VATnd cars

Most accountants and tax advisers have at some time been asked the question that apparently cannot be answered: 'I've bought a car solely for business use – can I reclaim the VAT?'. In this article, I will attempt to analyse the reasons why, despite the current regulations having been in force for five years, Customs, the tax profession and the VAT and Duties Tribunal still cannot reach agreement on this issue.
In order to stand any chance of dealing with the unanswerable question, it is necessary to familiarise oneself with the relevant legislation. So at the risk of losing readers who, like myself, find tax law indigestible, but with the inspiration of an old proverb that there are no shortcuts to anywhere worth going, I will proceed.

What the law says
The offending legislation is the Value Added Tax (Input Tax) Order 1992 (as amended) and the starting point is paragraph (1) of Article 7 of the Order which excludes deduction of input tax on the purchase of a motor car. However, paragraph (2) provides that paragraph (1) does not apply in certain specified instances. One of these instances, contained in paragraph (2)(a), is that the car is a qualifying motor car supplied to a taxable person and the relevant condition is satisfied.
In simple terms, a car is a 'qualifying motor car' if it has not been subject to a previous input tax block, so new cars will normally fall into this category. The 'relevant condition' is that the supply is to a taxable person who intends to use the motor car either exclusively for the purposes of a business carried on by him or primarily for a relevant purpose. In effect, the possible relevant purposes are: that the car is used primarily for the purpose of taxi hire, self-drive hire or driving instruction; or, from 1 December 1999, that the car is part of the stock in trade of a motor dealer or manufacturer. Clearly, VAT can be reclaimed if these conditions are satisfied.

Meaningless
The relevant condition with which this article is concerned is that the supply is to a taxable person who 'intends to use the motor car exclusively for the purposes of a business carried on by him'. The draftsman clearly put much thought into the construction of the legislation but, unfortunately, he failed to give a statutory meaning to this phrase. He did, however, take the time to tell us what it did not mean. Paragraph (2G) of Article 7 provides that a person shall not be taken to intend to use a motor car exclusively for the purposes of his business if:
he intends to let it on hire on terms that do not constitute a commercial arm's length transaction; or
he intends to make it available, otherwise than on hire, for private use, including his own private use.
On the assumption that there is generally no confusion over the meaning of letting on hire, we can safely remove this phrase from the equation to reveal the central issue – when a person acquires a car, what criteria determine whether that person intends to make it available for private use? It is a sad indictment of the VAT system that after five years neither Customs nor the tax profession can answer this question with any confidence.

Potential
Customs correctly point out that the test is one of availability for private use, not actual private use. The fact that a person may never use his car for private purposes does not, in their view, entitle him to reclaim the VAT on its purchase. Customs are concerned only with the question of whether the car has the potential for private use.
The department acknowledges that the test is stringent but insists that it was always meant to be and points to pool cars kept permanently at business premises as an example of the type of car that qualifies for VAT recovery.
This is a nice try by the VATman, but what justification can Customs have for the view that a pool car does not have the potential to be used privately?

Case law
The first tribunal case to address this issue was Gerald David Jones (14535). This involved a farmer who used a four wheel drive car for farm business and another vehicle for private use. The tribunal accepted that the car in question was not used for private motoring but found that the actual use was irrelevant: the fact that the car was available for private use meant that the VAT on its purchase could not be reclaimed.

In the chairman's view, it was:
'verging on the impossible that someone who acquires a motor vehicle which is freely usable on the roads for private use would not, at that time, have it at the back of his mind that it might be so usable.'
This policy was followed by the tribunal in a number of appeals including P C & A M Wood (14804), in which the tribunal concluded, applying the principle established by the European Court of Justice in Enkler v Finanzamt Hamburg, that the important point is that the consumer always has the opportunity to use the asset whenever he finds it necessary or desirable to do so.
In Webb Plant Hire Ltd (15162), the tribunal held that a person is deemed to intend the natural consequences of his actions. If a person buys a car he must have the intention of making it available for any use he wishes to make of it, including private use. By any standards this view is extreme and to a large extent it has been discredited in later appeals. On more than one occasion the tribunal has asked the appellant whether, in the event of a member of his family becoming ill, he would use the car to take that person to hospital. If the answer is in the affirmative, then the vehicle must be regarded as available for private use. It is only if the car is 'out of reach' to the owner that it is not available.

Out of reach
Customs contend that a car is out of reach if there are sufficient legal or physical obstacles insulating it from the possibility of private use. In Simon F Lowe (15124), the taxpayer was successful in arguing that his car was unavailable for private use because it was kept in a locked compound on his land some distance from his house. The tribunal distinguished Lowe from Jones and Wood because, in its judgment, those cases relied on inference, whereas Mr Lowe clearly intended to use the car exclusively for business purposes.
This was the first tribunal to give weight to the taxpayer's intention and, in the writer's opinion, this was the correct approach, although there was little merit in the tribunal's finding that locking the car in a compound for part of the year was relevant; the car was still available for private use whether or not it was locked away.
Another way in which a car can be kept out of reach of private use, according to Customs, is by insuring it only for business use. The tribunal has convinced itself in several appeals that business-only insurance means the car is not available for private use.
This is self-delusion. As the tribunal chairman pointed out in the recent appeal by C M Upton (16772), even where private use is restricted by the insurance policy the taxpayer could easily authorise use of the car by any other person who was adequately insured. Indeed, he might be tempted to use the car privately himself in an emergency. The only significance of business-only insurance is that it gives an insight into the taxpayer's intention at the time the car was acquired.

Academic outlook
The appeal by Luis Martinez (16320) produced the first and only decision in which the tribunal reviewed all the leading earlier decisions and adopted a helpful academic view of the subject. The chairman stated, 'If a tribunal accepts that it is intended that a vehicle shall be used for business only, it is not in my view legitimate to infer from the mere fact of its actual availability for private use a necessary inference that it is intended to be available for private use'.
A similar view was taken in the earlier case of J C Aldam (15851) where the tribunal observed that the term used in the legislation is not 'available' but 'make it available', implying an active element. The chairman sensibly concluded that 'make available' must mean more than 'be available'.
Original intention
This, in the writer's humble opinion, is the key. The test of availability for private use should be the subjective one of intention at the time the vehicle is acquired (the Flockton test), and not whether the car has the potential for private use or is 'out of reach' for private use. To ask a taxpayer if he would use the car to take his sick child to hospital is unfair and unreasonable. Of course he would. Surely, it cannot have been the draftsman's intention that such an act of charity should disqualify the taxpayer from entitlement to recover VAT.
Customs will, no doubt, argue that a subjective test of availability is open to abuse, but that is the risk the Government takes when drafting legislation based on intention. If a taxpayer forms a sincere intention not to make his car available for private use by, for example, using another car for private journeys he does all that the law requires in order to qualify for input tax deduction.

No sign of resolve
At the time of writing, there is little sign of this problem being resolved. Customs are sticking to their hard line and the divergence in approach by the tribunal continues. The sooner this matter is considered by a higher court, the sooner the tribunal will have the comfort of a binding authority. Customs need certainty in order to administer the tax, taxpayers deserve to know the rules and advisers cannot afford questions with no answer.
 

Issue: 3786 / Categories: Comment & Analysis