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Cite as: [2004] UKVAT V18631

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Masterguard Security Services Ltd v Customs and Excise [2004] UK V18631 (04 June 2004)

18631

VALUE ADDED TAX — input tax — motor cars — whether recovery of input tax on acquisition blocked — VAT (Input Tax) Order 1992, art 7 — cars kept available for business use 24 hours a day — whether private use effectively excluded — yes — appeal allowed

MANCHESTER TRIBUNAL CENTRE

MASTERGUARD SECURITY SERVICES LIMITED Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Colin Bishopp (Chairman)

Sitting in public in Birmingham on 30 March 2004

Nicholas Ashton, solicitor, for the appellant

Tariq Sadiq, of counsel, instructed by the Solicitor's Office of HM Customs and Excise, for the respondents

DECISION

This appeal raises again a question which has been before the tribunal on many occasions in recent years, namely whether recovery of the input tax incurred in the acquisition of motor cars for use in a business is blocked by the provisions of the Value Added Tax (Input Tax) Order 1992 (SI 1992/3222), as amended by, in particular, the VAT (Input Tax) (Amendment) (No 3) Order 1995 (SI 1995/1666). Those Orders were made in accordance with section 25(7) of the Value Added Tax Act 1994, and are designed to implement a sentence in article 17(6) of the Sixth VAT Directive (77/388/EEC): "Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure …".

The appellant, as its name suggests, is engaged in the security business. It installs and maintains alarms at industrial and commercial premises, the alarms being linked to a control centre at its base in Redditch, and it supplies security guards. Some of those guards are stationed permanently at a customer's premises while others, of relevance in this case, make scheduled visits to customers to ensure that their premises are secure (and to take appropriate action if they are not), remaining as long as is necessary before travelling on to the next customer's premises for the same purpose. The pattern of scheduled visits might be interrupted by an alarm call, which the guards are required to deal with in priority to a routine visit. It is the vehicles used by the mobile guards which are in issue in this appeal.

The only oral evidence I heard came from Ronald McMaster, the appellant's chairman and a major shareholder in it. He told me that the company had been in business since 1981, covering the whole of the West Midlands from its only office in Redditch, on the southern edge of the area. Mobile guards work, as a rule, 12-hour shifts—as I understood Mr McMaster's evidence, the appellant's preferred system is that one guard works during the daytime and in the evening hands over the vehicle to another guard who uses it for his night shift; the process is reversed in the morning. The changeover is usually effected locally rather than at the appellant's office. A guard who lives and works in, say, Wolverhampton will be paired with another guard who lives reasonably close by, and whose shift covers much the same area. The guard finishing his shift drives to the other's home to pick him up, and they then travel together in the appellant's vehicle to the former's home, where he alights, and the relieving guard starts his shift. Sometimes it is not possible to arrange a changeover in this fashion, and a guard finishing his shift travels to his home, leaving the vehicle parked outside. It might remain there until the guard begins his next shift—though in this case he remains on call in case of emergency in the meantime—or it might be collected by the appellant for use by another guard.

The respondents had at first taken the view that this practice amounted to use by the guards of the vehicles for their own purposes, but later they accepted (and in my opinion rightly) that this was not correct. By eliminating the need to travel to Redditch (about 25 miles from Wolverhampton—the distance would of course be different for guards living and working elsewhere) the appellant has increased the time the guards are available to undertake productive work. It seems to me quite clear that the changeover method is of considerable advantage to the appellant, and that the benefit to the guards, though not insignificant, is merely incidental.

It is in the nature of its business that security patrols are undertaken on every day of the year and the appellant endeavours to ensure, as I am satisfied, that the cars should be available for its purposes at all times. Mr McMaster also told me, and I accept, that for reasons of economy the appellant keeps only a limited number of spare patrol cars. Until 1997 or 1998, he said, the appellant had run its own fleet but had found it difficult to ensure, at reasonable cost, that its cars remained in working order at all times and had decided instead to obtain cars by contract hire (the appeal is against the Commissioners' refusal to allow credit for all of the VAT on the hire charges); the hiring company provides replacements when necessary, relieving the appellant of the need to keep more than a few spare cars. Even so, if a car breaks down out of office hours, a spare is not available and an immediate replacement cannot be obtained, a manager's or director's car will be used instead. The patrol cars are subject to very heavy use: Mr McMaster told me that they are replaced at 150,000 miles, achieved in only 18 months. The guards are required to complete logs of their shifts, which are designed to record not only the visits they have made but also the distance that have covered, and I am satisfied that by this means the use made by the guards of the cars is monitored.

At the hearing the Commissioners focussed, not on the actual use of the cars, but on the terms of the appellant's employment contracts which were internally inconsistent, and inconsistent too with what Mr McMaster told me was the appellant's policy about the private use of the cars. He said that in practice the guards had little opportunity to use the cars for their own purposes (and, since they all now had their own cars, would have little need to do so). Even if a car was parked outside his home, the guard would know either that he would have to use it for the appellant's purposes if called out, or that it was to be collected. Because of the appellant's need to have the cars available at all times, private use is prohibited, and contraventions of the prohibition are treated as disciplinary offences. Mr McMaster was aware of very few occasions when the cars had been used improperly but, he said, disciplinary action had been taken on each occasion. He had once authorised a guard (who did not then have a car of his own) to use one of the appellant's cars to travel to a hospital to which a member of his family had been admitted as an emergency, but that was, he said, wholly exceptional. Even then, the car had been collected from the hospital so that the appellant could use it and the guard was left to make his own way home.

The written evidence produced at the hearing contained a number of documents relating to the guards' conditions of employment. One, entitled "Transport Policy" contains the clause "The vehicles are for use on company business only, ie not for private use"; that, of course, is consistent with Mr McMaster's evidence. However, that is merely an attachment to another document, designed as an introduction to the appellant for new employees. The appellant's standard terms of employment are set out in a formal agreement which contains (among many others) these provisions:

"No Company vehicles may be taken out of the country without written permission from a Director of the Company."

"Subject to the restrictions already stipulated, vehicles may only be used for social, domestic and pleasure purposes and used for the business of the Company, excluding the carriage of passengers for hire or reward."

"Company vehicles may not be used for any private purposes of any kind without special permission and must be returned to the Company premises at the end of each working day."

"Company vehicles shall only be used in the performance of your duties for business purposes."

Tariq Sadiq, counsel for the Commissioners, argued that those clauses, apart from the last, as well as the fact that the cars were insured for private as well as business use, indicated that the cars were in fact available to the guards for personal use, even if on a restricted basis. Mr McMaster's explanation was that the appellant had bought a standard form of conditions of employment from its local Chamber of Commerce, and had adopted it without, as he acknowledged, considering whether it was entirely appropriate for the appellant's needs. I accept that evidence; the document has the hallmarks of a general-purpose agreement whose user is intended to select only one of the alternatives provided to cater for different matters (a course which the appellant has sometimes failed to adopt, those clauses which I have set out being a pertinent example). It contains other clauses of doubtful, if any, relevance to the appellant's business and I am satisfied that the appellant did adopt the document uncritically. I also accept Mr McMaster's evidence that he had attempted to effect business-only insurance cover but that the hire company had insisted that all risks were covered, even if private use was prohibited.

Article 7 of the 1992 Order, so far as relevant, reads:

"(1) Subject to paragraph (2) to (2H) below tax charged on—

(a) the supply (including a letting on hire) to a taxable person; …

of a motor car shall be excluded from any credit under section 25 of the Act.

(2) Paragraph (1) above does not apply where—

(a) the motor car is—

(i) a qualifying motor car;

(ii) supplied (including on a letting on hire) to … a taxable person; and

(iii) the relevant condition is satisfied; …

(2E) For the purposes of paragraph (2)(a) 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; …

(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, 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."

The Commissioners accept that the cars are "qualifying motor cars" within paragraph (2)(a)(i) and that paragraph (2)(a)(ii) is satisfied but, they say, the "relevant condition" is not satisfied since the cars are "available … to [the guards] … for private use" within the meaning of paragraph (2G)(b), and the appellant is therefore not entitled to input tax credit.

I was provided with the reports of several cases of this kind, heard in the tribunal and in the courts, but only one is of any real assistance in the application of these provisions, namely Upton (trading as Fagomatic) v Customs and Excise Commissioners [2001] STC 912 (in the High Court) and [2002] STC 640 (in the Court of Appeal). The facts of the case are now so well known that I need only mention that Mr Upton bought a Lamborghini car intending (as the tribunal had found) that it should be used exclusively for his business purposes, and at no time for any private purpose. However, he took no positive steps to put it out of his reach for lawful private use. The manner in which the legislation is to be interpreted was most succinctly expressed by Buxton LJ ([2002] STC 640 at 648) when he said:

"[31] Did Mr Upton at the moment of purchase intend to make the car available to himself for private use? The question is not whether he intended to use it, but whether he intended to make it available for use. That again seems to me to lead to a short answer. The first question, of whether what was done constituted a making available for private use, is answered, in the terms urged above, by analysis of what Mr Upton did in the context of the true construction of the statutory concept of making available for private use. Mr Upton unquestionably intended to do the acts that, on that true construction, constituted the making available of the car for private use. He therefore necessarily intended to make the car so available, by intending to do the acts that constituted making the car available for use. He cannot escape from that conclusion by saying, as he does, that he did not intend actual use; or that, for that reason, he did not regard the car as available for his use. If he intends to do the acts that are in law the state of affairs referred to in the statute, then he intends that state of affairs as statutorily defined."

That passage makes it clear that the test is severe and, for a sole trader such as Mr Upton, one which it is very difficult to satisfy. For a limited company, such as this appellant—and where there has at no time been any suggestion by the Commissioners that the relevant cars are, in any meaningful sense, available for private use by the directors—the test may be a little easier to satisfy. I bear in mind too that, since the provisions of article 7 are not expressed in terms apt to exclude input tax credit in every case, there must be a residue of cases, even if few in number, where credit is available.

Although this is a case which illustrates the dangers of using standard-form documents without adequate scrutiny, I am satisfied that the apparent terms of employment do not reflect the reality, and that, as Mr McMaster told me, the appellant has, and applies, a policy of prohibiting private use of the cars. I accept that the appellant's intention, throughout, has always been that the cars should be used exclusively for its business purposes and that it has done everything it reasonably can to limit their use accordingly. Private use of the cars by the guards is, I have concluded, quite inconsistent with the manner in which the business is conducted. The very heavy use made of the cars and the requirement that mileage be accounted for by completion of a log, too, render their further use for private purposes largely impractical. I recognise that the single authorisation of the use of a car for a hospital visit, at first sight, counts against the appellant but, as Buxton LJ also said (at paragraph 29 of his judgment) "The question has to be decided as at the moment of acquisition of the car." I have no doubt the appellant had not foreseen such an eventuality when it acquired the car, and have reached the view that this one incident does not disqualify it from credit. In short, I am satisfied that, in the circumstances of this case, the statutory test is met and that the appellant is entitled to the credit.

The appeal is, therefore, allowed. I direct that the Commissioners pay the appellant's costs, to be assessed by a chairman sitting alone if the parties are unable to agree them.

COLIN BISHOPP

CHAIRMAN

Release date : 04/06/2004

MAN/02/0169