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VAT Voice by Steve Allen

The recent court/Tribunal losses by HMRC on the issue of input tax on cars would appear to have changed the rules on when VAT can be reclaimed. Here’s what Steve Allen, Director of VAT Solutions (UK) Ltd, hopes will be a useful summary on where things are currently.

Private use – or not?

When you purchase a car you can only recover the VAT if there is no private use at all. If there is any private use no VAT can be reclaimed. HM Revenue & Customs has always taken a lot of convincing before they will accept that a car has no private use but several recent Tribunal decisions seem to have made it easier.

In some cases it is fairly clear cut, for example companies buying cars to lease on to customers, taxi firms, car dealers and pool cars. These situations do not cover most businesses however. In one case that came before the VAT Tribunal a few years ago (Lowe, 15124) the taxpayer won when he convinced the Tribunal that the purchase of a new car was exclusively for business use as he already had two cars for private use. There have, however, been a number of cases when the taxpayer has lost, the cases being decided on the facts of each case.

In 2002 HMRC managed to overturn a well-publicised Tribunal decision involving the recovery of VAT incurred on a new Lamborghini. The taxpayer successfully convinced a VAT Tribunal that there was no private use of his Lamborghini. The reasons given for this were his extremely long working hours and lack of any social life (Christopher Michael Upton t/a ’Fagomatic’, 16772). He had claimed that he had used the car to deliver cigarettes to clubs in London to stock up his cigarette machines, making it the most expensive delivery van in history.

Not surprisingly HMRC appealed to the Court of Appeal (CoA) and won.

Availability for private use

Unfortunately, it is not enough for a taxpayer to simply not use a car privately in order to claim the VAT back. The law states that the input VAT is blocked wherever a car is available for private use, regardless of whether or not the car is then actually put to such use.

To be sure of getting the VAT back you will have to show HMRC that the car is not “available” for private use. This can be done by obtaining business use only insurance. This was accepted by a VAT Tribunal (Thompson, 14777) and has been confirmed on several occasions since then.

Following the 2002 Court of Appeal decision in Upton t/a ‘Fagomatic’ [2002] BVC 451, it was difficult to see how anyone would ever be able to deduct VAT on the purchase of a car, even where the vehicle was never put to private use. The ‘Fagomatic’ decision had seemingly given HMRC an unassailable position based on the ‘available for private use’ test that had ultimately decided the case in their favour. It mattered not whether the car was actually used privately, it merely had to be ‘available for private use’, evidenced by an insurance policy that allowed social and domestic use.

Taxpayer victories

Since the beginning of 2006, however, three cases in quick succession that were decided in favour of the taxpayer, appear to have turned matters on their head. In late February, there was the Tribunal decision in Peter Jackson (Jewellers) Ltd (VTD 19,474). In early March, came the Court of Appeal case in Elm Milk Ltd [2006] BVC 296, and this was followed in May by the Tribunal decision in Philip Shaw (VTD 19,594).

In Elm Milk Ltd [2006] BVC 296 the CoA dismissed HMRC's appeal concerning whether a company was entitled to deduct VAT on a Mercedes car that had been purchased exclusively for business use and was not available for the private use of any person.

The taxpayer was a private company with one director. The company was the landlord of farm premises and also supplies consultancy services to the dairy trade and the leisure industry. This required the Director to do circa 50,000 miles a year. A board resolution was passed stating that a car (a Mercedes) was to be bought solely for business purposes and that the company did not intend to make the car available for private use. Further, any private use would be a breach of an employee's terms of employment. When not in use, the car was locked in a car park near the office, and fifty yards from the Directors home with the keys kept in the company office. The Tribunal had accepted the evidence that all private motoring was done in his wife’s Rover car.

Practical points

The CoA considered the intention of Parliament in framing the terms of the input tax blocking in the way it did, but focused on two practical aspects:

1. In considering 'non-availability for private use' test, how much application and weight should be given to the relevant physical, contractual, and insurance constraints.

2. How one differentiates this case from that of Upton t/a ‘Fagomatic’ (the sole proprietor vending machine operator driving a Lamborghini).

The CoA concluded that contractual arrangements between an employer and employee (in this case, deriving from the terms of the board resolution) can be sufficient to meet the 'non-availability for private use' test, and that HMRC had put undue emphasis on physical constraints.

The CoA differentiated Upton on the grounds that a sole proprietor is the sole decision maker, and cannot enter contractual arrangements with himself placing enforceable constraints upon the use of a car. This is in contrast to a company where, even if there is a sole director who is the directing force of the company, contractual constraints can be made via company law processes and where those constraints bind the actions of members and employees of the company. The CoA rejected an HMRC argument that the significance of the contractual constraints should be downgraded in the case of a single director company, as the director can unilaterally vary the terms of the board resolution at any time.

The CoA noted some confusion over the insurance cover position. The Tribunal had been led to understand that the insurance for the Mercedes covered the Directors wife and anyone driving with her permission. Despite this, the Tribunal concluded that, notwithstanding this cover, the 'non-availability for private use' test remained satisfied as private use of the Mercedes by any person would still be acting in defiance of the board resolution. It later transpired that the insurance cover notes for both the Mercedes and the Rover had been included in evidence, and

the insurance cover examined by the Tribunal had unwittingly been that of the Rover. The insurance for the Mercedes actually covered four named drivers – the Directors, his wife, their son, and his fiancée. HMRC argued that this mix-up was of sufficient significance that the Court should remit the case back to the Tribunal for a rehearing on the correct facts. However, The CoA agreed with the High Court that there were not sufficient grounds to remit the case back to the Tribunal as its conclusions on the insurance position remained valid, notwithstanding the differences in the specified levels of cover.

The Court concluded that the contractual constraints deriving from the terms of the board resolution, supported by the degree of physical constraints, were enough to establish that the Mercedes was not available for private use. The CoA subsequently dismissed HMRC's appeal.

In the ‘Jackson’ case, the car in question was a pool car that was kept overnight in a paid for bay of a nearby multi-storey car park. It was clearly understood by employees that the car was not available for private use, but unlike in Elm Milk, the restriction was purely an oral one, there was nothing that was actually written down. However, the Tribunal considers this oral restriction to be sufficient and found in favour of the taxpayer.

In the Shaw case the taxpayer bought two BMW X5 vehicles together, one for use in his farm business, the other for use privately. HMRC argued the case based on the social and domestic cover on the insurance policy, the same argument that they had lost in the two cases above, but Mr Shaw rebutted this by showing how the insurance policy for his combine harvester had ‘social, domestic and pleasure’ cover too, although HMRC accepted that it did not have any private use! He added that the premiums for both the X5s and the harvester were lower as a result.

Conclusions

The interpretation of the courts now seems to be based on ‘intention’ rather than ‘availability’, and in each of the three cases, the intention was evidenced in a different form; one written, one verbal, and one self-evidenced by the purchase of an identical vehicle.

September 2006

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

VAT Solutions (UK) Ltd
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VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via their website: