United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Bhailok Fielding v Revenue & Customs [2007] UKVAT V20391 (10 October 2007)
URL: http://www.bailii.org/uk/cases/UKVAT/2007/V20391.html
Cite as: [2007] UKVAT V20391

[New search] [Printable RTF version] [Help]

Bhailok Fielding v Revenue & Customs [2007] UKVAT V20391 (10 October 2007)

20391

VAT — input tax — exclusion of motor cars from credit for input tax — motor cars purchased by firm of solicitors — whether cars intended to be made available for private use — yes — no appearance by appellants — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

BHAILOK FIELDING Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: David Demack (Chairman)

Mrs Marilyn Crompton

Sitting in public in Manchester on 6 August 2007

The Appellant did not appear and was not represented

Miss Lisa Linklater of counsel, instructed by the Solicitor and General Counsel to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

The question for decision in this appeal by Ayub Bhailok and Robert Michael Fielding trading as Bhailok Fielding ("the appellants") is whether they are entitled to credit for input tax on three motor cars they bought in 2003 and 2004. Subsequent to the purchase of the cars, the appellants sought to recover the input tax. Her Majesty's Commissioners for Revenue and Customs ("the Commissioners") denied their claims on the basis that since they intended to make the cars available for private use, the input tax was not allowable and, to recover the tax which the appellants had by then deducted, on 22 June 2005 notified them of assessments to tax of £31,314.

The appellants appealed the assessments, in their Notice of Appeal of 8 August 2005 giving the following reason for appealing:

"The decision is based on an error of fact. The officer has determined that the vehicles in respect of which input tax has been reclaimed are available for private use. Sufficient evidence is available to show that this is incorrect."

Generally speaking, a taxpayer is entitled to credit for input tax on taxable supplies made to him (see section 25(2) and section 26 of the Value Added Tax Act 1994 ("VATA")). But by section 25(7) of VATA the Treasury may make exclusions from that general approach, and has done so in the case of motor cars in the VAT (Input Tax) Order 1992 ("the Order"). The three cars acquired by the appellants are undoubtedly motor cars for the purposes of the Order.

Paragraph 7(1) of the Order, so far as relevant, provides that tax charged on the supply to a taxable person of a motor car shall be excluded from any credit. But by paragraph 7(2) of the Order:

"(2) Paragraph 1 does not apply where—

(a) the motor car is:

(i) a qualifying motor car

(ii) supplied (including a letting on hire) to, or acquired from another member state or imported by a taxable person; and

(iii) the relevant condition is satisfied."

The "relevant condition" is to be found in paragraph 7(2)(e) which provides:

"(2)(e) 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 (2)(g) below; or

(b) primarily for a relevant purpose."

Paragraph (2)(g) states:

"(2)(g) 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."

We observe that partnerships are expressly included in that provision.

When the hearing was called on, the appellants were neither present nor represented. Miss Linklater, counsel for the Commissioners, was aware that they had made application for postponement of the hearing, and indicated that the Commissioners would not oppose the application if we were minded to grant it.

The postponement application was made against the following background. On 6 June 2007, in accordance with standard practice, the Manchester tribunal centre wrote to both parties to the appeal inviting them within 21 days to indicate in writing any dates inconvenient for a hearing in the months of August to November 2007 inclusive. The Commissioners replied to the letter on 15 June 2007: the appellants did not reply. On 2 July the tribunal centre gave notice that the hearing would take place on 6 August 2007. The appellants applied for its postponement by letter of 19 July saying that Mr Bhailok had been away from the office "for a considerable period of time" due to family emergencies, his mother having suffered a serious heart attack whilst in India necessitating his flying to that country, and a "close uncle" had died, so that correspondence addressed to the firm had not been dealt with. No evidence in support of either claim was provided. The letter further indicated that a "longstanding planning hearing" of a matter of which Mr Bhailok had personal conduct was also listed for 6 August.

In the event, Mr Demack refused the application. He did so for the following reasons. If Mr Bhailok was not available personally to deal with the tribunal's request for inconvenient dates, his partner, his secretary or another member of staff should have dealt with the relatively straightforward matter of responding to the tribunal request in his absence; and if the planning hearing was "longstanding" that fact should have been disclosed to the tribunal centre immediately on its asking for inconvenient dates. The appellants were informed that they could repeat their postponement application at the commencement of the hearing on 6 August.

On the hearing being called on, we were presented with a further request for postponement, again by letter, which merely repeated what had been said in the letter of 19 July. Having carefully considered the application, we refused it for the same reasons as Mr Demack had earlier given. We determined to proceed with the hearing under rule 26(2) of the VAT Tribunals Rules 1986, as amended, that is in the appellants' absence.

The case for the Commissioners, as set out in the statement of case, was based on the availability of the cars for private use, rather than, as the legislation requires, an intention to make the cars available for such use. Miss Linklater made application to amend the statement of case, which we granted.

Our findings of fact are based on the contents of the Commissioners' bundle of copy documents and a report by Mr Clarkson, an accountant employed by the Commissioners, which he prepared for an earlier application by the appellants for the appeal to proceed without their being required to pay or deposit the tax in dispute – an application which was granted by consent. The appellants failed to serve a list of the documents on which they intended to rely.

We find that the appellants are a two-partner firm of solicitors practising from one office in Preston. Mr Bhailok is the senior partner, he being entitled to 70 per cent of the profits, and Mr Fielding the junior partner.

On 21 March 2003 the appellants bought a Mercedes E270 CDSI Elegance motor car for £30,493.62 plus VAT of £5,336.38. In September 2003 they bought a Mercedes SL 350 Roadster for £58,358.09 plus VAT of £10,212.67. And on 14 June 2004 they bought a Bentley Continental GT for £941,895.32 plus VAT of £16,606.69. (The difference between the total sum assessed and the tax paid by the appellants results from their having inexplicably deducted only £14,603 input tax on the Bentley). The cars were included in the partnership accounts as partnership assets.

When officers of the Commissioners paid a routine control visit to the appellants on 26 January 2005 they found that they had claimed and deducted the input tax on the three motor cars. Following investigation of the claims, the Commissioners concluded that the appellants intended to make the cars available for private use as they had taken insufficient effective steps to render them incapable of such use. In particular, they noted that the cars were kept at Mr Bhailok's home, which is some little distance from the appellants' office, one being allocated for use by Mrs Bhailok and another by Mr Bhailok's brother. (We presume that Mr Bhailok used the Bentley himself, and his relations the Mercedes cars. But whether that presumption is correct or not makes no difference to our conclusion). The Commissioners were provided with no information as to the insurance of the three cars, so that they knew not whether it in any way restricted their use. The Commissioners also found that the appellants had claimed input tax on fuel purchases for two of the vehicles, but had applied no quarterly scale charges for their personal use; that they had reclaimed input tax in full on the finance element of contract hire payments for other cars, whereas it should have been restricted to 50 per cent; and that there were certain other irregularities in their accounting for VAT. The Commissioners particularly noted the reclaim of the contract hire payments as it indicated that other cars of the partnership were used for business purposes.

Initially the appellants accepted liability for the scale charges, but then withdrew their acceptance. Had they not done so, they would in effect have admitted that they were not entitled to claim the input tax in issue.

By letter of 24 June 2005 to the Commissioners, the appellants claimed to have provided them with "a breakdown of three separate vehicles … which are available to us for personal use", but apparently failed to include it. Consequently, we were not provided with the breakdown. The letter went on to say:

"You have suggested that the vehicles referred to in the assessment are available to Mrs Bhailok and Mr Bhailok's brother. It is confirmed that both work for the legal practice. Mr Bhailok's brother has been involved with the Marketing Department and Mrs Bhailok with data generation and input. The vehicles referred to in the assessment have been and will be available to the 2 individuals referred to as part of their work. We have previously provided information with regards to other vehicles that they both have use of on a totally private and personal basis … there being 3 other vehicles available to the family for private use".

In the absence of any evidence to support the claim that the appellants had other vehicles available for private use, we are not prepared to accept that there were any such vehicles.

Although no evidence was adduced to prove that Mrs Bhailok and Mr Bhailok's brother were employed by the appellants at the time the cars were purchased, that being the time at which the necessary legislative intention must have been formed, we accept that they were. If Mrs Bhailok was engaged in "data generation and input" there would seem to have been little or no business travel involved in the carrying out of her duties.

Amongst the documents before us in the appellant's partnership agreement of 1 November 2001. Clause 4.3 thereof provides as follows:

"4.3 The property, the Intellectual Property and all Partnership Assets, including real property, cars, computers and ancillary equipment, office equipment, furniture, books, stationery and other property and equipment whatsoever and wheresoever situate shall be the property of the Partnership and shall not be used otherwise than in the pursuance of the business of the Firm".

Miss Linklater invited us to take little or no notice of that clause as the partnership was merely between the two appellants, so that decisions could be taken by them as to the use of partnership assets with little or no formality and at a moment's notice; and as Mr Bhailok was the senior partner, Miss Linklater submitted that one would have expected him to be able to make decisions as to the private use of partnership assets. We accept those submissions. Further, she observed that the cars had been made available to Mrs Bhailok and Mr Bhailok's brother, apparently without contractual restraint. In the absence of any evidence of such restraint, and it being effective, we find there was no effective restraint.

The invoices for the two Mercedes cars show them as having been supplied to the partnership, whereas that for the Bentley was addressed to Mr Bhailok personally. The Commissioners take no point on that fact.

Had the appellants served a list of their documents, we might have been able to discern the case they intended to argue. In its absence, since the burden of proof is on them in relation to every aspect of the appeal (see Tynewydd Labour Working Men's Club and Institution Ltd v Commissioners of Customs and Excise [1979] STC 570), it is for them to show that they did not intend to make the cars available for private use, and intended them to be used exclusively for the purposes of their solicitors' practice.

Further, as a person intends the usual consequences of his actions, the purchase of a private motor car ordinarily means it is available for private use.

There is guidance on paragraph (2)(g) from the authorities. First, and most importantly, is the case of Commissioners of Customs and Excise v Upton trading as Fag-O-Matic [2002] STC 640. In that case, Mr Upton carried on business as a cigarette vending machine operator and, for the purpose of impressing his customers, bought a Lamborghini motor car. He enquired whether insurance cover could be restricted to business use, but was informed that all insurance policies covered private use without charge. He worked seven days a week and, when not in use, parked the car in a car park. Mr Upton owned no other car, but did not need one. He claimed the tax paid on the purchase of the car was allowable input tax. The Commissioners denied the claim. The tribunal allowed Mr Upton's appeal against the Commissioners' decision, but its decision was subsequently overturned in the High Court by Sir Andrew Morritt, the Vice-Chancellor, on the ground that the car might be "made available" if it was available in fact and the owner did nothing to prevent its private use by himself.

Before the Court of Appeal, to which Mr Upton then appealed, Peter Gibson LJ identified the meaning of the words "make it available" as the crucial issue. At page 645, the learned Lord Justice said this:

"But in the case of private use by the taxable person, the consequence of his acquisition of the car will be to make it available for his private use unless he takes positive steps to remove it. Accordingly, in my judgment [and this, of course, is the judgment of the Vice-Chancellor] the requirement of paragraph (2)(g)(b), that the taxable person intends to make the car available for his own private use, will be satisfied if on the acquisition of the car he intends not to take any step to exclude the necessary consequence of his ownership. In other words, a car may be 'made available' if it is available in fact and the owner does nothing to prevent its private use by himself."

And at page 646, he added:

"The intention specified in (2)(e), namely to use, is not synonymous with the intention specified in (2)(g)(b), namely to make available for use, nor does an intention to use a car exclusively for business purposes exclude the possibility of an intention to make the car available for private use. This distinction between (2)(e) and (2)(g) is important to be borne in mind."

He further added at page 647:

"The very fact of his deliberate acquisition of the car whereby he makes himself the owner of the car and controller of it means that at least ordinarily he must intend to make it available to himself for private use even if he never intends to use it privately."

Buxton LJ agreed with Peter Gibson LJ, dealing with the meaning of "make available" at paragraph 28 of the judgment in the following way:

". . . the meaning of 'make available'. The first issue is therefore what the draughtsman meant by 'make available for use'. That is an ordinary English expression deliberately different from 'use' itself. An object can be made available for use without there being any present intention of actually using it, just as for instance a person can be available for, say, military service without there being any intention that he should serve or be asked to serve. The question has to be decided as at the moment of acquisition of the car. On the facts of the present case, I see no escape from the conclusion that the car was at that moment as a matter of fact available – and he puts that in italics – available for Mr Upton's private use however little he then had any intention of actually so using it."

And at paragraph 34, page 649, he said:

"It therefore followed that if at the time of purchase the owner's intentions did not include the taking of any steps to exclude what the Vice-Chancellor called 'the necessary consequence of his ownership,' then that necessary consequence indeed followed, that the car was available for his use."

The Court of Appeal upheld the judgment of the Vice-Chancellor.

The second case is that of Commissioners of Customs and Excise v Robins [2005] STC 1103, where more than one car was owned by the taxpayer. Summarising the effect of Upton, Lloyd J (as he then was) said at paragraph 21 page 1109:

"The correct test in law is that laid down by the Vice-Chancellor and approved by the Court of Appeal, namely that the taxable person does intend to make the car available for his own private use unless at the time of acquisition he intends to take effective steps to exclude the necessary consequences of availability which would follow from his ownership of the car."

The third case is that of Commissioners of Customs and Excise v Elm Milk Ltd [2006] STC [792]. Taking its facts from part of the headnote, they read:

"The company purchased a Mercedes car for business use by its director P who needed a large, comfortable car for business travel of up to 50,000 miles in a year. The car was insured for both business and private use by himself and three members of his family because his insurance company was unwilling to insure it for business use only. P's wife had another car which was used for all his private motoring. The car was kept in a car park near to the company's office, where the keys were kept. A Board resolution was passed, ratifying the purchase of the car in which it was noted that the car was to be used for business purposes only by P, that the company did not intend to make it available to anyone for private use, and that it would a breech of the employee's terms of employment to use it for private purposes."

The significant, indeed crucial, difference between the Elm Milk case and the instant one is that in the former the taxpayer was a company in contrast to the appellants' partnership status.

In the leading judgment in Elm Milk, Arden LJ, with whom the other members of the Court of Appeal agreed, said at paragraph 39:

"The Judge and the tribunal in this case clearly thought that unavailability for private use could be achieved by appropriate contractual provisions as well as by physical constraints, and I agree."

Arden LJ went on to observe that the prohibition was "wrapped up" by the terms of Elm Milk director's employment and the arrangement for location of the car keys, and confirmed that there was no doubt that a company could enter into a binding contract of employment with its sole director. She explained the scheme of the provisions of paragraph 7 of the Order as being to exclude the right to VAT paid on the purchase of a motor car except where the taxable person showed first that the intention was to use the car exclusively for business purposes and, secondly, that it was not his intention even to make it available for private use (and not simply that he did not intend to use the car for private purposes). She added that the object of the provisions was to prevent claims to deduct tax on cars purchased for business save where the possibility of private use was excluded. On that basis, Arden LJ concluded that there was no reason why a car could not be made available for private use by suitable contractual restraints, and she allowed the appeal.

In the fourth case, Commissioners of Customs and Excise v Shaw [2006] EWHC 3699 (Ch), the facts were that Mr Shaw purchased two almost identical BMW X5 vehicles, one found by the tribunal to be solely for business use and the other for private use. The judge, Lindsay J, accepted as the correct test to be applied that laid down by the Vice-Chancellor Morritt in Upton as summarised by Lloyd J at paragraph 21 of his judgment in Robins (see paragraph 33 above).

Lindsay J observed that Mr Shaw, as a sole trader, could not make a binding contract with himself, whereas a company with a sole director could, and in Elm Milk did make a contract with that director prohibiting his using the car for private purposes. The learned judge continued, at paragraph 31:

"The result does seem to me an unfortunate consequence that appears to me unfairly to put sole traders at a disadvantage in comparison with their competitors who have organised themselves as companies, even as what one might call one man companies. But the fact that there is an unfortunate consequence does not enable me to escape the reasoning of the Court of Appeal [in Upton]."

In our judgment, that observation of Lindsay J is equally applicable to partnerships.

Lindsay J added at paragraph 26:

"…Nothing in law or in fact disentitles Mr Shaw from using the diesel X5 for private purposes, and that in law, as it seems to me, suffices for the Commissioners to succeed. It is not enough for Mr Shaw to say, completely credibly, as [the tribunal] held to be the case, that he did not, at the point of acquisition or at all, intend to use the diesel X5 for private purposes. That does not take him far enough. It does not satisfy the second part, the availability test …"

Again, we consider Lindsay J's observation to be equally applicable to partnerships.

Lindsay J considered the possibility of a sole trader or partnership framing an argument that Upton went too far, observing that it could perhaps be argued that it required proof of the legal or physical unavailability of private use, and that that went beyond what paragraph (2)(g), looking to intent, strictly required. But, he continued, at paragraph 47:

"… Even if there were such an argument, I could not bow to it in the face of Upton. I have in mind the difficulty – perhaps even, impossibility – of the sole trader passing the (2)(g) test if the (2)(g) test remains as Upton suggests that it is, but that, as I say, does not enable me to escape Upton as a discussion which binds me."

Having expressed his sympathy with Mr Shaw's position, Lindsay J concluded his judgment by saying at paragraph 49:

"It is difficult also to imagine that Parliament intended to devise a test which expressly includes sole traders and yet is such that – fanciful circumstances apart – it is hard to see how a sole trader could ever pass the test, especially if, as observations in the cases suggest, it is difficult, impossible or unreasonably costly to obtain "business only" insurance cover for a sole trader's motorcar. But all that, I fear, is no assistance to Mr Shaw unless I can escape Upton as a binding authority. I do not find that I am able to escape Upton as a binding authority and accordingly I must allow the appeal."

Yet again, we observe that Lindsay J's comments at paragraphs 47 and 49 of his judgment are equally applicable to partnerships as to sole traders.

Even if, which we gravely doubt, the appellants could have overcome the hurdles which the cases show to exist where cars are owned by individuals and partnerships, we have no evidence whatsoever of the existence of any effective steps taken by the appellants preventing the cars being intended to be made available for private purposes. In their absence, we conclude that the appellants did intend the cars to be made available for such purposes. We therefore dismiss the appeal.

We direct the appellants to pay the Commissioners costs in the sum of £900.00.

DAVID DEMACK

CHAIRMAN
Release Date: 10 October 2007

MAN/05/0570