19809

VAT INPUT TAX – MOTOR CARS – Appellant hired motor cars for use by one of its company directors – the director used the motor car exclusively for the Appellant’s business –the Appellant directors passed resolutions regarding business use of the cars –the resolutions did not prohibit expressly private use – the resolutions did not amount to a legal impediment on the use of the car – no physical impediments – the insurance permitted domestic and social use – the Appellant failed to demonstrate on balance of probabilities it did not  intend the cars to be made available for the private use of the director – Appeal dismissed. 

MANCHESTER TRIBUNAL CENTRE

	VICKERS REYNOLDS & CO (LYE) LTD 	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      JOHN LAPTHORNE FMCA     (Member)

Sitting in public in Birmingham on 15 August 2006

Mike O’Shaugnessey of MF Accountants Ltd for the Appellant 

Sara Williams, counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal
1.	The Appellant was appealing against an assessment for VAT in the sum of £4,146 plus interest issued on 19 October 2004 for periods from 10/01 through to 07/04.
2.	The amount in dispute was £3,875 which related to an alleged over claim of input tax for car contract hire. The Appellant admitted that it was liable for the balance of £271 which represented an under-declaration of output tax in the sales day book for the period 7/04.
The Dispute
3.	The dispute concerned the Appellant’s claim for input tax on a contract hire agreement which supplied a motor car for use by one of its directors, Mr J M Thomson, in connection with its business.
4.	 The Appellant claimed 100 per cent of the VAT paid on the contract hire agreement during the relevant period. The Respondents contended that the Appellant was restricted to 50 per cent of the VAT paid because the Appellant placed no restrictions preventing private use of the motor car by Mr Thomson.
5.	Article 7 of the Value Added Tax (Input Tax) Order 1992 limits input tax claims to 50 per cent on contract hire agreements for motor cars unless the taxpayer intends to use the car exclusively for its business and does not make it available for private use.
6.	The issue to be decided in this Appeal was whether the Appellant could show on the balance of probabilities that it intended to use the car under the contract hire agreement exclusively for business purposes with no intention of making it available for private use.
The Facts
7.	We heard evidence upon oath from John Murray Thomson, director of the Appellant company.  The witness statement of Mr S Bourne, the officer who issued the assessment, was admitted in evidence.
8.	The facts of the Appeal were agreed between the parties.
9.	The Appellant operated as a firm of accountants and auditors. Mr and Mrs Thomson were the directors of the Appellant company. 

10.	Mr Thomson worked seven days a week, which he had done so for the last 13 years without ever taking a holiday.  His work involved daily visits to clients as a result of the Appellant’s policy of going out to clients rather than expecting them to attend the Appellant’s office. 
11.	The Appellant supplied Mr Thomson with a motor car under a contract hire agreement so that he could perform the duties of his employment. Mr Thomson used the car exclusively for business purposes, which was substantiated by detailed mileage records. Mr Thomson did not use the car for private purposes. His wife and two daughters each had their own cars. Mr Thomson would use his wife’s car for private purposes.
12.	During the period of assessment the Appellant entered into two contract hire agreements for the benefit of Mr Thomson, the first one involved a new Mercedes Benz 320d which was stolen and replaced by a Jaguar under the second agreement in August 2003. A particular feature of the agreements was that the Appellant would pay an excess mileage charge when the agreed annual mileage limit in the agreements had been exceeded.
13.	The Appellant insured in its own name the cars which were the subject of the contract hire agreements. The insurance named Mr Thomson as the sole driver. The insurance permitted Mr Thomson to use the cars for social and domestic purposes as well as for business use. According to Mr Thomson the Appellant’s insurance company would not insure the cars solely for business use. Mr Thomson was unable to produce a letter from the insurance company to corroborate his assertion, however, his evidence was not challenged by the Respondents.
14.	Mr Thomson held two keys for the contract hire car, the spare key was kept secure in the garage whilst the other key was kept on his person until he finished work when he left it on the kitchen table at his home. Mr Thomson accepted that Mrs Thomson had access to the key in the garage and to the other key when he finished work. Mrs Thomson, however, was not insured to drive the vehicle.
15.	 Mr Thomson produced copies of directors’ meetings held on 15 June 2001 and 1 August 2003 chaired by Mrs Thomson who also signed the minutes. The copy of the 15 June 2001 minutes were endorsed as being sworn before a Commissioner for Oaths on 20 August 2006, which was done to prove their authenticity and produced in response to the Tribunal direction issued at the end of the hearing on 15 August 2006.
16.	The minutes of 15 June 2001 recorded that
“It was reported that the company was today receiving a new Mercedes Benz 320d Motor Car which was the subject of a new lease agreement already signed by the company as agreed earlier in the year.
Mrs Thomson proposed that this car should only be used for business purposes in order to minimise costs as any excess mileage under the contract would render the vehicle too expensive.
After discussion Mr Thomson agreed and the matter was resolved.
17.	The minutes of 1 August 2003 were in identical wording to that of 15 June 2001 except that they recorded that a new Jaguar was being received instead of the Mercedes Benz.
Reasons for Our Decision
18.	Article 7(1) of the VAT (Input Tax) Order 1992 provides that tax charged on the supply of a motor car to a taxable person shall be excluded from any credit under section 25 of the 1994 Act.  Where the car is leased for business purposes the block on input tax recovery is limited to 50 per cent of the tax, provided it is a qualifying car within the meaning of the Article (Article 7(2H).
19.	Article 7(2), however, provides that the block on input tax recovery will 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.
20.	The “relevant condition” so far as is material to this Appeal 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” (article 7(2E)).
21.	Article 7(2G) qualifies article 7(2E) by setting out that 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 to any person (including himself) for private use.
22.	The combined effect of Articles 7(2E) and 7(2G) is that the test of intention to use the motor car for exclusive business purpose will not be met if the taxable person at the time of acquisition of the motor car intended to make it available for private use.
23.	The dispute in this Appeal centred upon whether the Appellant at the time of acquisition of the contract hire cars intended to make them available for the private use of Mr Thomson.
24.	The Court of Appeal in Customs and Excise Commissioners v Upton (trading as Fagomatic) [2002] STC 640 considered the application of Articles 7(2E) and 7(2G) to the situation where a company purchases a motor vehicle for use by one of its directors. Mr Justice Neuberger  at paragraphs 41, 42 and 44 stated that

“If an article is supplied by one person to another with no physical or legal restraint as to a particular use, then it appears to me that, as a matter of ordinary language, the article has been 'made available' for that use. The fact that neither the supplier nor the recipient expects, or even intends, the article to be put to the particular use does not prevent the article being 'available' for that use, if there is no physical or legal restraint on such use by the recipient. Further, it cannot be said, at any rate as a matter of ordinary language, that the supplier does not 'make' the article available for that use, simply because he does not expect or intend it to be put to that use. If he supplies the article so that it is, as a matter of fact, available for a particular use, then he has, in normal parlance, made it available for that use. On the other hand, if the supplier provides the article under a contract which bona fide precludes the recipient from putting it to a particular use, or if it is supplied only at such times that it cannot be put to a particular use, then there is clearly a powerful argument for saying that it has not been 'made available' for such use”.

“The fact that the article is also made available for other purposes, even primarily for other purposes, does not alter this conclusion. If a motor car or other article is supplied to a recipient in circumstances where he can put it to, among other uses, private use, then, as I see it, as a matter of ordinary language the supplier 'make[s] it available ... for private use'. That appears to me to be reinforced in this case by the absence in art 7(2G)(b) of the word 'exclusively', found in art 7(2E)(a). Article 7(2G)(b) requires one to consider the intention of the taxpayer with regard to making the motor car available for a particular use. Accordingly, to my mind, the proper inquiry is, as the commissioners contend, whether the taxpayer intends to supply the motor car to a third party in circumstances where it could be available for private use. The intention in question is concerned with the basis on which the motor car is to be made available to the recipient, not with the use to which the motor car is to be put by the recipient”.

“ In these circumstances, given that one is required to consider the taxpayer's intention at the time of the purchase of the motor car, it seems to me that, where a company acquires a motor car 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 motor car 'available ... for private use'. The fact that the company may not intend, and may not even want, the motor car to be put to such a use is not in point. By intending to provide it for use by a director, who will be legally and physically free to put it to private use, the company is intending to make the motor car available to him for private use”.

25.	 Park J in Customs and Excise Commissioners v Elm Milk Limited [2005] STC 776 considered in detail the decision of Mr Justice Neuberger in Fagomatic. He pointed out that Mr Justice Neuberger used the word “or”  in the phrase “with no legal or physical impediment on private use”, from which he concluded that at paragraph 25:
“The implication appears to me to be that, if a company acquires a car with a view to providing it to a director with one or more legal or physical impediments on private use, the company would not be intending to make the car available for private use”.

26.	The facts of Elm Milk Limited involved a family company that purchased a Mercedes car for business use by its only director. The car was insured for both business and private use by the director and three members of his family. The insurance company was unwilling to insure it for business use only. The car was kept in a park near to the company’s office where the keys were kept. A board resolution was passed ratifying the purchase of the car in which it was noted that the car was to be used for business purposes only by the director, that the company did not intend to make it available for anyone for private use and that it would be in breach of the director’s terms of employment to use it for private purposes.
27.	 Park J at paragraph 27 observed that
“What, however, is the position in an employer and employee case where the employer provides the car on terms that the employee may use it for business purposes only and may not use it for private purposes? In my judgment, provided that those contractual terms are genuine in all respects, “the relevant condition” referred to in article 7(2) (a) (iii) is satisfied and, assuming that all other requirements that input tax recovery are also fulfilled, the input tax included in the price of the car. The requirement which the employer must fulfil in order not to fall foul of article 7(2G)(b) is that, at the time when the employer acquires the car, he must not intend to make it available for the employee’s private use. If he intends to provide it to the employee subject to a contractual stipulation that the employee may not use it privately, and if that contractual stipulation is genuine and not colourable, it seems to me that the requirement is met. At the very least, it is open to a tribunal to find that it is met”.
28.	Park J dismissed the Commissioners’ Appeal, holding that
“Where an employer provided a car on contractual terms that the employee might use it for business purposes only, as opposed to the purchase of a car by an individual who could not contract with himself, that there was a genuine intention that the car should not be used for private purposes and that the term was not included merely in order to claim credit for input tax, the relevant condition referred to in article 7(2)(a)(iii) and article 7(2G)(b) would be satisfied. The absence of physical arrangements such as keeping the car in a locked compound outside business hours would not always prevent an employer from recovering the input tax. The question was not whether it the car might be used for private purposes, despite a contractual condition  that it should not be so used, but whether, at the time when the car was purchased,  the intention was to make it available for private use. It was open to the tribunal to make the findings that there was no such intention and it made no error of law”.
29.	The Appellant contended that the facts demonstrated that Mr Thomson used the contract hire cars exclusively for business purposes. Further the directors’ resolutions dated 15 June 2001 and 1 August 2003 were clear evidence of the Appellant’s intention at the time of acquisition of the contract hire cars to make them available solely for business use. The resolutions amounted to a legal restriction on private use of the cars.
30.	At the hearing Respondents counsel accepted that the same legal principles applied whether it was a contract hire car or a purchased car. Counsel submitted that the actual use of the cars was not determinative of the issue. Equally, counsel conceded that the insurance position of the cars did not decide the outcome of the Appeal. The thrust of her contentions was directed at the issue about whether the Appellant placed a physical or legal restriction on the private use of the vehicles by Mr Thomson. Counsel reminded the Tribunal that the facts showed that the Appellant put no physical constraint on private use. Although she did not challenge the authenticity of the directors’ resolutions, Counsel considered that they did not amount to a contractual stipulation preventing Mr Thomson from using the cars for private purposes. 
31.	The agreed facts in this Appeal were as follows:
(1)	Mr Thomson used the contract hire cars exclusively for business purposes.
(2)	The Appellant insured the cars, naming Mr Thomson as the sole driver. The insurance permitted Mr Thomson to use the cars for social and private use as well as for business use. The Appellant’s insurance company, however, would not insure the cars just for business use. Further the Appellant did not insure any other person including Mrs Thomson to drive the vehicles.
(3)	The Appellant placed no physical impediment on Mr Thomson’s private use of the vehicles. 
(4)	The directors passed resolutions at the time of delivery of the contract hire cars restricting their use to the Appellant’s business. Mr Thomson was a party to the resolutions, and, therefore, fully aware of their contents. The resolutions were genuine and not used as a device to recover input tax. The reason for passing the resolutions was to limit the charges under the contract hire agreements, which was supported by the evidence on the contract terms. The resolutions, however, did not expressly prohibit private use of the contract hire cars or spell out the legal consequences for Mr Thomson if he failed to comply with them.
32.	The issue for us to determine is whether the Appellant has met the requirements of  the “relevant condition” in articles  7(2E)(a) and 7(2G)(b) of the 1992 Order. The critical aspect of that requirement is the wording of Article 7(2G)(b) of not making it available for private use, which has been interpreted by the Higher Courts as placing a legal or physical impediment on private use.  The Appellant relied on the wording of the directors’ resolutions dated 15 June 2001 and 1 August 2003 to demonstrate that the Appellant had put a legal impediment on the private use of the cars by Mr Thomson. The resolutions, however, did not expressly prohibit private use or spell out the consequences for Mr Thomson if he failed to comply with the resolutions. Further the Appellant produced no evidence about whether the resolutions formed part of Mr Thomson’s employment contract with the Appellant company. Whilst we accept that the resolutions were genuine, we conclude that they amounted to no more than a statement of intent about business use. They did not constitute a legal restriction on the private use of the contract hire cars by Mr Thomson.
33.	 We hold that
(1)	The directors’ resolutions amounted to no more than a statement of intent about business use. They did not constitute a legal restriction on the private use of the contract hire cars by Mr Thomson.
(2)	The insurance permitted Mr Thomson to drive the contract hire cars for social and domestic purposes.
(3)	The Appellant placed no physical impediment on the private use of the vehicles by Mr Thomson.
34.	The Appellant has, therefore, failed to demonstrate on the balance of probabilities that at the time when the contract hire cars were delivered it did not have the intention of making them available for the private use of Mr Thomson. We dismiss the Appeal and make no order for costs.

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 17 October 2006

MAN/05/564