First-tier Tribunal (Tax)

[2010] UKFTT 116 (TC)

TC00427

VAT – input tax – car dealership – purchase of demonstrator / courtesy vehicles – whether input tax blocked on the purchase – yes – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

                                              WOLVERHAMPTON JEEP LTD                             Appellant

- and -

THE COMMISSIONERS FOR

                                      HER MAJESTY’S REVENUE AND CUSTOMS         Respondents

Tribunal:        Lady Mitting (Judge)

                        J D Kippest (Member)

Sitting in public in Birmingham on 16 December 2009

Mr. James Turner for the Appellant

Mrs. Andrea Strugo, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.           The Appellant appeals against the decision of the Commissioners to refuse its claim for input tax relating to 21 motor vehicles purchased between 1993 and 1997 (“the vehicles”).  Input tax was refused on the basis that it was the Commissioners’ view that the vehicles were demonstrator vehicles and as such input tax was not recoverable under the Value Added Tax (Input Tax) Order 1992 (“the 1992 Order”).  It was the Appellant’s case that the vehicles were not demonstrator cars but courtesy cars and as such fell outside the scope of the Order.

2.           We heard oral evidence from Mr. Turner, who at the time of the transactions was the managing director of the Appellant company.  In circumstances which we set out below, Mr. Turner amended certain documents before they were put in to the tribunal.  Mrs. Strugo suggested that this had been a deliberate attempt to mislead the tribunal.  Mr. Turner explained to us the circumstances in which he made the amendments and we wish to state at the outset of this Decision that we understand and accept his explanation and we do not believe that he was in any way attempting to mislead us.  We found Mr. Turner to be a truthful and straightforward witness and the findings of fact which we set out below are largely based on his oral evidence and supplemented by the documents put before us.

3.           We find the following facts.  The Appellant is a motor car dealer and in October 1992 was amongst the first UK dealerships to be awarded a Chrysler Jeep franchise, which was eventually relinquished in October 1997.  During this period, the Appellant purchased 297 Chrysler vehicles, the vast majority of which were for immediate resale as new, but 21 of which were purchased for the use of the dealership as either demonstrator vehicles as contended by the Commissioners or courtesy vehicles as contended by Mr. Turner.  We refer to the 21 vehicles as “the vehicles”.  It was a condition of the franchise that franchised dealers had available to customers a demonstrator vehicle which a new customer could test drive before deciding on its purchase.  For this purpose, Chrysler allocated to franchisees one vehicle of each model which the dealership was supplying.  Initially there were just two models and Mr. Turner explained that they never had more than three demonstrator models at any one time.  The vehicles were purchased by the dealership at their own expense, through a Chrysler-operated “Demonstrator Plan” which was in effect a finance arrangement with minimal interest.  The vehicles were kept for approximately 12 months and were, during this period, registered in the name of the dealership.  Chrysler would then set down when the vehicle had to be sold on.  It was also a condition of the franchise that dealers had to have available for customers a courtesy car which would be used when a customer’s newly-purchased car came in for its first service or when a car was having any work done on it under the manufacturer’s warranty.  Chrysler did not provide or allocate a separate courtesy vehicle and Mr. Turner used his allocated vehicles as both the demonstrator and courtesy cars.  It sometimes happened that one of the vehicles was out with a customer as a courtesy car when a need for a demonstrator vehicle came in.  In this case it was Mr. Turner’s practice to put trade plates on a car which was in for supply to a customer and use that.  In respect of each of the vehicles, the Appellant was paid by Chrysler a “demonstrator discount”.  This was a payment to which the franchisee was entitled to reflect the fact that the dealer had to have a demonstration model and when the vehicles eventually came to be sold on the dealership would not realise the profit from them as it would have done from a new vehicle.  No payment was ever made by the customer to the dealership for the use of the demonstrator or the courtesy vehicle.  In each case it was provided free of charge.

4.           We were referred by Mr. Turner and Mrs. Strugo to the invoices which accompanied each of the vehicles.  The vehicles came in on consignment and each invoice set out full details of the vehicle and various reference numbers.  At the top of each invoice, when Mr. Turner received it, it was his practice to write “WTON Jeep demo” and he would then underneath that write the registration number of the vehicle.  This was to distinguish the allocated vehicles from all other vehicles bought for resale.  It was these invoices which the Commissioners suggested had been doctored by Mr. Turner.  Mr. Turner’s markings were in pencil and when the invoices were first produced to the Commissioners, the markings were still on.  During the course of Mr. Turner’s dealings with the Commissioners over this dispute, Mr. Turner was advised by his accountant that if the vehicles were in fact courtesy cars and not demonstrator cars then the input tax would be recoverable.  On the accountant’s advice therefore Mr. Turner deleted the markings by rubbing them out and it was the unmarked versions which were put into the tribunal.  As the Commissioners had already seen the marked copies and as Mr. Turner had never made any secret of the fact that the vehicles were dual use, as we said before, we do not believe that there was any attempt to mislead us but equally we don’t think that either the markings or their absence take the matter any further.  It is a question of the use of the vehicles rather than what is marked on the invoices. 

5.           Mr. Turner’s dealings with the Commissioners have been protracted.  We were referred to correspondence which predated the dispute and to the correspondence which passed between the parties during the dispute.  Initially the Appellant was claiming not only for the input tax on the purchases but he also put in a claim for a repayment of overpaid output tax which he had paid on profits and bonuses upon the sale of all vehicles.  The claims were also held back pending the decision in Fleming and eventually the claim for overpaid output tax was repaid but the Commissioners refused repayment of the input tax claim.  The content of the correspondence does little to further a determination of the issues but Mrs. Strugo did refer us to the fact that in virtually every letter which Mr. Turner wrote to the Commissioners he referred to the vehicles as demonstrator vehicles.  In the schedule of the vehicles which he provided for officers he referred to them as “demonstration vehicles”.  Mr. Turner also submitted to the Commissioners newspaper cuttings where car dealers had been successful in claims.  Again he highlighted in these articles any reference to demonstrator vehicles.  It was Mrs. Strugo’s case that until early 2009 when Mr. Turner was advised by his accountant that courtesy cars would be eligible for a refund of input tax whereas demonstrator vehicles would not, it had always been Mr. Turner’s case that these vehicles were demonstrators.

6.           Mrs. Strugo put in an extremely helpful skeleton argument in which she set out not only the legislation at the time of these transactions but also a history of the various amendments which had been made through time.  The legislative provisions relevant to this case are to be found in the 1992 Order.  Paragraph 7(1) provides that tax charged on the supply to a taxable person of a motor car shall be excluded from input tax credit.  This blanket block is subject to various exceptions which are set out in paragraph 7(2).  Specifically paragraph 7(2)(c) excludes from the block a motor car which is unused and is supplied to the taxable person for the purpose of being sold.  As a consequence of this car dealers are entitled to credit for input tax charged on all new cars which they purchase as trading stock for immediate sale on.  There are various other exceptions set out in sub-paragraph (2), none of which are relevant to this case.

7.           It is clear to us that however one terms the allocated vehicles, whether they are demonstrator or courtesy cars, they were not at the time of purchase for the purpose of being sold on to customers.  They were supplied to the dealership specifically to be used as demonstrator or courtesy cars.  We found Mr. Turner to be totally frank on this.  In fact one of his answers to Mrs. Strugo was to say “it was a demo car given to the customer as a courtesy car”.  This sums up exactly what they were in that they were vehicles supplied by Chrysler to the Appellant with the dual purpose of serving as a demonstrator car or courtesy car.  It follows that these vehicles were not therefore excluded from the paragraph 7(1) block and input tax was not recoverable on them.

8.           By the VAT (Input Tax) (Amendment) Order 1999, from 1 December 1999 input tax relief was introduced for the stock in trade cars of motor manufacturers and dealers.  Stock in trade included a car which was bought as a demonstrator or courtesy car provided that it was obtained by a dealer who intended to sell it within 12 months of the date from which VAT was incurred on its purchase.  This would mean that had Mr. Turner purchased the vehicles after 1 December 199 and used them for precisely the same purpose, he would have been allowed to recover his input tax.  Mr. Turner questioned why he could not rely on the 1999 Order in relation to his cars purchased earlier given that following the House of Lords judgment in Fleming, the three-year cap was being disapplied for input tax claims which had accrued by 1 May 1997 and the Commissioners were meeting claims for input tax in respect of which the entitlement to deduct arose before that date.  The answer to that is simply that there had to have been a valid claim for input tax recovery at the time and at the time input tax recovery was barred by the 1992 Order.

9.           It is clear that Mr. Turner was a highly successful businessman.  He told us that his dealership finished second in the country for service and sales and only had to be relinquished when he was unable to expand in the manner required of him by Chrysler.  He was in effect the victim of his own success.  He put his case to us in a straightforward manner but for the reasons which we have given above the appeal does have to be dismissed.  The Commissioners made no application for costs and no order is made.

MAN/2006/0150

LADY MITTING

JUDGE
Release Date: 4 March 2010