt and therefore the BMW could not be attributable solely to his taxable supplies as a financial adviser.

Partial exemption

39.  Even if Mr Rudge was able to show that he did not intend to make the car available for private use and he was able to overcome the difficulties with claiming VAT incurred before registration as input tax, he would still not recover the full £4,731 in input tax which he is claiming.  As a financial consultant, Mr Rudge is partially exempt.  Using the standard method of partial exemption calculation, Mr Bensley had calculated that Mr Rudge would only be entitled to 15% recovery of input tax even if he were successful – i.e. £709.65. When he made this calculation Mr Bensley was unaware Mr Rudge also had a wine business which could have affected the calculation as Mr Rudge told the tribunal he used the BMW in both his businesses.

Business use

40.  As Mr Rudge has not succeeded in overcoming the first two hurdles referred to in paragraph 35, his appeal does not succeed.  As he specifically appealed on the ground that he only used the BMW for business use, we briefly would make the following observations in this respect.

41.  We are satisfied from the evidence before us that the BMW was intended by Mr Rudge to be used exclusively for the purposes of his two businesses in the ordinary sense of that expression as found in article 7(2E).  The question before us is whether the vehicle is excluded from satisfying that relevant condition by article 7(2G).  We have to determine whether, when he bought the vehicle, he intended to make it available to any person (including himself) for private use.

42.  One of the important issues in a case of this nature is what insurance cover Mr Rudge obtained for the BMW at the time of purchase or, as he purchased the vehicle in Germany and did not insure it until his return to England, the first time he was able to effect insurance.

43.  Mr Rudge has attempted to show that the car was insulated legally from private use by producing a certificate of motor insurance for the period 20 June 2003 to 20 June 2004, which limits the insured drivers to Mr Rudge 
himself and limited the use of the case to “ use in connection with his/her business or profession”.  However, even if business-only insurance was capable of legally insulating a car from private use, Mr Rudge has only been able to produce an insurance certificate for this one period.  He has not been 
able to produce any certificate of insurance for the periods between the purchase of the car in April 2002 and June 2003.  Although he has produced a letter from Churchill Insurance Company dated 26 July 2004, this simply confirms that Mr Rudge was “insured against business use on [his] policy between the dates 25 November 2002 until 28 June 2003 inclusive”.  This letter does not reveal whether Mr Rudge was the only driver insured to drive.  Nor does it reveal whether Mr Rudge had business only insurance in the period between April and November 2002.  Mr Rudge was asked by the Commissioners to provide a copy of any insurance documentation for this period in a letter dated 24th February 2004.  He was then directed by another tribunal to provide any certificate still in his possession on 6 July 2004.  He has been unable to do so.

44.  Indeed, the insurance situation on purchase is particularly important because, as stated above, the relevant time for assessing Mr Rudge’s intentions in relation to the vehicle is at the date of acquisition.  Mr Rudge has produced no evidence of the insurance situation on and immediately after that date.  Furthermore, the evidence of Mr Bensley was that Mr Rudge told him orally during the visit of 28 January 2003 that the car was insured for social, domestic and pleasure purposes as well as business purposes at that time.

45.  Part of Mr Rudge’s case was that when he was not driving the BMW on business he would avail himself of Mrs Hammond’s motor car.  He produced evidence that he was an additional driver on her Toyota Celica car from  11 December 2002 with social, domestic and pleasure insurance cover including commuting.  Mrs Hammond apparently has ownership of a previous car when the BMW was acquired in April 2002 with identical insurance cover including Mr Rudge as an additional driver but no evidence was produced to confirm this situation.

46.  Mr Rudge was unable to produce the insurance certificates, schedule and policy booklets for either the Toyota Celica or the earlier car.  Therefore, it is not possible to tell whether Mrs Hammond’s insurance policies covered Mr Rudge to drive vehicles other than the Toyota and the earlier car for social, domestic and pleasure purposes.

47.  Another feature of the case which the tribunal would have taken into account if it had been necessary to consider whether the BMW was available for non-business use was the fact that occasionally it would be parked outside Mrs Hammond’s residence in Suffolk.  Therefore, at that time it would have been available for private use.  It may be that Mrs Hammond as well was insured through her insurance cover to drive the BMW but we do not know if this is the case as the documentary evidence was not available.

48.  In Upton, when considering the question “if the motor car was in fact available for private use, what intention was necessary for the taxable person to intend to make it available for private use.” Buxton LJ answered at paragraph 31 of the judgment :

“Did Mr Upton at the moment of purchase intend to make the car available to himself for private use ?  The question is not whether he intended to use it, but whether he intended to make it available for use.  That again seems to me to lead to a  short answer.  The first question, of whether what was done constituted a making available for private use, is answered, in the terms urged above, by analysis of what Mr Upton did in context of the true construction of the statutory concept of the making available for private use.  He therefore necessarily intended to make the car so available by intending to do the acts that constituted making the car available for use.  He cannot escape from that conclusion by saying, as he does, that he did not intend actual use; or that for that reason, he did not regard the car as available for his use.  If he intended to do the acts that are in law the state of affairs referred to in the statute, then he intends that state of affairs as statutorily defined.”.

49.  Neuberger J in Upton also indicated at paragraph 47 as follows :

“…where, as in the present case, a sole trader acquires a motor car for his own use: in circumstances where he does not intend to impose any physical or legal restriction on his ability to make private use of it, logic and consistency would suggest that, for the purposes of the same paragraph [article 7(2G)(b)], the motor car is intended to be made available for his private use, irrespective of the fact that he does not intend to take advantage of that availability”.

50.  The onus is on Mr Rudge to prove on the balance of probabilities that when he bought the BMW he did not intend to make it available to any person for private use.  Applying the principles as laid down in Upton, Mr Rudge has not succeeded in making his case. He therefore has failed all three hurdles.

51.  Mr Rudge’s appeal is dismissed. There is no order as to costs.

Rodney P Huggins
Chairman

Released : 7 June 2006

LON/2003.0517