© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
M7a. Blocked input:
Cars
GENERAL
- 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)
- Parliament regarded deduction as the exception rather than the rule
"[36] The policy is clear, particularly when the reason is recalled from the Royscot case for member states having the option to exclude VAT paid on the purchase of cars in the first place. Tax paid on the purchase of cars for private use is not deductible and it would be anomalous and unfair if that rule could be avoided by controllers of organisations who buy cars ostensibly for business purposes but also for private purposes. Cars are by nature mobile and capable of mixed business and private use. The convoluted nature of the provisions demonstrate that Parliament regards the deduction of VAT on the purchase of cars as the exception rather than the rule and something that has to be subject to rigorous scrutiny and the satisfaction of tough conditions. There is no discretion in the Commissioners to waive compliance with these conditions." (CEC v. Elm Milk Limited [2006] EWCA Civ 164, Arden LJ)
MOTOR CAR
- Note the deemed supply on producing or converting to a motor car
See F7. Cars
Meaning of motor car
""“Motor car” means any motor vehicle of a kind normally used on public roads which has three or more wheels and either—
(a) is constructed or adapted solely or mainly for the carriage of passengers; or
(b) has to the rear of the driver’s seat roofed accommodation which is fitted with side windows or which is constructed or adapted for the fitting of side windows;
but does not include—
(i) vehicles capable of accommodating only one person;
(ii) vehicles which meet the requirements of Schedule 6 to the Road Vehicles (Construction and Use) Regulations 1986 and are capable of carrying 12 or more seated persons;
(iia) vehicles which would otherwise meet the requirements of sub-paragraph (ii) but which can carry fewer than 12 seated persons solely because they have been adapted for wheelchair users;
(iii) vehicles of not less than three tonnes unladen weight (as defined in the Table to regulation 3(2) of the Road Vehicles (Construction and Use) Regulations 1986);
(iv) vehicles constructed to carry a payload (the difference between a vehicle’s kerb weight (as defined in the Table to regulation 3(2) of the Road Vehicles (Construction and Use) Regulations 1986) and its maximum gross weight (as defined in that Table)) of one tonne or more;
(v) caravans, ambulances and prison vans;
(vi) vehicles constructed for a special purpose other than the carriage of persons and having no other accommodation for carrying persons than such as is incidental to that purpose;" (SI 1992/3222, Article 2)
- Temporarily installed seats behind driver's are may be sufficient
"[35] The definition of a motor car is set out above. A commercial vehicle will become a motor car if seats are fitted behind the driver's seat and/or if there are clear side windows. Although the seats fitted in the present case were described as temporary, and folded up so that they were only used for passengers when a number of people need to use the vehicle, e.g. when going to a trade show, they still constituted "roofed accommodation to the rear of the driver's seat. In addition, the side and rear windows which had been blacked out were cleared. Mr Spencer was therefore correct to conclude that the commercial vehicle had been converted to a car." (Three Shires Trailers Limited v. HMRC [2024] UKFTT 79 (TC), Judge McKeever)
- Commercial vehicle intended to be converted to motor car not treated as motor car
"[34] Article 5 of the Order applies where a taxable person converts a vehicle into a motor car and input tax was deductible on the supply of the original vehicle to the taxable person. The Appellant acquired commercial vehicles on which input tax was deductible. Mr Merson, on Mr Spencer's advice initially disallowed the input tax. Mr Spencer said he gave this advice because the vehicles were converted within days of their acquisition. That advice was clearly wrong. At the time when the vehicles were acquired, they were indisputably commercial vehicles and the Appellant was entitled to deduct the input tax on them. The reviewing officer disagreed with Mr Spencer on this point and allowed the input tax, but charged output tax on the basis that the commercial vehicles were converted into non-qualifying cars." (Three Shires Trailers Limited v. HMRC [2024] UKFTT 79 (TC), Judge McKeever)
Qualifying car
GENERAL RULE
- 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)
"[40] The first requirement is that the vehicle has never been subject to an input tax block. That condition is satisfied in the present case so the vehicles were "qualifying motor cars"." (Three Shires Trailers Limited v. HMRC [2024] UKFTT 79 (TC), Judge McKeever)
- 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)
Hiring of vehicle
- 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.
- Finance leases treated as supply of goods: still treated as hire
"The EON decision has also raised questions in relation to the input tax block as it applies to FL cars. HMRC can confirm that whether the eventual VAT treatment of FL supplies is as goods or as services FL cars will continue to have a 50 per cent input tax block applied to them.
Where taxpayers are supplied cars for use in their business then unless the cars are stock in trade (for example, demonstrator cars at car showrooms), the car is central to their business (for example, driving instructors) or the car is not made available for private use, the input tax they incur is subject to a block on deduction. Normally input tax is wholly blocked but where the supply received is a 'letting on hire' (such as under an FL) the block applies at 50 per cent, rather than at 100 per cent, of the tax incurred.
Whether FL supplies are eventually concluded to be supplies of goods, rather than supplies of services, will not affect the fact that they are 'lettings on hire'. Consequently no change to input tax blocked on FL supplies can be needed." (HMRC Brief 37/12)
EXCEPTIONS
(1A) QUALIFYING CAR INTENDED EXCLUSIVELY FOR BUSINESS USE
"(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)
"(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)
- 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)
"[42]...As Peter Gibson LJ observed in Upton at [21] quoted above, it is the intention at the time of acquisition that matters. The fact that a car is made available to a person for private use or is so used after its acquisition is not determinative but that fact may be highly relevant in deciding what the taxable person's intention was at the time of acquisition." (Collins v. HMRC [2012] UKFTT 220 (TC), Judge Sinfield)
- Absence of business insurance due to mistake not determinative of intention
"[32] I accept the lack of business use on some insurance documents was by reason of the illness of the Appellant’s wife and I attach no weight to those documents as rationale for the intention of the use of the cars." (Graham v. HMRC [2019] UKFTT 517 (TC), Judge Allatt)
CONDITION 1: 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)
- Availability of alternative car for private purposes may be significant
"[50] As to the evidence of where the cars were parked overnight. The cars in question were over time Land Cruisers, a Volvo and two Mercedes. Mr Allen privately owns a Mercedes; Mr Munnerlly privately owns a Volvo (and his wife has a newer model). Both of their private cars of are of the same specification as the saloon cars which Zone owned. The Tribunal finds that there was no need for either director to use the saloon cars for private purposes." (Zone Contractors Limited v. HMRC [2016] UKFTT 594 (TC), Judge Brown)
- Off the shelf contract not reflecting real intention
"[8]...Mr McMaster's explanation was that the appellant had bought a standard form of conditions of employment from its local Chamber of Commerce, and had adopted it without, as he acknowledged, considering whether it was entirely appropriate for the appellant's needs. I accept that evidence; the document has the hallmarks of a general-purpose agreement whose user is intended to select only one of the alternatives provided to cater for different matters (a course which the appellant has sometimes failed to adopt, those clauses which I have set out being a pertinent example). It contains other clauses of doubtful, if any, relevance to the appellant's business and I am satisfied that the appellant did adopt the document uncritically. I also accept Mr McMaster's evidence that he had attempted to effect business-only insurance cover but that the hire company had insisted that all risks were covered, even if private use was prohibited." (Masterguard Security Services Limited (2004) VATD18531, Judge Bishopp)
- Not satisfied where T voluntarily replaced old car in global lease agreement with newer, much more valuable car and did not increase rent
"[32] It seems to us that the tribunal have ultimately tested the matter by approaching it from various directions. First they have said that if the new Rolls Royce were being rented to Eden Ltd on a commercial basis, they would expect a separate agreement to recognise the enhanced value of that new car [para 46 first sentence]. Secondly they have said that if the new Rolls Royce was in the inventory as opposed to the old, they would expect that the overall rent would have been larger [second sentence same para]. Thirdly they have said that the applicant could have fulfilled its contractual obligations to Eden Ltd by supplying a car of much less a value to replace the Rolls Royce Spirit, worth only £10,000 or so. [para 47.]
[33] Mr Fraser would criticise their suggestion that a separate agreement should ever have been contemplated. We are not convinced that he is right in this connection. However, even if that criticism were accepted, each of the second and third findings amply supports the view that the tribunal were addressing the right question, and amply supports the view that they were entitled to come to the conclusion that they did. That in turn supports the view that the judge's decision cannot be criticised." (Crown & Cushion Hotel (Chipping Norton Ltd) v. CEC [2004] EWCA Civ 516, Waller, Neuberger LJJ (PTA Decision))
CONDITION 2: Must not intend to make available for private use
"(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
"[37] In my judgment, while, if "available" meant only "physically available", there would undoubtedly be fewer cases where VAT paid on the purchase of a car could be deducted, that itself is not the object of the provision. The object is to prevent claims to deduct tax on cars purchased for business save where the possibility of private use is excluded. That purpose can equally well be achieved if the concept of availability is not restricted to physical availability but includes also cases of unavailability due to the imposition of effective legal restraints." (CEC v. Elm Milk Limited [2006] EWCA Civ 164)
"[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)
- Contemplation of things that might happen in unlikely, emergency situation not affecting intention
"[29] I also consider that the employer would meet the requirement of not intending to make the car available for private use by the employee even if the employer might, perhaps under pressure, acknowledge the possibility that an employee might, in exceptional circumstances, break the contractual condition. In this case Mr Phillips had said to an officer of Customs and Excise that, if an unforeseen emergency had arisen at a time when his wife's Rover was not available, he might have used the Mercedes. He added that in that situation a hire charge would be made by Elm Milk for the private use of the car. The tribunal thought that that was 'a bit far fetched.' So do I. Realistically, whether in the actual case of Elm Milk and Mr Phillips, or in a hypothetical case of any employer and employee with a contractual inhibition or use for private purposes, use for a non-business purpose in a genuine emergency situation would be a breach of the condition, but few reasonable employers would do anything about it.
[30] The important point, in my view, is this. The question is not whether it is possible to imagine any circumstances, however exceptional, in which the car might be used for a private purpose, despite a contractual condition that it should not be so used. The question is whether, at the time when the employer purchases the car, he intends to make it available to the employee for private use. If the employer's intention is to make it available to the employee for business use and subject to a contractual prohibition of private use, and if the employer genuinely intends the prohibition to mean what it says, then in my judgment, the case is, from the taxpayer's point of view, on the right side, not the wrong side, of art 7(2G)(b)." (CEC v. Elm Milk Ltd [2005] EWHC 366 (Ch), Park J, approved CEC v. Elm Milk Limited [2006] EWCA Civ 164, §34, Arden LJ)
"[56] As regards private use, the Tribunal cannot accept HMRC’s assertion that private use would include buying cigarettes or lunch whilst out on a business journey, or even going off site to collect lunch. Such use must be entirely de minimis such as to conclude that it is non-business use at all. Further if the legislation rendered it a requirement that if such use were to be both prevented, enforced and monitored it would render the ability to recover one which was entirely hollow as no entity could comply. That such a conclusion is a reasonable one to draw is, in the Tribunal’s view implicit in the drafting of the legislation and in the articulation of its purpose. The legislation requires that it not be the intention of the taxpayer to make the cars available for private use. It is an intention which, certainly in the case of an emergency, and periodically otherwise, may not be one that is fulfilled so long as there is some form of enforcement, legal or physical, to the breach or abuse of such an intention." (Zone Contractors Limited v. HMRC [2016] UKFTT 594 (TC), Judge Brown)
- Actual permitted use in emergency not reflecting intention at time of acquisition
"[13]... I recognise that the single authorisation of the use of a car for a hospital visit, at first sight, counts against the appellant but, as Buxton LJ also said (at paragraph 29 of his judgment) “The question has to be decided as at the moment of acquisition of the car.” I have no doubt the appellant had not foreseen such an eventuality when it acquired the car, and have reached the view that this one incident does not disqualify it from credit. In short, I am satisfied that, in the circumstances of this case, the statutory test is met and that the appellant is entitled to the credit." (Masterguard Security Services Limited (2004) VATD18531, Judge Bishopp)
Private use (meaning)
- Buying cigarettes or lunch whilst on business journey/going off site to collect lunch not private use
"[56] As regards private use, the Tribunal cannot accept HMRC’s assertion that private use would include buying cigarettes or lunch whilst out on a business journey, or even going off site to collect lunch. Such use must be entirely de minimis such as to conclude that it is non-business use at all. Further if the legislation rendered it a requirement that if such use were to be both prevented, enforced and monitored it would render the ability to recover one which was entirely hollow as no entity could comply. That such a conclusion is a reasonable one to draw is, in the Tribunal’s view implicit in the drafting of the legislation and in the articulation of its purpose. The legislation requires that it not be the intention of the taxpayer to make the cars available for private use. It is an intention which, certainly in the case of an emergency, and periodically otherwise, may not be one that is fulfilled so long as there is some form of enforcement, legal or physical, to the breach or abuse of such an intention." (Zone Contractors Limited v. HMRC [2016] UKFTT 594 (TC), Judge Brown)
- Employees using vehicles to drive to next worker's house for changeover is business use because it increases available time
"[3] ... The guard finishing his shift drives to the other's home to pick him up, and they then travel together in the appellant's vehicle to the former's home, where he alights, and the relieving guard starts his shift. Sometimes it is not possible to arrange a changeover in this fashion, and a guard finishing his shift travels to his home, leaving the vehicle parked outside. It might remain there until the guard begins his next shift—though in this case he remains on call in case of emergency in the meantime—or it might be collected by the appellant for use by another guard.
[4] The respondents had at first taken the view that this practice amounted to use by the guards of the vehicles for their own purposes, but later they accepted (and in my opinion rightly) that this was not correct. By eliminating the need to travel to Redditch (about 25 miles from Wolverhampton—the distance would of course be different for guards living and working elsewhere) the appellant has increased the time the guards are available to undertake productive work. It seems to me quite clear that the changeover method is of considerable advantage to the appellant, and that the benefit to the guards, though not insignificant, is merely incidental." (Masterguard Security Services Limited (2004) VATD18531, Judge Bishopp)
- Asset "made" available to owner by obtaining ownership and control (unless positive step taken to exclude)
"[30] Further, I see no escape from the conclusion that Mr Upton had made the car available to himself. He did that, tautologically enough, by providing himself with ownership and control of the car. And, as we have seen, the availability that was created was availability for private as well as for business use." (Upton v. CCE [2002] EWCA Civ 520, Buxton LJ)
Unless positive step taken to exclude availability
"[34] ... 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 . I do not think that this analysis involved the writing into the Regulation of any requirement that is not there to be found, nor did it apply a different test in the case of the man who makes the car available to himself, as compared with the man who makes the car available to a third party. Rather, it simply recognises the particular factual implications for the Regulation of a purchase of a car that is to be available to, and used by, the purchaser himself." (Upton v. CCE [2002] EWCA Civ 520, Buxton LJ)
Odd concept: owner making his own property available to himself
"[40] Ignoring, for the moment, the unusual concept of a person making his own property available to himself, what does the provision mean when it refers to an intention to make a motor car available to a person other than the taxpayer for private use?..." (Upton v. CCE [2002] EWCA Civ 520, Neuberger J)
Sole trader position v. company
- Advertisement on car does not mean not being used for private use
"[44] ... Mr Collins also stated in evidence that when he drove the car other than for delivery to a customer, it had removable magnetic panels advertising the Unique Vehicles business stuck on it. The fact that the car had the magnetic panels stuck on it does not mean that the use of the car was exclusively for business purposes. In travelling between the business premises and his home or elsewhere, Mr Collins was using the car for private purposes..." (Collins v. HMRC [2012] UKFTT 220 (TC), Judge Sinfield)
- 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)
- Difficulties for sole trader to meet test v. one man company
"[30] Of course, that does not help Mr Shaw here because he is a sole trader; he cannot make a binding contract with himself and he cannot indicate that he will abide by a resolution made by his employer as the employer is himself. I do not read the Elm Milk case as any form of relaxation of the principles decided by the Court of Appeal in Upton and followed by Lloyd J in Robbins. The test remains as the Upton case decided but a company taxpayer, even a one-man band company as in Elm Milk, is entitled by contract sufficiently to achieve a situation in which the courts will accept that legally the use of the car has been made unavailable for private purposes.
[31] The result does seem to me an unfortunate consequence that appears to me unfairly to put sole traders at a disadvantage in comparison with their competitors who have organised themselves as companies, even as what one might call one-man companies. But the fact that there is an unfortunate consequence does not enable me to escape the reasoning of the Court of Appeal.
...
[48] Mr Shaw has addressed me with moderation and good sense, and I must say I feel a great deal of sympathy with his position, especially to the extent, as now underlined by Elm Milk, that as a sole trader, he seems to be put at a disadvantage to his competitors or colleagues who have organised themselves as companies albeit even only one-man companies. If (2G) can be escaped by so insubstantial a mechanism as a contract between a sole director and his own company, it seems a little hard—or more than a little hard—on individual sole traders that no corresponding escape can be devised for them.
[49] It is difficult also to imagine that Parliament intended to devise a test which expressly includes sole traders and yet is such that—fanciful circumstances apart—it is hard to see how a sole trader could ever pass the test, especially if, as observations in the cases suggest, it is difficult, impossible or unreasonably costly to obtain 'business only' insurance cover for a sole trader's motor-car. But all that, I fear, is no assistance to Mr Shaw unless I can escape Upton as a binding authority. I do not find that I am able to escape Upton as a binding authority and accordingly I must allow the appeal." (HMRC v. Shaw [2006] EWHC 3699 (Ch), Lindsay J)
Equally applicable to partnerships
"[44] Yet again, we observe that Lindsay J's comments at paragraphs 47 and 49 of his judgment are equally applicable to partnerships as to sole traders." (Fielding v. HMRC (2007) VATD 20391, Judge Demack)
Physical restraints
- 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)
- Putting keys in safe amounting to a "barrier"
"[46] He put a physical impediment (by way of securing the keys in a safe to which only Mr Graham had the code) to prevent their use by his children and his wife.
[47] It remains the case that despite these precautions Mr Graham himself had no legal impediment to using the vehicle, and had access to the cars from his home.
[48] However, he had put a barrier, however slight, in the form of keeping the keys in the safe. Having shown that he did not intend to use the car privately, and that he had at least two other cars (the private cars of him and his wife) available to him, it appears to me that this barrier, whilst minimal physically, is nevertheless present to a greater degree mentally to prevent Mr Graham using the cars." (Graham v. HMRC [2019] UKFTT 517 (TC), Judge Allatt)
Legal restraints
- Mileage logs may be a critical part of the evidence where T relies solely on physical restriction
"[53] HMRC’s case was that unless a taxpayer maintains mileage logs to evidence that there is, as a matter of ex post fact, no actual private use recovery of input tax recovery is not possible. By reference to the analysis in Elm Milk that simply is not an accurate reflection of the case law. Absent some legal restriction on use, and where a taxpayer relies only on the physical restrictions to use, it may be the case that mileage logs are either the best form of evidence or potentially even critical. However, the Court of Appeal has made clear that legal restrictions are sufficient, particularly if supported by physical restrictions, such as requiring the cars to be stored overnight at company premises." (Zone Contractors Limited v. HMRC [2016] UKFTT 594 (TC), Judge Brown)
- Not insured for private 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)
"[51] In response to the Tribunal’s questions as to what restraints or measures in this case would be sufficient from the perspective of HMRC, Mr Cameron did helpfully suggest by way of a non-exhaustive list that:
(a) The policy of insurance for the Audi Q5 could have been amended as soon as possible to permit business use only;
(b) It would have been open to the company to agree to restrict the use of the motor car by its directors/ employees to business use only, to be buttressed by a condition that any use otherwise than for business would be grounds for dismissal, and for this to be recorded in the company minutes." (London Drylining Ltd v. HMRC [2023] UKFTT 9 (TC), Judge Lee)
"[20] Given the general thrust of the reasoning of the Court of Appeal, it is tempting to suggest that an intention (carried through into an action) to insure a motor car solely for business use ought to be no more effective from the sole trader taxpayer’s point of view in circumventing the disqualifying condition than setting up “pool car” arrangements; the taxpayer still has the power, as owner of the car, to change his or her mind at any time and extend the insurance cover to private use. If that possibility remains open from the outset, can it properly be said that the taxpayer had no intention at the outset to “make [the car] available… to… himself… for private use”?
[21] We have grappled at length with this argument, but in the end we have decided the better view is that if a taxpayer has, with the intention of satisfying the relevant condition, specifically arranged and maintained insurance cover which extends only to business use of the car (and has a settled intention to maintain that state of affairs throughout his or her period of ownership), then (following the suggestion to that effect made by Neuberger J in Upton), it is permissible for a tribunal to make a finding of fact that the taxpayer had no intention, when acquiring the car, to make it available to any person, including himself (or herself), for personal use. Such a finding can, of course, only actually be made if it is justified by reference to the evidence as a whole in the particular case." (Borton v. HMRC [2016] UKFTT 472 (TC), Judge Poole)
- 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)
- 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)
"[49]...(b) The fact that the policy of insurance for the period 1 February 2021 to 1 February 2022 described the permitted use of the car as “social, domestic, pleasure and commuting”, without reference at all to business use. We do not accept, on the balance of probabilities, that this was a result of clerical or admin error on the part of the insurers. If this had been an error, it would have been more likely than not that the Appellant (or its co-directors/ employees) would have noticed the mistake and taken steps to rectify the error as soon as the insurance documentation was received when the policy was initially taken out, and at subsequent renewals." (London Drylining Ltd v. HMRC [2023] UKFTT 9 (TC), Judge Lee)
Or: insurance for private use is the lowest level of cover
"[57] HMRC relied upon the insurance cover and asserted that the documents prevented recovery. With respect the Tribunal rejects any reliance on the insurance documentation. It is not clear whether the letter from Adler concerned the cars or not. It seems perfectly possible that the commercial fleet included the cars, certainly the 2013 Cobra review of renewal covered all vehicles. Further, as the director in Elm Milk established when contacting his insurance company the answer was the same. Social, domestic and pleasure is the lowest level of insurance cover for cars. Business use is in addition to social, domestic and pleasure. It does not appear possible to have a policy limited to business cover. To require it as evidence of a real intention to limit private use would be to render it impossible to comply with. The tribunal and subsequent courts in Elm Milk did not consider it a factor preventing recovery of input tax and neither does this Tribunal." (Zone Contractors Limited v. HMRC [2016] UKFTT 594 (TC), Judge Brown)
- Contractual restriction on private use of car by employee would be respected if genuine and not colourable
"[27] What, however, is the position in an employer and employee case where the employer provides the car on terms that the employee may use it for business purposes only and may not use it for private purposes? In my judgment, provided that those contractual terms are genuine in all respects, 'the relevant condition' referred to in art 7(2)(a)(iii) is satisfied and, assuming that all other requirements that input tax recovery are also fulfilled, the employer is entitled to recover the input tax included in the price of the car. The requirement which the employer must fulfil in order not to fall foul of art 7(2G)(b) is that, at the time when the employer acquires the car, he must not intend to make it available for the employee's private use. If he intends to provide it to the employee subject to a contractual stipulation that the employee may not use it privately, and if that contractual stipulation is genuine and not colourable, it seems to me that the requirement is met. At the very least, it is open to a tribunal to find that it is met.
[28]...However, I do not accept that, in the absence of such physical arrangements, art 7(2G)(b) is always going to prevent the employer from recovering the input tax. If an employer trusts his employees to observe a contractually binding condition, then surely he (the employer) can say that he does not intend to make the car available to be used in a way which would involve a breach of the condition..." (CEC v. Elm Milk Ltd [2005] EWHC 366 (Ch), Park J, approved CEC v. Elm Milk Limited [2006] EWCA Civ 164, §34, Arden LJ)
"[48] Critical to the decision of the Tribunal in this case is the terms of the employment contract. The Tribunal considers that the terms of the contract are explicit and binding. Pursuant to the clause set out in paragraph 24 above employees are prohibited from using company vehicles for private purposes, they are told they will be subject to disciplinary procedures. The clause also requires that the cars be delivered at the end of the day to an address nominated by the directors.
[49] All of the Zone witnesses stated that all members of staff signed the contract terms. Both directors confirmed that they were subject to the same terms and conditions. That evidence was not challenged by HMRC..." (Zone Contractors Limited v. HMRC [2016] UKFTT 594 (TC), Judge Brown)
- Board resolution of sole director company restricting sole director from private use of vehicle accepted as restriction on such use
"[9] The tribunal heard evidence from Mr Phillips, whom it accepted as a witness of truth. It found that the car was purchased for business use and also that the company and Mr Phillips intended to be bound by the board resolution (decision paras 10 and 11).
...
[40] In the present case the prohibition was backed up by the terms of Mr Phillips' employment and in addition the arrangements as to the location of the keys. The tribunal accepted Mr Phillips' evidence that he intended to be bound by the terms of the board resolution prohibiting from using the car for private use. There is no doubt that a company can enter into a binding employment contract with its sole director, even where that director is also the controlling shareholder: see Lee v Lee's Air Farming Ltd [1961] AC 12, a decision of the Privy Council. Mr Paines contends that the restrictions are worthless in this case because they can be revoked at any time by Mr Phillips and would be automatically revoked if he were to use the car for private purposes. The first part of that submission is not open to Mr Paines in the light of the tribunal's findings to which I have referred. As to the latter part of that submission, the question whether the restrictions are revoked would depend on what should be inferred to be the intention of the company in that situation. It would not necessarily follow that the intention of the company would be to lift the restrictions rather than to enforce any remedy for breach." (CEC v. Elm Milk Limited [2006] EWCA Civ 164, Arden LJ)
- Non-binding agreement between directors not sufficient
"[44] We accept that there was an agreement between Mr Bradley and Ms Eckersall at the time of purchase that neither of them would use the Vehicle for private purposes. We are not satisfied from the circumstances in which the agreement was made that it was intended to have any legal effect. It was not documented in any way and there was no sanction for breach of the agreement. It contrasts with the circumstances in Elm Milk where there was express provision that private use would be a breach of the director’s contract of employment. In that case there was also a formal board resolution and any private use would have been a breach of the director’s duties to the company." (Venda Valet Limited v. HMRC [2016] UKFTT 572 (TC), Judge Cannan)
- Contradictory contract not reflecting true policy of prohibiting private use
"[13] Although this is a case which illustrates the dangers of using standard-form documents without adequate scrutiny, I am satisfied that the apparent terms of employment do not reflect the reality, and that, as Mr McMaster told me, the appellant has, and applies, a policy of prohibiting private use of the cars. I accept that the appellant's intention, throughout, has always been that the cars should be used exclusively for its business purposes and that it has done everything it reasonably can to limit their use accordingly. Private use of the cars by the guards is, I have concluded, quite inconsistent with the manner in which the business is conducted. The very heavy use made of the cars and the requirement that mileage be accounted for by completion of a log, too, render their further use for private purposes largely impractical. I recognise that the single authorisation of the use of a car for a hospital visit, at first sight, counts against the appellant but, as Buxton LJ also said (at paragraph 29 of his judgment) “The question has to be decided as at the moment of acquisition of the car...” (Masterguard Security Services Limited (2004) VATD18531, Judge Bishopp)
- Board resolution of sole director company restricting sole director which was not intended to be acted upon would be ignored
"[23] If the tribunal had found that the resolution was never intended to be acted upon, but was merely a piece of window dressing aimed at Customs and Excise, the tribunal would no doubt have dismissed the appeal. A further appeal from a decision of that sort by Elm Milk to this Court would have had little chance of success. But in my judgment the same is true in reverse where, as happened in this case, the tribunal found that the resolution was genuine and was properly to be taken into account in determining the value added tax effects of Elm Milk's acquisition of the car. I set out my own analysis and views in more detail in the following paragraphs." (CEC v. Elm Milk Ltd [2005] EWHC 366 (Ch), Park J, approved CEC v. Elm Milk Limited [2006] EWCA Civ 164, §34, Arden LJ)
(1B) QUALIFYING CAR INTENDED 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)
"(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)
Primarily for hire with driver
- No insurance for carrying passengers for reward
"[83] The Tribunal noted that MF had stated that private hire use, which is one of the grounds on which VAT relief can be given, was not applicable as there was no intention to use the vehicles for this purpose. In addition, no insurance for “carrying passengers for hire or reward” was included in the insurance policy documents for the vehicles despite there being a licence from the local council which allowed BF to use vehicles for this purpose.
[84] The Tribunal, therefore, did not consider that taxi/private hire was a ground on which VAT on the vehicles could be claimed." (Firth v. HMRC [2022] UKFTT 169 (TC), Judge Gemmell)
- 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)
Primarily for self-drive hire
- Absence of evidence of regular hiring to customers where car was used personally preventing proof of primary intention
"[45] The fact that the Mercedes was made available for private use does not prevent recovery of the input tax if, at the time it was purchased, the Mercedes had been intended for use primarily for self-drive hire. There is no contemporaneous evidence of the intended use of the Mercedes at the time it was purchased. Mr Collins said in evidence that the Mercedes was hired more often than any other car in the business. If the Mercedes had been the most frequently hired car then we would have expected Mr Collins to be able to produce more examples of it being hired out than three invoices all relating to a combined period of two weeks in February and March 2006. Mr Collins bears the burden of proving that, when he bought it, he intended to use the Mercedes primarily for self-drive hire. On the basis of the lack of evidence of regular hiring to customers and in view of the fact that the car (whether with or without magnetic logos) was used by Mr Collins for personal use when available, we find on the balance of probabilities that the Mercedes was not intended for use primarily for self-drive hire when it was acquired by Mr Collins. It follows that the input tax incurred on the Mercedes is excluded from credit by Article 7 of the Input Tax Order." (Collins v. HMRC [2012] UKFTT 220 (TC), Judge Sinfield)
(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)
- Occasional hire of alleged prestige purchase interspersed with long gaps held not sufficient
"[7] It is conspicuous too that the invoices are all addressed to the customers, rather than the insurance companies supposedly paying the charges. Ravenfield told a visiting HMRC officer that when it realised that use of the car for its credit hire business would be difficult, it began hiring it out for weddings and similar occasions, and this assertion may go some way to explain the addressing of the invoices, though it would have been simplicity itself to produce some evidence of payment on one or two occasions by an insurance company, if such evidence existed. What, in my view, is even more important is that Ravenfield produced no copies of hire contracts, customers’ identification checks, verification of insurance cover (Ravenfield’s own case is that the customers were required to arrange their own insurance), the taking of deposits or the verification of the mileage of the vehicle at the beginning and end of each hire. Other evidence garnered by the respondents showed that hirers of cars of this calibre took great care to ensure that they were protected by their contractual conditions and by the other precautionary measures I have mentioned, steps which Ravenfield itself took in relation to the remaining cars in its fleet. Its explanation of its not doing so in respect of this car was that it was unnecessary at the prestige end of the market, an assertion which seems to me to be quite implausible. The respondents also point out that other companies hiring out cars of this quality charged a good deal more per day than Ravenfield claimed to charge." (Ravenfield Limited v. HMRC [2010] UKFTT 359 (TC), Judge Bishopp)
- Stock in trade
"“stock in trade” means new or second-hand motor cars (other than second-hand motor cars which are not qualifying motor cars within the meaning of article 7(2A) below or paragraph 4(3) of Schedule 2 to this Order) which are—
(a) produced by a motor manufacturer or, as the case may require, supplied to or acquired in Northern Ireland from a member State or imported by a motor dealer, for the purpose of resale, and
(b) are intended to be sold by—
(i) a motor manufacturer within 12 months of their production, or
(ii) by a motor dealer within 12 months of their supply, acquisition in Northern Ireland from a member State or importation, as the case may require,
and such motor cars shall not cease to be stock in trade where they are temporarily put to a use in the motor manufacturer’s or, as the case may be, the motor dealer’s business which involves making them available for private use;" (SI 1992/3222, Article 2)
- Motor dealer
"“motor dealer” means a person whose business consists in whole or in part of obtaining supplies of, or acquiring in Northern Ireland from a member State or importing, new or second-hand motor cars for resale with a view to making an overall profit on the sale of them (whether or not a profit is made on each sale);" (SI 1992/3222, Article 2)
- Motor manufacturer
"“motor manufacturer” means a person whose business consists in whole or part of producing motor cars including producing motors cars by conversion of a vehicle (whether a motor car or not);" (SI 1992/3222, Article 2)
(3) HIRE OF CAR ON WHICH INPUT PREVIOUSLY 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 ULTIMATELY HIRED 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)