Tax Cases

Demonstrably an asset

JDL Ltd sold new cars under franchise from manufacturers. Under the terms of the franchise, the retailer was required to have available a number of up-to-date models for use as demonstrators. The retailer had to buy these models, so that title to the car was passed to the retailer, who then registered and licensed them. A tax invoice in respect of them was issued. Eventually, the demonstrators would be sold as used cars or at a car auction. Demonstrator and ex-demonstrator cars were depreciated monthly in the management accounts, compared with the ordinary new and used cars which formed part of the stock in trade, and were therefore not depreciated.

Under Article 7(1) of the Input Tax Order 1992, tax charged on the supply of a car to a taxable person was excluded from input tax credit but, under Article 7(1)(c), the exclusion did not apply to unused cars supplied for the purpose of being sold. So the retailer could claim the credit on all new cars purchased as trading stock, but not on those bought as demonstrators. Article 7(4) provided that once the car had been sold, the retailer was accountable for output tax on its profits margin.

In 1997, Customs allowed traders to charge VAT on the profit margin or alternatively to treat the sale of input tax blocked cars as exempt. JDL therefore claimed a VAT repayment for the period between November 1994 and October 1997 on the basis that the supplies of the demonstrators were exempt.

Customs said that the demonstrators were sold as items of stock in trade, and were not capital assets. The VAT tribunal allowed the taxpayer's appeal, so Customs appealed to the High Court.

Mr Justice Lawrence Collins said that there was no general definition of capital goods for the purposes of the Sixth Directive or the United Kingdom VAT legislation. The tribunal had to decide on the facts present and, in the instant case, it relied on the fact that the demonstrator cars were acquired to carry on taxable activities rather than to be sold immediately. These cars were of sizeable durability and value compared with other items used in management, and were depreciated in the management accounts. The tribunal had considered the appropriate questions and was entitled to reach its conclusion.

The appeal failed.

(Commissioners of Customs and Excise v JDL Ltd, Chancery Division, 25 October 2001.)

Issue: 3831 / Categories: