Tuesday, April 04, 2006



Three cheers for the Court of Appeal decision in C&E Commrs v Elm Milk Ltd. Elm Milk purchased a Mercedes company car for use by its sole director He drove 50,000 miles a year on business. The car was normally kept in a car park near the Elm Milk office and within 50 yards of the director’s home. The keys were kept in the office. The director’s wife owned a Rover which the director used for all his private motoring. A board resolution recited that the company did not intend to make the car available for private use. The insurance cover was not restricted to business use, but that was because the company had been told that it is not possible to insure a car for business use only.

The VAT legislation provides that VAT is recoverable where a car is supplied to a taxable person who “intends to use the motor car…exclusively for the purposes of a business carried on by him”. It goes on to say that a person is not to be taken to intend to use a motor car exclusively for such a purpose if he intends “to make it available…to any person (including, where the taxable person is an individual, himself…) for private use, whether or not for a consideration”.

This tiny provision has been subject to a great deal of litigation. The view of HMRC seems to be that the provision was a joke by parliament and that, although it pretends to give tax relief, it is in fact impossible ever to show that a car is intended never to be made available for private use.

In C&E Commrs v Upton the Court of Appeal said that the question had to be decided at the moment of acquisition and in that case “the car was at that moment, as a matter of fact, available for Mr Upton’s private use, however little he then had any intention of actually so using it”. It decided that as a matter of law a person is deemed to intend the natural consequences of his actions, those actions being insuring the car for private use and keeping it close by. The Court commented that it was difficult to envisage circumstances in which a car could qualify for relief other than if it were insured for business use only – which seems to be generally accepted is impossible to do

In a later case C&E Commrs v Robbins, the judge commented, “The limited, perhaps very limited indeed, circumstances in which a taxable person might be able to get through these provisions…were addressed in the Upton case…one possibility mentioned being the situation where the motor car was insured only for business use. As Mr Robbins says, that may not be a practical solution”.

The Court of Appeal in Elm Milk Ltd has held that on the facts of that case Elm Milk had established its right to recover VAT. “The prohibitions on private use was backed up by the terms of the director’s employment and the arrangements as to the location of the keys”. This was in spite of the fact that HMRC had gleefully pointed out that the director had admitted in cross-examination that if an emergency arose when his wife’s Rover was not available he might use the Mercedes. The court regarded that as de minimus. This has been a favourite argument by HMRC. In an earlier case they asked the taxpayer what he would do if his daughter was seriously injured in an accident, the company car was sitting in the street with the keys in the ignition and his own car was in the garage some distance away. I hope I am not the only one to regard such arguments as “sick” and to welcome the fact that the judge in Elm Milk were not swayed by it.

So hurrah for some commonsense at last. I believe that only one other person has succeeded in the courts in establishing a right to recover input tax – and that was a Scottish case where, my friends North of the border tell me, the judges tend to apply the law with a fair modicum of commonsense.

This area seems to be a clear case where the law is an ass. It does not help anyone for parliament to grant a tax exemption that it is virtually impossible to achieve. It does not matter whether the fault lies with HMRC for guarding the exemption was extreme zeal, with parliament for hedging it around to such an extent that it is almost impossible to meet the qualifying conditions, or with the courts for interpreting the provisions in an unduly restrictive manner. What ought to matter is that reliefs that virtually never apply not only needlessly complicate the legislation but damage the integrity of the tax system by bringing it into disrepute when taxpayers come to realise that the promised relief is a mirage.

Will HMRC take defeat graciously? I doubt it. I expect them to seek leave to appeal the decision to the House of Lords.

Robert W Maas


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