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VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Ltd, provides an update on two recent VAT developments.

Court of Appeal allows VAT recovery on Company car with private use exclusions

The Court of Appeal (CoA) recently released its judgment in the Elm Milk Ltd case on whether a company is entitled to deduct VAT on the purchase of a Mercedes car that had been purchased exclusively for business use and is not available for the private use of any person.

The CoA has dismissed HMRC's appeal, meaning that the company has now been successful at Tribunal, High Court and Court of Appeal.

Summary of the case

Elm Milk Ltd is a private company with one director, Mr P. The company is the landlord of a farm premises and also supplies consultancy services to the dairy trade and the leisure industry. The latter requires Mr P 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 only by Mr P, 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 Mr P's home with the keys kept in the company office. The Tribunal had accepted the evidence of Mr P that all private motoring was done in Mrs P's Rover car.

The Court of Appeal considered the intention of Parliament in framing the terms of the input tax blocking in the way it did, but focuses 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 (basically, whether HMRC are right to say the contractual constraints carry the least weight)

2. How one differentiates this case from that of Upton t/a Fagomatic (the sole proprietor vending machine operator driving a Lamborghini)

The Court of Appeal 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 notes some confusion over the insurance cover position.

The Tribunal had been led to understand that the insurance for the Mercedes covered Mrs P 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 Mrs P's 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 - Mr P, Mrs P, their son, and his fiance. 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.

COMMENT : Although this case addresses a single director company, it may well encourage larger companies to try and enhance the possibility of input tax deduction on the purchase of company cars by incorporating the relevant use restrictions into board resolutions (assuming there is in reality the genuine intention that the cars are solely for business use). No doubt HMRC will argue that this case cannot have wider implications because it was a single director company, and that, in their eyes, the case did not properly address the significance of the insurance cover arrangements. We will also have to wait and see whether this results in an appeal by HMRC to the House of Lords.

In the meantime, you may wish to inform clients of the facts in this case to see whether any have bought cars in similar circumstances. It may also be that some are willing to adopt the restriction measures employed by Elm Milk going forward.

HMRC defers implementation date for medical services exemption

HMRC have issued Business Brief 4/06 announcing that the consultation on the scope of medical services exemption following the D'Ambrumenil (C-307/01) ECJ case (commenced in September 2005 through Business Brief 18/05), has now closed and the responses are being considered. The Brief confirms that the proposed implementation date for any changes, 1 April 2006, is no longer practical, and a further announcement on implementation date will be made at an unspecified time later in the year. A full summary of responses to the consultation will also be issued.

In the interim, the guidance laid down in Business Brief 29/03 (i.e. that exemption applies until otherwise stated) should continue to be used.

March 2006

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


VAT Solutions (UK) Ltd
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(T) 01925 212244
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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 web

About The Author

Mark McLaughlin is a Fellow of the Chartered Institute of Taxation, a Fellow of the Association of Taxation Technicians, and a member of the Society of Trust and Estate Practitioners. From January 1998 until December 2018, Mark was a consultant in his own tax practice, Mark McLaughlin Associates, which provided tax consultancy and support services to professional firms throughout the UK.

He is a member of the Chartered Institute of Taxation’s Capital Gains Tax & Investment Income and Succession Taxes Sub-Committees.

Mark is editor and a co-author of HMRC Investigations Handbook (Bloomsbury Professional).

Mark is Chief Contributor to McLaughlin’s Tax Case Review, a monthly journal published by Tax Insider.

Mark is the Editor of the Core Tax Annuals (Bloomsbury Professional), and is a co-author of the ‘Inheritance Tax’ Annuals (Bloomsbury Professional).

Mark is Editor and a co-author of ‘Tax Planning’ (Bloomsbury Professional).

He is a co-author of ‘Ray & McLaughlin’s Practical IHT Planning’ (Bloomsbury Professional)

Mark is a Consultant Editor with Bloomsbury Professional, and co-author of ‘Incorporating and Disincorporating a Business’.

Mark has also written numerous articles for professional publications, including ‘Taxation’, ‘Tax Adviser’, ‘Tolley’s Practical Tax Newsletter’ and ‘Tax Journal’.

Mark is a Director of Tax Insider, and Editor of Tax Insider, Property Tax Insider and Business Tax Insider, which are monthly publications aimed at providing tax tips and tax saving ideas for taxpayers and professional advisers. He is also Editor of Tax Insider Professional, a monthly publication for professional practitioners.

Mark is also a tax lecturer, and has featured in online tax lectures for Tolley Seminars Online.

Mark co-founded TaxationWeb (www.taxationweb.co.uk) in 2002.