Tax Case - Smoker's Loss

Commissioners of Customs and Excise v Upton (t/a Fagomatic).

AN EXPENSIVE CAR purchased solely for business purposes was nevertheless held to be available for private use and thus the VAT incurred on its acquisition was not recoverable as input tax.

It has been generally accepted that input tax on a motor car used partly for business purposes could not be reclaimed. Unlike the direct tax position, which will allow a claim for capital allowances and running costs based on the proportion of business to private use, unless the car is, for example, the stock in trade of a motor dealer or used for some hire purposes, etc., then under paragraph 1 of Article 7 to the VAT (Input Tax) Order SI 1992 No 3222, input tax will not be recoverable. However, paragraph 2 of Article 7 does go on to state that: 'Paragraph (1) above does not apply where ... the relevant condition is satisfied'.

Paragraph 2E then states that 'the relevant condition' 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'. So, in most cases, the fact that a car is also likely to be used for private purposes will preclude an input tax claim.

Mr Upton supplied and serviced cigarette machines in London clubs, a business described as 'an affair of cut-throat rivalry where image is everything'. Arriving at a potential clients' premises in an 'ordinary' car or 'white van' was not particularly remunerative. However, if one arrived in a 'prestige' car, one was treated as 'a person of consequence'. Mr Upton had previously invested in an Aston Martin which increased his turnover by 100 per cent. However, after his business rivals copied his methods and also acquired Astons, Mr Upton 'decided to go one better' and, in 1998, he purchased a Lamborghini Diablo. His turnover increased by another 50 per cent, but Customs refused to allow his claim for the input tax incurred of £19,571.

The tribunal allowed Mr Upton's appeal. It found him 'a witness of truth'. It noted that 'he appears to have no visible private life worth mentioning' as he worked from 8 am until midnight or later, he had not had a holiday for five years and had no wife or family. He lived in London and all the necessary shops were within walking distance. If he did socialise - which he admitted would involve alcohol - he used taxis. Having been disqualified from driving before, and with transport critical to his business, he could not afford to risk this again.

Mr Upton had asked his insurer whether the car could be insured for business purposes only, but had been advised that all insurance policies would include private use for no extra charge.

Finding that 'this is a case that turns entirely on its own facts', the tribunal allowed the claim. Customs' appeal to the High Court was allowed and the taxpayer appealed to the Court of Appeal.

(Penny Hamilton for the taxpayer; Nicholas Paines QC and R Hill for Customs.)

Lord Justice Gibson commenced his reasoning with a reference to the general principle of VAT that it should be wholly neutral for a registered person, but that the Sixth Directive provides for certain derogations. Specific to this case is Article 17(6), which permits exclusions from the right to deduct input tax only where it is 'strictly business expenditure', and VAT (Input Tax) Order SI 1992 No 3222, referred to above, is pertinent here.

Article 7(2G) of the Order provides that:

Lord Justice Gibson recognised that it is the term 'make it available' that is critical. The High Court had taken the view that where, say, a company had purchased a car it could not have personal use and it was easy to see whether it was then 'made available' for another's personal private use. The Court went on to say: 'But the concept of a taxpayer taking any positive action to make his own property available for his own private use is unreal. If it is his property and is available for private use by him, what more is there to be done?'.

Lord Justice Gibson agreed with the High Court's answer that the negative wording of Article 7(2G) meant that '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'.

The tribunal had not made this distinction and had simply held that if the taxable person intended to use the car exclusively for business purposes, then he could not intend to make it available to himself for private use. In this case, the only step that Mr Upton took to exclude private use was to enquire whether such use could be excluded from his insurance policy, but this was not possible.

Lord Justice Buxton agreed with the above view. He used the comparison of a person being 'available for, say, military service without there being any intention that he should serve'. The availability of the car for private use was not restricted simply because of the decision to use it only for business purposes. It would be difficult for a sole trader to make a car unavailable for private use, but this did not mean that the Court's interpretation of the Order was wrong.

(Reported at [2002] STC 640.)

Commentary

In retrospect, perhaps the tribunal's decision did seem 'too good to be true' and the Court's decision with regard to the 'made available' concept appears to be more in line with the income tax view that, for a taxable car benefit to arise, it is merely sufficient that the car is 'available for private use'. Lord Justice Neuberger thought that it would be difficult for a sole trader to make a car physically unavailable for private use; for example, an employee holding the keys could be compelled to return them to the employer. However, he did acknowledge that: 'I think it is also possible that a legal impediment to private use, so that such use would be unlawful, might also amount to unavailability for private use. An obvious example would be where a motor car was only insured for business use'.

Presumably, if Mr Upton had managed to exclude private use from his insurance policy, this would have meant that the car was 'made unavailable' for private use and the VAT would have been recoverable, but supposing he had then driven it uninsured? Presumably this will have to wait for another case. In the meantime, one wonders if insurance companies will start offering 'business only' policies?

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