© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
M7. Blocked input tax
GENERAL
- Restrictions on deduction to be interpreted strictly
"[28]...Any limitation on the right of deduction of VAT affects the level of the tax burden and must be applied in a similar manner in all the Member States. Consequently, derogations are permitted only in the cases expressly provided for in the Sixth Directive (see Joined Cases C‑177/99 and C‑181/99 Ampafrance and Sanofi [2000] ECR I-7013, paragraph 34; Metropol and Stadler , paragraph 42; and Case C‑371/07 Danfoss and AstraZeneca [2008] ECR I-0000, paragraph 26). Furthermore, provisions laying down derogations from the principle of the right to deduct VAT, which ensures the neutrality of that tax, are to be interpreted strictly ( Metropol and Stadler , paragraph 59)." (Magoora C-414/07)
"[59] Provisions laying down derogations from the principle of the right to deduct VAT, which ensures the neutrality of that tax, are to be interpreted strictly."(Metropol C-409/99)
MARGIN SCHEME GOODS
- Art, antiques, collector's items, second-hand goods within margin scheme blocked
"(1) Subject to paragraph (4) below, tax charged on the—
(a)supply;
...
(c)importation,
of any goods such as are described in paragraph (2) below which are supplied to, or imported by, a taxable person in the circumstances described in paragraph (3) below shall be excluded from any credit under section 25 of the Act;" (SI 1992/3222, Article 4)
The relevant goods
"(2) The goods referred to in paragraph (1) above are—
(a) works of art, antiques and collectors' items
(b) second-hand goods;" (SI 1992/3222, Article 4)
The relevant circumstances (margin scheme)
"(3) The circumstances of the supply or importation referred to in paragraph (1) above are—
(a) a supply on which, by virtue of an Order made under Section 50A of the Act or a corresponding provision of the Manx Act F26..., VAT was chargeable on the profit margin;
(b)(if the goods are a work of art, an antique or a collectors' item) the taxable person imported it himself;
(c)(if the goods are a work of art) it was supplied to the taxable person by its creator or his successor in title;
(4)
(4) Paragraph (1) above shall only apply to exclude from credit, tax chargeable on a supply of goods to or importation of goods by a taxable person in the circumstances set out in paragraph (3)(b) and (c) above if the taxable person—
(a)has opted to account for VAT chargeable on his supplies of such goods on the profit margin and
(b)has not elected to account for VAT chargeable on his supply of the goods by reference to its value, in accordance with the provisions of an Order made under section 50A of the Act." (SI 1992/3222, Article 4)
BUSINESS ENTERTAINMENT
- Goods or services to be used for business entertainment (unless for overseas customer)
"(1) Tax charged on any goods or services supplied to a taxable person, or on any goods imported by a taxable person, is to be excluded from any credit under section 25 of the Act, where the goods or services in question are used or to be used by the taxable person for the purposes of business entertainment unless the entertainment is provided for an overseas customer of the taxable person and is of a kind and on a scale which is reasonable, having regard to all the circumstances." (SI 1992/3222, Article 5)
Note the cap on chargeable consideration for any onward supply of a blocked service (Article 5(2)).
- Business entertainment: hospitality of any kind (except provided to employees)
"(3) For the purposes of this article, “business entertainment” means entertainment including hospitality of any kind provided by a taxable person in connection with a business carried on by him, but does not include the provision of any such entertainment for either or both—
(a)employees of the taxable person;
(b)if the taxable person is a body corporate, its directors or persons otherwise engaged in its management,
unless the provision of entertainment for persons such as are mentioned in sub- paragraph (a) and (b) above is incidental to its provision for others." (SI 1992/3222, Article 5)
- Overseas customer
"(4) For the purposes of this article “overseas customer”, in relation to a taxable person, means—
(a)any person who is not ordinarily resident nor carrying on a business in the United Kingdom or the Isle of Man and avails himself or herself, or may be expected to avail himself or herself, in the course of a business carried on by that person outside the United Kingdom and the Isle of Man, of any goods or services the supply of which forms part of the taxable person’s business; and
(b)any person who is not ordinarily resident in the United Kingdom or the Isle of Man and is acting, in relation to such goods or services, on behalf of an overseas customer as defined in paragraph (a) above or on behalf of any government or public authority outside the United Kingdom and the Isle of Man." (SI 1992/3222, Article 5)
GOODS INCORPORATED INTO ZERO-RATED BUILDING
- Goods other than building materials incorporated into building/site for purpose of ZR supply
"Where a taxable person constructing, or effecting any works to a building, in either case for the purpose of making a grant of a major interest in it or any part of it or its site which is of a description in Schedule 8 to the Act, incorporates goods other than building materials in any part of the building or its site, input tax on the supply or importation of the goods shall be excluded from credit under section 25 of the Act" (SI 1992/3222, Article 6)
CARS
- Legal basis: PVD Article 176
"The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Pending the entry into force of the provisions referred to in the first paragraph, Member States may retain all the exclusions provided for under their national laws at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession." (PVD Article 176)
"[25] However, in excluding from the right of deduction certain goods such as motor cars, the United Kingdom has not impaired the general system of the right of deduction, but has made use of an authorisation deriving from Article 11(4) of the Second Directive. This is a fortiori the case inasmuch as cars are goods which, by their nature, are capable of being used exclusively or partially for the private needs of the taxable person or of his staff.
[26] The answer to the first and second questions must therefore be that Article 11(4) of the Second Directive authorised Member States to introduce or retain, and Article 17(6) of the Sixth Directive authorises them to retain, general exclusions from the right to deduct the VAT payable on the purchase of motor cars used by a taxable person for the purposes of his taxable transactions, even though
- those cars were essential tools in the business of the taxable person concerned, or
- those cars could not, in a specific case, be used for private purposes by the taxable person concerned." (Royscot Industrial Leasing Ltd C-305/97)
"[33] The submission made by Mr Paines that art 7 is not incompatible with Community law was not disputed by Mr Conolly, and I am content on the basis of the Royscot case to accept that it is correct. Advocate General Leger explained in his opinion that member states had concerns about the difficulty of ensuring observance of the dividing line between the acquisition of cars for private purposes and the acquisition of cars for business purposes." (CEC v. Elm Milk Limited [2006] EWCA Civ 164, Arden LJ)
General rule
- Exclusion of right to deduct input tax on supply/importation of car
"(1) Subject to paragraph (2) to (2H) below tax charged on—
(a)the supply (including a letting on hire) to a taxable person;
...
(c)the importation by a taxable person,
of a motor car shall be excluded from any credit under section 25 of the Act." (SI 1992/3222, Article 7)
- Supply to T is hiring of vehicle: only 50% of input is blocked
"(2H) Where paragraph (1) above applies to a supply of a motor car on a letting on hire it shall apply to the tax charged on that supply as if for the word “tax” there were substituted “one half of the tax" (SI 1992/3222, Article 7)
See Authorising Decision.
Exceptions
(1) Qualifying car intended exclusively for use for business purposes or primarily for hire/driving lessons
"(2) Paragraph (1) above does not apply where—
(a)the motor car is—
(i) a qualifying motor car;
(ii) supplied (including on a letting on hire) to, or imported by, a taxable person; and
(iii) the relevant condition is satisfied;" (SI 1992/3222, Article 7)
- Qualifying car: car not previously supplied/imported in circumstances where input deduction was blocked
"(2A) Subject to paragraph (2B) and (2C) below, for the purposes of paragraph (2)(a) and (b) above a motor car is a qualifying motor car if—
(a) it has never been supplied or imported in circumstances in which the VAT on that supply or importation was wholly excluded from credit as input tax by virtue of paragraph (1) above; or
(b) a taxable person has elected for it to be treated as such." (SI 1992/3222, Article 7)
- Intention as to use rather than actual use (but Tribunal likely to test against actual use)
"[6] Secondly, the exceptions in art 7 (2E) are based around the intention to use the car rather than use itself. No doubt that is because the deductibility of the input tax has to be determined when the car is purchased. The time for assessing the relevant intentions is at the time of the supply. Nonetheless the need to find intention to use rather than actual use adds an additional layer of difficulty. In the Upton case, the conclusion as to intention as to use departed from the evidence as to actual use after acquisition although it was not suggested that there had been any change of intention. This highlights the point that the Upton case turns on its very special facts since in the usual way consciously or unconsciously a tribunal or court would seek to test any provisional finding as to the taxpayer's intention as to use by reference to what use had actually taken place after the alleged intention was formed." (CEC v. Elm Milk Limited [2006] EWCA Civ 164)
(a) Intention to use exclusively for purposes of business
"(2E) For the purposes of paragraph (2)(a) above the relevant condition is that the letting on hire, supply or importation (as the case may be) is to a taxable person who intends to use the motor car either—
(a) exclusively for the purposes of a business carried on by him, but this is subject to paragraph (2G) below;..." (SI 1992/3222, Article 7)
Must not intend to hire for less than market value
"(2G) A taxable person shall not be taken to intend to use a motor car exclusively for the purposes of a business carried on by him if he intends to—
(a) let it on hire to any person either for no consideration or for a consideration which is less than that which would be payable in money if it were a commercial transaction conducted at arms length;..." (SI 1992/3222, Article 7)
Must not intend to not intend to make available for private use (otherwise than by hire) even for consideration
"(2G) A taxable person shall not be taken to intend to use a motor car exclusively for the purposes of a business carried on by him if he intends to—
(a) let it on hire to any person either for no consideration or for a consideration which is less than that which would be payable in money if it were a commercial transaction conducted at arms length; or
(b) make it available (otherwise than by letting it on hire) to any person (including, where the taxable person is an individual, himself, or where the taxable person is a partnership, a partner) for private use, whether or not for a consideration." (SI 1992/3222, Article 7)
- Car intended to be made available for private use even if no intention to use it privately if facts mean it is available (and those facts are intended)
"[6] Secondly, the exceptions in art 7 (2E) are based around the intention to use the car rather than use itself. No doubt that is because the deductibility of the input tax has to be determined when the car is purchased. The time for assessing the relevant intentions is at the time of the supply. Nonetheless the need to find intention to use rather than actual use adds an additional layer of difficulty. In the Upton case, the conclusion as to intention as to use departed from the evidence as to actual use after acquisition although it was not suggested that there had been any change of intention. This highlights the point that the Upton case turns on its very special facts since in the usual way consciously or unconsciously a tribunal or court would seek to test any provisional finding as to the taxpayer's intention as to use by reference to what use had actually taken place after the alleged intention was formed." (CEC v. Elm Milk Limited [2006] EWCA Civ 164)
[23]...But what is plain is that the Tribunal did not recognise that Mr. Upton’s deliberate action in acquiring the car and obtaining insurance permitting private use was to make the car available to himself for private use and that he must be taken to have intended that result in the absence of evidence to the contrary, even if he did not intend to use the car privately..." (Upton v. CCE [2002] EWCA Civ 520, Peter Gibson LJ)
- Car made available for private use if supplied with no physical or legal restraint as to that use
"[41] If an article is supplied by one person to another with no physical or legal restraint as to a particular use, then it appears to me that, as a matter of ordinary language, the article has been “made available” for that use. The fact that neither the supplier nor the recipient expects, or even intends, the article to be put to the particular use does not prevent the article being “available” for that use, if there is no physical or legal restraint on such use by the recipient. Further, it cannot be said, at any rate as a matter of ordinary language, that the supplier does not “make” the article available for that use, simply because he does not expect or intend it to be put to that use. If he supplies the article so that it is, as a matter of fact, available for a particular use, then he has, in normal parlance, made it available for that use..." (Upton v. CCE [2002] EWCA Civ 520, Neuberger J)
- Car still available to T even if T gives custody to another, if T could compel its return
"[48]...It was suggested on behalf of the Commissioners during argument that, if a sole trader acquired a motor car for the sole use of employees in his business, and arranged for the motor car to be housed some distance away from his home, and for the keys to be kept by an employee, with a view to its only being used for business purposes, the motor car would not thereby be made available for private use. I find that difficult to accept. The person in control of the motor car and of the keys would be an employee of the trader, and could be compelled to provide him with the motor car and the keys for whatever purpose the trader chose..."(Upton v. CCE [2002] EWCA Civ 520, Neuberger J - see §49 on situation where T hires to another)
- Legal impediment, e.g. not insured for use, may mean not available for that use
"[49]...However, as mentioned, 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. However, it is unnecessary to decide whether that would be sufficient to enable a sole trader taxpayer to avoid the effect of paragraph 7(2G)(b). Even if only physical unavailability will do, I do not think the fact that the Vice-Chancellor’s decision would lead to it being difficult for a sole trader to be able to take advantage of paragraph 7(2E) justifies a different conclusion from that which he reached." (Upton v. CCE [2002] EWCA Civ 520, Neuberger J)
- Contractual exclusion gives powerful argument not available for such use
"[41] ... On the other hand, if the supplier provides the article under a contract which bona fide precludes the recipient from putting it to a particular use, or if it is supplied only at such times that it cannot be put to a particular use, then there is clearly a powerful argument for saying that it has not been “made available” for such use." (Upton v. CCE [2002] EWCA Civ 520, Neuberger J)
- Asset made available to third party requires some step by owner to make it so available
"[33]...He however recognised that the implications of the very act of acquiring the car will be different, according to whether it is said thereby to be made available to another person, on the one hand; or to the taxpayer himself. The Vice-Chancellor therefore said, [2001] STC at p 918e:
“In the case of a private use by a third party a car which is intrinsically capable of private use will not be available for that use unless the taxable person as its owner takes some steps to make it so. But in the case of private use by the taxable person the consequence of his acquisition of the car will be to make it available for his private use unless he take positive steps to remove it”
[34] That distinction is, with great respect, entirely correct as a matter of the factual implications of a mere purchase of a vehicle. It therefore followed that if, at the time of purchase, the owner’s intentions did not include the taking of any steps to exclude what the Vice-Chancellor, [2001] STC at p918f, called the necessary consequence of his ownership, then that necessary consequence indeed followed: that the car was available for his use." (Upton v. CCE [2002] EWCA Civ 520, Buxton LJ)
- Obtaining insurance for private use meaning car available for that use
"[22]...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...
[23]...But what is plain is that the Tribunal did not recognise that Mr. Upton’s deliberate action in acquiring the car and obtaining insurance permitting private use was to make the car available to himself for private use and that he must be taken to have intended that result in the absence of evidence to the contrary, even if he did not intend to use the car privately..." (Upton v. CCE [2002] EWCA Civ 520, Peter Gibson LJ)
(b) Intention to use primarily for hire/driving lessons
"(2E) For the purposes of paragraph (2)(a) above the relevant condition is that the letting on hire, supply or importation (as the case may be) is to a taxable person who intends to use the motor car either—
...
(b) primarily for a relevant purpose."
Relevant purpose: self-drive hire, with driver, driving lessons
"(2F) For the purposes of paragraph (2E) above a relevant purpose, in relation to a motor car which is let on hire or supplied to, F56... or imported by, a taxable person (as the case may be), is any of the following purposes—
(a)to provide it on hire with the services of a driver for the purpose of carrying passengers;
(b)to provide it for self-drive hire; or
(c)to use it as a vehicle in which instruction in the driving of a motor car is to be given by him." (SI 1992/3222, Article 7)
- Self-drive hire: hirer expected to drive + limits on expected duration of hire
"(3)...
(b) “self-drive hire” means hire where the hirer is the person normally expected to drive the motor car and the period of hire to each hirer, together with the period of hire of any other motor car expected to be hired to him by the taxable person—
(i) will normally be less than 30 consecutive days; and
(ii) will normally be less than 90 days in any period of 12 months." (SI 1992/3222, Article 7)
(2) Stock in trade of motor manufacturer or dealer
"(2) Paragraph (1) above does not apply where—
...
(aa) the motor car forms part of the stock in trade of a motor manufacturer or a motor dealer" (SI 1992/3222, Article 7)
(3) Hire of car on which input tax has previously been wholly blocked
"(2) Paragraph (1) above does not apply where—
...
(b) the supply is a letting on hire of a motor car which is not a qualifying motor car (other than a supply on a letting on hire of a motor car which is not a qualifying motor car by virtue only of the application of paragraph (2C) below, to a person whose supply on a letting on hire prior to 1st August 1995 resulted in the application of that paragraph)" (SI 1992/3222, Article 7)
(4) Unused car supplied to taxable person who lets taxable person who makes zero-rated hire supplies to disabled persons
"(2) Paragraph (1) above does not apply where—
...
(c) the motor car is unused and is supplied to a taxable person whose only taxable supplies are concerned with the letting of motor cars on hire to another taxable person whose business consists predominantly of making supplies of a description falling within item 14 of Group 12 of Schedule 8 to the Act;
(d) the motor car is unused and is supplied on a letting on hire to a taxable person whose business consists predominantly of making supplies of a description falling within item 14 of Group 12 of Schedule 8 to the Act, by a taxable person whose only taxable supplies are concerned with the letting on hire of motor cars to such a taxable person." (SI 1992/3222, Article 7)
"The letting on hire of a motor vehicle for a period of not less than 3 years to a disabled person in receipt of a disability living allowance by virtue of entitlement to the mobility component, of a personal independence payment by virtue of entitlement to the mobility component, of an armed forces independence payment, of mobility supplement, of disability assistance for children and young people by virtue of entitlement to the mobility component or of disability assistance for working age people by virtue of entitlement to the mobility component where the lessor’s business consists predominantly of the provision of motor vehicles to such persons." (VATA, Sch 8, Group 12, item 14)