The Court of Appeal’ (CoA) has dismissed HMRC's appeal in a case concerning whether a company is entitled to deduct VAT on a Mercedes car that had been purchased exclusively for business use and is not available for the private use of any person.
The taxpayer is a private company with one director, Mr P. The company is the landlord of a farm premises and also supplies consultancy services to the dairy trade and the leisure industry. The latter requires Mr P to do circa 50,000 miles a year. A board resolution was passed stating that a car (a Mercedes) was to be bought solely for business purposes only by Mr P, and that the company did not intend to make the car available for private use. Further, any private use would be a breach of an employee's terms of employment. When not in use, the car was locked in a car park near the office, and fifty yards from Mr P's home with the keys kept in the company office. The Tribunal had accepted the evidence of Mr P that all private motoring was done in Mrs P's Rover car.
The CoA considered the intention of Parliament in framing the terms of the input tax blocking in the way it did, but focused on two practical aspects:
1. In considering 'non-availability for private use' test, how much application and weight should be given to the relevant physical, contractual, and insurance constraints
2. How one differentiates this case from that of Upton t/a ‘Fagomatic’ (the sole proprietor vending machine operator driving a Lamborghini)
The CoA concluded that contractual arrangements between an employer and employee (in this case, deriving from the terms of the board resolution) can be sufficient to meet the 'non-availability for private use' test, and that HMRC had put undue emphasis on physical constraints.
The CoA differentiated Upton on the grounds that a sole proprietor is the sole decision maker, and cannot enter contractual arrangements with himself placing enforceable constraints upon the use of a car. This is in contrast to a company where, even if there is a sole director who is the directing force of the company, contractual constraints can be made via company law processes and where those constraints bind the actions of members and employees of the company. The CoA rejected an HMRC argument that the significance of the contractual constraints should be downgraded in the case of a single director company, as the director can unilaterally vary the terms of the board resolution at any time.
The CoA notes some confusion over the insurance cover position. The Tribunal had been led to understand that the insurance for the Mercedes covered Mrs P and anyone driving with her permission.
Despite this, the Tribunal concluded that, notwithstanding this cover, the 'non-availability for private use' test remained satisfied as private use of the Mercedes by any person would still be acting in defiance of the board resolution.
It later transpired that the insurance cover notes for both the Mercedes and Mrs P's Rover had been included in evidence, and the insurance cover examined by the Tribunal had unwittingly been that of the Rover.
The insurance for the Mercedes actually covered four named drivers - Mr P, Mrs P, their son, and his fiancée. HMRC argued that this mix-up was of sufficient significance that the Court should remit the case back to the Tribunal for a rehearing on the correct facts.
However, The CoA agreed with the High Court that there were not sufficient grounds to remit the case back to the Tribunal as its conclusions on the insurance position remained valid, notwithstanding the differences in the specified levels of cover.
The Court concluded that the contractual constraints deriving from the terms of the board resolution, supported by the degree of physical constraints, were enough to establish that the Mercedes was not available for private use. The CoA subsequently dismissed HMRC's appeal.
COMMENT: Although this case addresses a single director company, it may well encourage larger companies to try and enhance the possibility of input tax deduction on the purchase of company cars by incorporating the relevant use restrictions into board resolutions (assuming there is in reality the genuine intention that the cars are solely for business use).
No doubt HMRC will argue that this case cannot have wider implications because it was a single director company, and that, in their eyes, the case did not properly address the significance of the insurance cover arrangements. We will also have to wait and see whether this results in an appeal by HMRC to the House of Lords.
