VAT reclaim on car for 'business use only'
Discussion
A recent ruling by the First Tier Tribunal Tax Chamber that illustrates just how carefully constructed & implemented 'not available for private use' needs to be
http://www.financeandtaxtribunals.gov.uk/judgmentf...
http://www.financeandtaxtribunals.gov.uk/judgmentf...
I'm just picking out the more pertinent bits for people who just want the TL;DR version.
“ (2G) 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 (otherwise than by letting it on hire) to any person (including
5 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...”
"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. "
"Accordingly, I have reached the same conclusion as the Vice-Chancellor, for the
same reasons. A point that gives pause for further thought is that the consequence of
this conclusion may be to render it very difficult for a sole trader, who acquires a motor
car exclusively for his business, thereby satisfying paragraph 7(2E)(b) (sic), to avoid
45 falling foul of paragraph 7(2G)(b). It was suggested on behalf of the Commissioners
4
during argument that, if a sole trader acquired a motor car for the sole use of employees
in his business, and arranged for the motor car to be housed some distance away from
his home, and for the keys to be kept by an employee, with a view to its only being
used for business purposes, the motor car would not thereby be made available for
5 private use. I find that difficult to accept. The person in control of the motor car and of
the keys would be an employee of the trader, and could be compelled to provide him
with the motor car and the keys for whatever purpose the trader chose. Accordingly,
while it is unnecessary to express a concluded view on the point, I think that the logical
consequence of the Vice-Chancellor’s decision is that a sole trader who purchases a
10 motor car with that sort of arrangement in mind would not avoid the consequences of
paragraph 7(2G)(b).”"
"In Elm Milk the taxable person was a company with one director, Mr Phillips.
The company was owned by members of the director’s family. It purchased a
Mercedes motor car and claimed that it was intended to be used exclusively for the
15 purposes of its faming business. It was a landlord of farm premises, a consultant to the
dairy trade and a consultant to the leisure industry. The director travelled considerable
distances on the company’s business. He passed a board resolution stating that the
vehicle was to be used for business purposes only, that the company did not intend to
make it available for private use and that any private use would be a breach of an
20 employee’s terms of employment.
10. The tribunal in Elm Milk held that the there was no intention that the vehicle
should be made available for the director’s private use. That was upheld by the High
Court. In the Court of Appeal at [14] Arden LJ (with whom Moore-Bick and Ward
LJJ agreed) summarised and subsequently adopted the reasoning of the High Court as
25 follows:
“ 14. The judge held that the tribunal had not erred. The physical circumstances of
where the car was kept did not mean that as a matter of law the company intended to
make it available for private use ([22]). The tribunal found that the board resolution
was genuine and was properly to be taken into account in determining the VAT effects
30 of the company's acquisition of the car ([23]). Accordingly, the decision of this court in
the Upton case was distinguishable ([24] to [25]). There was a clear difference between
the sole trader situation and the employer and employee situation ([26]). Where an
employer provides a car genuinely on terms that the employee may use it for business
purposes only, the "relevant condition" in art 7(2)(a)(iii) of the 1992 Order was
35 satisfied and thus if all the other requirements for input tax recovery were fulfilled the
employer could recover the input tax included in the price of the car ([27)]. The
condition could be satisfied even if the car was not for example placed in a locked
compound when not required for business use ([28]). Deductibility was not lost if the
employer recognised that the car might be used for non-business use in an emergency
40 ([29]). Such use would be a breach of the contractual restriction on use for private
purposes but "realistically…few reasonable employers would do anything about it"
([29)]. The important point was not whether it was possible to imagine any exceptional
circumstances in which the car might be used for private purposes. The question was
whether when the employer purchased the car he intended to make it available for
45 private use. The maxim that a person is presumed to intend the natural consequences of
his acts was only a presumption ([30)]. "In my judgment the presumption is pushed too
far if it used to argue that a person intends something to happen when he has
specifically imposed a contractual condition designed (and genuinely designed, rather
5
than merely colourably designed) to prevent it happening." ([30]). There was no
difference of principle where the director was the sole director of a small family
company though where the employer and employee are connected the facts may require
closer scrutiny ([32]) but the tribunal had examined the claim of the taxpayer with care
5 ([33] to [36]).”"
“ (2G) 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 (otherwise than by letting it on hire) to any person (including
5 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...”
"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. "
"Accordingly, I have reached the same conclusion as the Vice-Chancellor, for the
same reasons. A point that gives pause for further thought is that the consequence of
this conclusion may be to render it very difficult for a sole trader, who acquires a motor
car exclusively for his business, thereby satisfying paragraph 7(2E)(b) (sic), to avoid
45 falling foul of paragraph 7(2G)(b). It was suggested on behalf of the Commissioners
4
during argument that, if a sole trader acquired a motor car for the sole use of employees
in his business, and arranged for the motor car to be housed some distance away from
his home, and for the keys to be kept by an employee, with a view to its only being
used for business purposes, the motor car would not thereby be made available for
5 private use. I find that difficult to accept. The person in control of the motor car and of
the keys would be an employee of the trader, and could be compelled to provide him
with the motor car and the keys for whatever purpose the trader chose. Accordingly,
while it is unnecessary to express a concluded view on the point, I think that the logical
consequence of the Vice-Chancellor’s decision is that a sole trader who purchases a
10 motor car with that sort of arrangement in mind would not avoid the consequences of
paragraph 7(2G)(b).”"
"In Elm Milk the taxable person was a company with one director, Mr Phillips.
The company was owned by members of the director’s family. It purchased a
Mercedes motor car and claimed that it was intended to be used exclusively for the
15 purposes of its faming business. It was a landlord of farm premises, a consultant to the
dairy trade and a consultant to the leisure industry. The director travelled considerable
distances on the company’s business. He passed a board resolution stating that the
vehicle was to be used for business purposes only, that the company did not intend to
make it available for private use and that any private use would be a breach of an
20 employee’s terms of employment.
10. The tribunal in Elm Milk held that the there was no intention that the vehicle
should be made available for the director’s private use. That was upheld by the High
Court. In the Court of Appeal at [14] Arden LJ (with whom Moore-Bick and Ward
LJJ agreed) summarised and subsequently adopted the reasoning of the High Court as
25 follows:
“ 14. The judge held that the tribunal had not erred. The physical circumstances of
where the car was kept did not mean that as a matter of law the company intended to
make it available for private use ([22]). The tribunal found that the board resolution
was genuine and was properly to be taken into account in determining the VAT effects
30 of the company's acquisition of the car ([23]). Accordingly, the decision of this court in
the Upton case was distinguishable ([24] to [25]). There was a clear difference between
the sole trader situation and the employer and employee situation ([26]). Where an
employer provides a car genuinely on terms that the employee may use it for business
purposes only, the "relevant condition" in art 7(2)(a)(iii) of the 1992 Order was
35 satisfied and thus if all the other requirements for input tax recovery were fulfilled the
employer could recover the input tax included in the price of the car ([27)]. The
condition could be satisfied even if the car was not for example placed in a locked
compound when not required for business use ([28]). Deductibility was not lost if the
employer recognised that the car might be used for non-business use in an emergency
40 ([29]). Such use would be a breach of the contractual restriction on use for private
purposes but "realistically…few reasonable employers would do anything about it"
([29)]. The important point was not whether it was possible to imagine any exceptional
circumstances in which the car might be used for private purposes. The question was
whether when the employer purchased the car he intended to make it available for
45 private use. The maxim that a person is presumed to intend the natural consequences of
his acts was only a presumption ([30)]. "In my judgment the presumption is pushed too
far if it used to argue that a person intends something to happen when he has
specifically imposed a contractual condition designed (and genuinely designed, rather
5
than merely colourably designed) to prevent it happening." ([30]). There was no
difference of principle where the director was the sole director of a small family
company though where the employer and employee are connected the facts may require
closer scrutiny ([32]) but the tribunal had examined the claim of the taxpayer with care
5 ([33] to [36]).”"
I am not sure you picked the relevant highlights of this case at all.
Here is my tl;dr version
42. We do not accept Mr Minton’s submission that the physical restraints are somehow more important than any legal restrictions. It is clear that the existence of legal restrictions was significant in both Upton and Elm Milk. It seems to us that we must consider the combined effect of both physical and legal restrictions in the circumstances as a whole. We therefore turn to the legal restrictions.
43. The Appellant’s failure to consider insuring the Vehicle only for business use adds little if any weight to the Respondents’ arguments. It was not suggested that the Appellant had consciously decided to retain insurance for social domestic and pleasure purposes. This was simply one form of restriction that might have been implemented but was not.
44. We accept that there was an agreement between Mr Bradley and Ms Eckersall at the time of purchase that neither of them would use the Vehicle for private purposes. We are not satisfied from the circumstances in which the agreement was made that it was intended to have any legal effect. It was not documented in any way and there was no sanction for breach of the agreement. It contrasts with the circumstances in Elm Milk where there was express provision that private use would be a breach of the director’s contract of employment. In that case there was also a formal board resolution and any private use would have been a breach of the director’s duties to the company.
45. There is force in Mr Minton’s submission that it would be unrealistic to expect a company such as the Appellant to pass a formal board resolution. However in the light of the relationship between Mr Bradley and Ms Eckersall it is not unrealistic to expect at least some formalilty if the agreement was intended to have legal effect. In particular we would expect to see some sanction for breach. In Elm Milk for example the agreement was incorporated into the director’s contract of employment. In our view the agreement between Mr Bradley and Ms Eckersall was simply a non-binding informal agreement as to use of the Vehicle. It was not a legal restriction on private use enforceable by the Appellant.
46. In the absence of any effective legal restrictions we do not consider that the physical restrictions lead to a conclusion that there was no intention to make the Vehicle available for private use. As we have stated above, the physical restrictions could be ignored. They did not in themselves prevent private use of the Vehicle by Mr Bradley or Ms Eckersall, although they did make possible that any private use by one could be identified by the other. In the absence of a sanction we consider that the Vehicle was available for private use and that at the time of purchase the Appellant must be taken to have intended to make it available for private use."
And the ultra tl;dr version
Pass a Board resolution that makes it a breach of the contract of employment, with sanction, for the vehicle to be used privately and ensure that is accepted and agreed by anyone with any possible access to the vehicle as a condition in the contract of employment.
Here is my tl;dr version
42. We do not accept Mr Minton’s submission that the physical restraints are somehow more important than any legal restrictions. It is clear that the existence of legal restrictions was significant in both Upton and Elm Milk. It seems to us that we must consider the combined effect of both physical and legal restrictions in the circumstances as a whole. We therefore turn to the legal restrictions.
43. The Appellant’s failure to consider insuring the Vehicle only for business use adds little if any weight to the Respondents’ arguments. It was not suggested that the Appellant had consciously decided to retain insurance for social domestic and pleasure purposes. This was simply one form of restriction that might have been implemented but was not.
44. We accept that there was an agreement between Mr Bradley and Ms Eckersall at the time of purchase that neither of them would use the Vehicle for private purposes. We are not satisfied from the circumstances in which the agreement was made that it was intended to have any legal effect. It was not documented in any way and there was no sanction for breach of the agreement. It contrasts with the circumstances in Elm Milk where there was express provision that private use would be a breach of the director’s contract of employment. In that case there was also a formal board resolution and any private use would have been a breach of the director’s duties to the company.
45. There is force in Mr Minton’s submission that it would be unrealistic to expect a company such as the Appellant to pass a formal board resolution. However in the light of the relationship between Mr Bradley and Ms Eckersall it is not unrealistic to expect at least some formalilty if the agreement was intended to have legal effect. In particular we would expect to see some sanction for breach. In Elm Milk for example the agreement was incorporated into the director’s contract of employment. In our view the agreement between Mr Bradley and Ms Eckersall was simply a non-binding informal agreement as to use of the Vehicle. It was not a legal restriction on private use enforceable by the Appellant.
46. In the absence of any effective legal restrictions we do not consider that the physical restrictions lead to a conclusion that there was no intention to make the Vehicle available for private use. As we have stated above, the physical restrictions could be ignored. They did not in themselves prevent private use of the Vehicle by Mr Bradley or Ms Eckersall, although they did make possible that any private use by one could be identified by the other. In the absence of a sanction we consider that the Vehicle was available for private use and that at the time of purchase the Appellant must be taken to have intended to make it available for private use."
And the ultra tl;dr version
Pass a Board resolution that makes it a breach of the contract of employment, with sanction, for the vehicle to be used privately and ensure that is accepted and agreed by anyone with any possible access to the vehicle as a condition in the contract of employment.
JPJPJP said:
And the ultra tl;dr version
Pass a Board resolution that makes it a breach of the contract of employment, with sanction, for the vehicle to be used privately and ensure that is accepted and agreed by anyone with any possible access to the vehicle as a condition in the contract of employment.
I wonder what would be deemed as an appropriate sanction - termination of employment (tricky for a single-director business)? Financial penalty? Something else?Pass a Board resolution that makes it a breach of the contract of employment, with sanction, for the vehicle to be used privately and ensure that is accepted and agreed by anyone with any possible access to the vehicle as a condition in the contract of employment.
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