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Cite as: [2004] UKVAT V18592

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Elm Milk Ltd v Customs and Excise [2004] UK V18592 (16 April 2004)

INPUT TAX – Motor car – Appellant a family company – Appellant bought motor car for purposes of its business – Motor car made available to sole employee of Appellant – Sole employee a member of the family – Whether on acquisition of motor car Appellant intended to make motor car available to employee for private use – No – VAT (Input Tax) Order 1992 Art 7(2G)(b) – Appeal allowed

LONDON TRIBUNAL CENTRE

ELM MILK LIMITED Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

RACHEL ADAMS FCA

Sitting in public in London on 29 March 2004

Hugh Phillips, employee, for the Appellant

Richard Smith, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

This appeal is against a decision to disallow the claim by Elm Milk Ltd ("Elm Milk") for input tax in the sum of £5,790 which was incurred in the purchase of a motor car. It is common ground that this motor car was used in the course of Elm Milk's business.

Mr Hugh Phillips (" Mr Phillips") represented Elm Milk and gave evidence. Mr Phillips is now an employee of Elm Milk. At the time when the motor car was purchased he was sole director of Elm Milk. Evidence was given for the Commissioners by Mr Robert Morgan, an officer of the Customs.

Elm Milk carries on business in three areas. It is a landlord of farm premises. It acts as consultant to the dairy trade and as consultant to the leisure industry.

At the end of February 2003 Elm Milk purchased a Mercedes E320. By its 4/03 VAT return Elm Milk sought to reclaim input tax in respect of the purchase in the sum of £5,790.

At all material times Elm Milk has been under the shareholding control of the family of Mr Phillips. Mr Phillips himself has not held any shares.

Mr Phillips, as sole director and now as sole employee, has been the only employee of Elm Milk to carry on its business activities. Elm Milk's consultancy work requires visits to London, to Bedford and to other places in the UK. In the course of those business activities Mr Phillips has driven the Mercedes motor car for over 50,000 miles since its purchase a year ago. He said, and we accept this, that a large and comfortable car is needed to enable one individual to travel those distances and to perform the job effectively.

On 1 February 2003 Mr Phillips, as sole director of Elm Milk, minuted a board resolution. The minutes read, so far as is relevant, as follows:

"It was NOTED that on 17 February 2003 the company was to purchase a motor vehicle for registration on 1 March 2003. It was to be bought with the intention that it be used for business purposes only by one of the Company's employees, Hugh Phillips.

4 It was further NOTED that the company did not intend to make the car available to anyone for private use, and that it would be a breach of an employee's terms of employment to use it for private purposes.

5 It was further NOTED that the car's insurance policy did not permit anyone (other than the company) to use it for social, domestic or pleasure purposes.

1 IT WAS RESOLVED that the purchase of the car for the purposes described in paragraph 1.3 above to be ratified."

(The resolution refers to and is signed by Adeline Phillips as the Chairman. That was wrong. Mr Phillips was the only director at the time. We nonetheless accept the resolution as evidence of what Elm Milk's board resolved at the time.)

By way of background we mention that this was not the first time Elm Milk has been in dispute with the Commissioners over a claim for input tax on the purchase of a motor car. Some time in 2000 Elm Milk claimed input tax on the purchase of a Golf and a Volvo. The Commissioners refused to allow relief for the input tax on the grounds that the claims were blocked by Article 7 of the VAT (Input Tax) Order 1992 ("the 1992 Order"). The decision of the Commissioners was appealed. The Commissioners withdrew their assessments in respect of both claims for VAT at the door of the Tribunal on the morning of the hearing. A Memorandum of Agreement pursuant to VAT Act 1994 section 85 reads as follows:

"The claim for input tax on the purchase by the Appellant … will be allowed, provided that the motor car continues to be used exclusively for business carried on by the Appellant and that VAT will be accounted for to the Commissioners on any future sale."

We infer that the Resolution of 1 February 2003 was carried out in anticipation of a possible further dispute with the Commissioners in relation to input tax incurred by Elm Milk on purchase of the Mercedes motor car.

On 24 March 2003 Mr Robert Morgan, an officer of the Customs, and Mr Hugh Phillips met. On 5 November 2003 Mr Morgan noted his conclusions at the meeting in a witness statement. The relevant notes are as follows:

"(i) The insurance to which the vehicle was subject permitted use for both business and private purposes.

(ii) The vehicle was stored at the Appellant's business premises which is situated approximately fifty yards from Mr Phillips' home.

(iii) Should the Mercedes be needed in an emergency and Mr Phillips' own car was not available for use, then the Mercedes will be used for the purposes of addressing that emergency.

(iv) Should an emergency arise and the Mercedes be used for private use then the Appellant will charge for that use at a commercial rate.

(v) There were no physical or legal restrictions which prevented the Mercedes from being available for private use."

There is no formal contract of employment between Elm Milk and Mr Phillips. We are satisfied from the evidence that the Mercedes motor car was purchased for use for business purposes only. Mr Phillips as Elm Milk's only employee was the intended user of the motor car. Private use was not permitted to Mr Phillips. We are satisfied that the use by Mr Phillips of the motor car for private use would have been unlawful.

These findings are, we recognize, based on a board resolution made by Mr Phillips in relation to his own activities. We also recognize that Elm Milk is a company controlled by Mr Phillips' family. And we recognize that the resolution would not have been made in the absence of Article 7 of the 1992 Order. We have however had the opportunity of hearing evidence from Mr Phillips and considering his replies in the course of cross-examination. Our conclusion is that Elm Milk and Mr Phillips intended to be bound by the terms of the Resolution. Both parties well understood that the condition they had to adhere to, to enable input tax relief to be obtained, was that the Mercedes motor car was not to be made available by Elm Milk for the private use of anyone. By making that resolution Elm Milk was committed and Mr Phillips was committed, both in good faith, to a course of conduct that precluded Elm Milk from making the motor car available to Mr Phillips for private use and Mr Phillips from using it for private use. Mr Phillips, we are satisfied, became contractually bound to Elm Milk by reason of that resolution not to use the Mercedes motor car for private use.

The motor car was normally kept in a park near the Elm Milk office and within fifty yards of Mr Phillips' home. The keys were kept in the office.

Insurance cover was obtained from N F U Mutual. Cover included "use for social, domestic and social purposes and use by or on behalf of the policyholder in connection with the business or profession". Mr Phillips enquired of the insurer and was told by letter that "it is not possible to insure a vehicle for business purposes only".

Persons entitled to drive the Mercedes motor car included Mrs M Phillips (as policyholder) and anyone driving with her permission. Mr Phillips accepted that if a life-threatened emergency arose while he was driving the motor car, he would respond to it (having exhausted all other means, such as dialling 999) and take the person in question to, e.g, hospital. That, we think, would be an eventuality arising out of the business use of the motor car. Otherwise Mr Phillips said he would use the Rover 75 kept at home and registered in his wife's name. We accept that. Equally we accept that an unforeseen emergency could arise when the Rover 75 was not available. Mr Phillips said that a hire charge would be made for the use of the motor car in that situation. We find this a bit far fetched. All the same, if Mr Phillips did use the motor car in such an emergency, he would have been using it in breach of the terms of his employment as spelt out in the Resolution.

Finally, we are satisfied that all private motoring done by Mr Phillips is done in his wife's Rover 75.

The legal background

The circumstances in which it is permissible for a taxable person to reclaim input tax in respect of the purchase of a motor car are set out in Article 7 of the 1992 Order. For the purposes of this case the relevant sub-paragraph of Article 7 is (2)(iii), namely that the "relevant condition is satisfied". The relevant condition is defined by paragraph (2E) which provides, so far as material, as follows:

"For the purposes of paragraph 2A above the relevant condition is that the letting on hire, supply, acquisition or importation (as the case may be) is to a taxable person who intends to use the motor car either –

(a) exclusively for the purposes of a business carried on by him, but this is subject to paragraph (2G) below; or

(b) primarily for a relevant purpose."

Paragraph (2G) provides as follows:

"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 … to any person (including, 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."

Conclusions

The Commissioners submitted that the present motor vehicle was clearly intended to be made available for private use. The Commissioners' case was based on the decision of the Court of Appeal in Customs and Excise Commissioners v Upton [2002] STC 640. There a person carrying on a business on his own account bought a Lamborghini for use in his business and in fact (as the tribunal found) he used it for no other purpose. The Court of Appeal decided that the Lamborghini had been made available for the appellant's use because it had been available in fact and he had done nothing to prevent its private use by himself; this conclusion followed notwithstanding the fact that the taxpayer had no intention of actually using the motor car otherwise than for business.

In the Upton case the Lamborghini was directly owned by the taxable person. He intended the Lamborghini to be available to himself for private use because, as we have just noted, it was in fact available to him. Here the Mercedes motor car is owned by Elm Milk, a limited company. Neuberger J (as he then was) addressed the position of third party ownership in paragraphs 41 and 44.

"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 constraint 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 intended 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 to be 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.

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 impairment 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 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."

We have to determine, in the light of the Upton decision, whether Elm Milk, the supplier, has provided the Mercedes motor car to Mr Phillips, the recipient, "under a contract which bona fide precludes the recipient from putting it to a particular use" or whether there is any "physical or legal constraint" on non-business use by the recipient. In approaching this we bear in mind the argument for the Respondents that the board resolution is irrelevant because this was not intended to be acted upon.

In a scenario like the present where the car is owned by the family company and made available to the head of the family as sole employee of the company, we would need to be satisfied on strong evidence if we were to conclude that there was no intention that the motor car should be made available to the head of the family for private use. Having said that we are satisfied in the circumstances of the present case that the motor car has not been so made available. We think that Mr Phillips was a witness of truth. He, as director of Elm Milk, approached the purchase of the motor car with his eyes wide open. He, individually as an employee and in his capacity as a member (the sole member) of the board of Elm Milk, did what could be done to place a legal embargo on private use of the motor car by himself and by anyone else. And in both capacities he intended to stick to it.

The fact that the insurance cover permits private use is beside the point. If Mr Phillips were to use the car for a non-business purpose he would be acting in defiance of the board resolution which contained the relevant terms of his employment. That resolution was, we are satisfied, intended to be acted upon. On that basis it would have been a breach of the employee's terms of employment to have used the motor car for private purposes: see Resolution 1.4.

For those reasons we are satisfied that "the relevant condition" in Article 7 of the 1992 Order is satisfied. We therefore allow the appeal.

We award Elm Milk an amount in respect of its costs. If the parties are unable to agree that amount, the matter should be referred back to this Tribunal (chairman alone) for further directions.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED:

LON/03/0718