Customs & Excise v Elm Milk Ltd

This is an appeal from the order dated 3 February 2005 of Park J. By his order, the judge dismissed the appeal of the Commissioners of Customs & Excise (“Customs & Excise”) from the decision of the Value Added Tax and Duties Tribunal (Mr Stephen Oliver QC and Ms Rachel Adams FCA). The tribunal had in turn allowed the appeal of Elm Milk Limited (“the company”) from the refusal of Customs & Excise to allow the company’s claim to recover input tax incurred on the purchase of a Mercedes motor car.

As one would expect, input tax of this kind is not deductible unless the car is intended to be used exclusively for business use. But the relevant statutory provisions go on to provide that a person is not deemed to intend to use a car exclusively for business use if he intends to make it available for private use. The question is how such intention is shown where the owner of the car is a small company with a sole director. To decide that question I shall have to consider an important authority of this court, referred to below as the Upton case, on these provisions where the taxable person was a sole proprietor of his business who was to use the car for business use. I shall have to consider the ratio of that decision and whether it applies to a company with a sole director for whose use the car is bought. There is a further issue as to the meaning of “available” in this context, and as to what is meant by an intention to make available. Finally, there is a subsidiary ground of appeal as to the effect of a finding of fact of the tribunal that was clearly in error.

The relevant statutory provisions are contained in art 7 of the Value Added Tax (Input Tax) Order 1992 (“the 1992 Order”). I set out the relevant provisions in para 4 of this judgment. Art.7 applies to motor cars as defined by the 1992 Order, but nothing turns on that definition for the purposes of this appeal, and so I need not set out that definition. The 1992 Order was made pursuant to section 14(10) of the Value Added Tax Act 1983 but following the consolidation of that enacting provision the Order now has effect as if made under the Value Added Tax 1994 (“the 1994 Act”). Section 25 of the 1994 Act, referred to in art 7, provides for the general right of a taxable person to deduct input tax in respect of the supplies of goods and services to him for the purposes of his business.

The relevant provisions of art 7 of the 1992 Order, as amended, are as follows:-

the supply . . . to a taxable person. . .

I will have to consider the interpretation of these provisions in some detail below but at this stage I will confine myself to three preliminary observations. First, the provisions of art 7 set out above are drafted in a convoluted way. Parliament’s starting point is an exclusion from the general rule as to deductibility (art. 7(1)). Art. 7(2) then sets out an exception from this exclusion. Art. 7(2G) then provides for an exception to that exception in certain circumstances. I shall consider the implications of this convoluted scheme below.

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.

Thirdly, the exception to the exception in art 7(2G) is also based on intention rather than an actual act, but this time the intention is not an intention to use but an intention to make available for use.

At the relevant time, the company was a private company with one director, Mr Phillips, and members of his family owned it. The company carried on business in three areas, as a landlord of farm premises, as a consultant to the dairy trade and as a consultant to the leisure industry. Mr Phillips was an executive director but he had no written terms of employment. Mr Phillips drove considerable distances in the course of the company’s business. In the year following the purchase of the car (which took place in February 2003) the car has been driven some 50,000 miles on company business. On 1 February 2003, the company acting by Mr Phillips passed a board resolution noting that the company was to purchase the car. The board minutes stated that the car was to be bought with the intention that it should be used for business purposes only by Mr Phillips, that the company did not intend to make the car available for private use, and that any private use would be a breach of an employee’s terms of employment.

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).

There is an issue as to the terms of the insurance for the car. The board minute referred to above noted that the insurance policy for the car would not permit anyone other than the company to use it for social, domestic or pleasure purposes. On this basis the company’s intention was that no third party should be insured to use the car for private use. The tribunal found that the persons insured to drive the car “included Mrs Phillips (as policyholder) and anyone driving with her permission” (decision para 14). Mrs Phillips is the wife of Mr Phillips. In fact the insurance policy for the car when issued named a number of drivers, and permitted all the drivers to drive the car for any purpose. The company had been informed by its insurers that it was not possible to insure the car solely for business purposes. I shall have to come to the implications of the terms of the insurance below.

In due course the car was purchased. When not in use, it was kept locked in a car park near the company’s office and within fifty yards of Mr Phillip’s home. The keys to the car, however, were kept in the company’s office. As sole director Mr Phillips would clearly have had access to the keys at all times. Mrs Phillips had a Rover 75 car and the tribunal was satisfied that all private motoring was done by Mr Phillips in Mrs Phillips’ car.

The tribunal considered the decision in the Upton case (referred to below). It recognised that in this situation it would have to be satisfied on strong evidence that there was no intention to use the car for private use. Nonetheless, the tribunal found as a fact that there was no intention that the car should be made available for Mr Phillips’ private use. It held that the terms of the insurance were “beside the point”. If Mr Phillips were to use the car for private purposes this would be a breach of the terms of the board resolution which the tribunal was satisfied was “intended to be acted upon”(decision para 21). Accordingly the company was entitled to deduct the VAT which it paid on the purchase of the car from the VAT for which it had to account to Customs & Excise.

Customs & Excise appealed to the High Court. Their principal submission was that the decision of the tribunal was perverse. They also contended that the Upton case mandated the result that the company was not entitled to deduct the VAT paid on the purchase of the car. They submitted that the decision of the tribunal was against the weight of the evidence and that the car was suitable for private use and the terms of the insurance for the car permitted it to be driven by others. In those circumstances there was no physical barrier to prevent the employee or the other named drivers using the car for private purposes and the board resolution was not an effective restraint on private use of the car.

The judge held that the tribunal had not erred. The physical circumstances of where the car was kept did not mean that as a matter of law the company intended to make it available for private use ([22]). The tribunal found that the board resolution was genuine and was properly to be taken into account in determining the VAT effects of the company’s acquisition of the car ([23]). Accordingly, the decision of this court in the Upton case was distinguishable ([24] to [25]). There was a clear difference between the sole trader situation and the employer and employee situation ([26]). Where an employer provides a car genuinely on terms that the employee may use it for business purposes only, the “relevant condition” in art 7(2A) (iii) of the 1992 Order was satisfied and thus if all the other requirements for input tax recovery were fulfilled the employer could recover the input tax included in the price of the car ([27)]. The condition could be satisfied even if the car was not for example placed in a locked compound when not required for business use ([28]). Deductibility was not lost if the employer recognised that the car might be used for non-business use in an emergency ([29]). Such use would be a breach of the contractual restriction on use for private purposes but “realistically…few reasonable employers would do anything about it” ([29)]. The important point was not whether it was possible to imagine any exceptional circumstances in which the car might be used for private purposes. The question was whether when the employer purchased the car he intended to make it available for private use. The maxim that a person is presumed to intend the natural consequences of his acts was only a presumption ([30)]. “In my judgment the presumption is pushed too far if it used to argue that a person intends something to happen when he has specifically imposed a contractual condition designed (and genuinely designed, rather than merely colourably designed) to prevent it happening.” ([30]). There was no difference of principle where the director was the sole director of a small family company though where the employer and employee are connected the facts may require closer scrutiny ([32]) but the tribunal had examined the claim of the taxpayer with care ([33] to [36]).

In his judgment, the judge considered also a judgment of the Inner House of the Court of Session in Customs & Excise Commissioners v Skellett [2004] STC 201. That case followed the Upton case but does not further deal with the issues in this case so I need not make further reference to it, save to note that the Inner House expressed a provisional view that a strong case for saying that a sole trader had complied with art 7(2G) might be made if (for example) the insurance for the car had been restricted to business use. Likewise the Upton case has been followed in two decisions of the High Court, Crown & Cushion Hotels Ltd v Commissioners of Customs & Excise[2003] EWHC 1693 (Ch) (Lawrence Collins J) and Commissioners of Customs & Excise v Robbins[2004] EWHC 3373 (Ch), Lloyd J, 28 April 2004 unreported. In the first case, the point only arose obiter as the claim failed for other reasons but it was held that contractual restrictions could be relied on for the purposes of art 7(2G). In the latter case, the claim failed because there were neither legal nor physical restrictions against private use. The number of cases on this point, however, illustrates the importance of the principal point of law in issue on this appeal.

I now turn at last to examine the important decision of this court in the Upton case. I take the facts from the headnote. Mr Upton carried on business as a cigarette vending machine operator. His vending machines were installed in nightclubs in London. In 1998 for the purpose of impressing his customers and staying ahead of his competitors, he bought a Lamborghini motor car. When the car was insured, Mr Upton made enquiries as to whether it could be insured for business use only but was told by his agent that all insurance policies covered private use without charge. He conducted his business seven days a week from 8am until midnight or later. When the car was not in use it was parked in a car park. Mr Upton owed no other car for private use but did not need one. He did not use the car for shopping or for social occasions. He claimed to recover the VAT paid on the purchase of the car. Customs & Excise disallowed the claim. Mr Upton appealed to the tribunal which held allowing the appeal that “made available” in the 1992 Order had to mean more than “be available” and that there was no evidence in the specialised circumstances of Mr Upton’s business and personal life that he intended to make the car available for his own private use. Customs & Excise appealed to the High Court. Sir Andrew Morritt VC allowed the appeal on the ground that the car might be made available if it was available in fact and the owner did nothing to prevent its use by himself. Mr Upton then appealed to this court. His appeal was dismissed.

It is convenient to set out the material passages from each judgment.

Peter Gibson LJ gave the first judgment and held as follows:-

In these passages, Peter Gibson LJ is considering only the case of a sole trader. He applies the presumption that a person must be presumed to intend the natural and probable consequences of his act from the fact that the insurance for the car permitted private use and there was no evidence to rebut that conclusion.

Buxton LJ in his judgment held as follows:-

Buxton LJ then drew a distinction between intention to use and intention to make available. He considered that Mr Upton could not show that he did not intend to make the car available for private use simply by showing that he intended to use it for business purposes only or indeed by showing that he did not intend to use the car for private use. The statutory question was whether he intended to make it available for private use and if he did acts which made the car so available he was to be taken to intend to make the car so available. Like Peter Gibson LJ he decided the case on its particular facts. He did not consider what availability for the purpose of art 7 meant and in particular whether it could be satisfied by contractual provisions.

The third judgment was given by Neuberger J (as he then was). He adopted Peter Gibson’s LJ analysis of the facts, the procedural history and legislative provisions. He agreed with his reasons and those of Buxton LJ. He then went on to add some additional reasons of his own. In the course of those reasons he held as follows:-

Accordingly, to show lack of intention to make available for private use required restraint on such use. Neuberger J considered, leaving aside the particular case of a sole trader, that such restraint could be legal or physical. As to the sole trader, Neuberger J left open the question whether it would be possible for a sole trader to satisfy art 7(2G) if there was a legal restraint on private use.

Mr Nicholas Paines QC, for Customs & Excise, submits that under the 1992 Order the fact that a taxpayer, whether a company or an individual, who purchases a car, intends to use the car for business use does not of itself mean that he can set off the input tax paid on purchase against its or his output tax. This is a policy decision because cars lend themselves to private use. It is self-evident that it would be difficult to police the use of cars. Customs & Excise have drawn up a list of non-deductible expenses. This was done so as to block recovery. The list was relaxed over the years. The aim was to block repayment claims save where the car was not used for private use. The legislative scheme in the United Kingdom is less extensive than Community law permits. So, there will be cases where cars are put to business use but no input VAT is recoverable.

On Community law, Mr Paines relies on Royscot Leasing Ltd v Customs & Excise[2000] 1 WLR 1151. In that case the taxpayer contended that there was no private use. It was held by the Court of Justice that member states could exclude expenditure even though business-related. The Advocate General explained the rationale at page 1158. It follows that member states can block the deduction of input tax even where business use is involved. The reason for this is the difficulty of enforcement. So no question arises in the present case of the compatibility of domestic legislation with Community law.

In the present case the question arises whether the contractual prohibition in the employee’s terms of employment was capable of making the car not available if available factually for private use. The employee could have revoked the contractual prohibition at any time in his capacity as sole director. There is further, on Mr Paines’s submission, an issue as to whether, where a controller forbids himself in a private company to use a car for private use, there is an effective prohibition on private use. Mr Paines accepts that a controller can cause a company to contract with himself as an individual. He further accepts that an unconnected employee can be effectively prohibited and that any board can change its mind even in relation to an unconnected employee. However, in this case the contractual fetter was revocable at the will of the sole director. It was not a contractual fetter for the purposes of input recovery. The relevant time for testing this is at time of acquisition. At that time the car was factually available. The Upton case establishes that intention not to make a car available for private use is not enough.

Mr Paines submits that it follows from the Upton case that where there is availability for private use and acts are intentionally done to bring about availability, intention within art 7(2G) is presumed. It is therefore, difficult for a private trader to get within the 1992 Order. “Available” for the purposes of art 7(2G) means physically available although Mr Paines does not submit that the Upton case establishes this.

Mr Paines submits that the legislature made a deliberate choice. Contractual restrictions can be very difficult to monitor. As to use of the car in emergencies, this possibility is very vague. If a company would not impose a hire charge, it would be unreal to say there was a breach of contract.

In summary on this point, Mr Paines submits that the judge erred in treating a legal impediment as a practical impediment, and treating the company resolution as amounting to a practical impediment in this case where the use was by the person who controlled the company so that no distinction could be drawn between this case and that of a sole trader.

Mr Paines submits that there were four drivers, not just Mr and Mrs Phillips. There was no finding by the tribunal that the other drivers would drive Mr Phillips, and thus private use was not in fact excluded. Accordingly, Mr Paines submits that the tribunal’s finding regarding the insurance was perverse. The judge was wrong to find that the decision could not be different. He accepts that it was a question of discretion but that discretion had to be judicially exercised. It was wrong in principle. It was not inevitable that the tribunal would have reached the same result. It might have accepted the explanation. There were no relevant findings from the tribunal. It is no answer that this court cannot interfere with the tribunal’s finding as to the effectiveness of the contractual restriction because it goes to whether the contractual restriction was varied or revoked or was ever genuine.

Mr Oliver Conolly, for the company, submits that the ratio of the Upton case applies where a sole trader acquires the car without more and by that active acquisition he has put it to use without restriction. The case turns on the impossibility of contracting with oneself. For the purpose of this case, he relies particularly on para 49 of the judgment of Neuberger J and seeks to uphold the judgment of the judge for the reasons that he gave.

As to the insurance point, Mr Conolly submits that the tribunal held that a business only insurance would be a sufficient impediment to private use. Thus the terms of the insurance for the car may have evidential value, but no more. Mr Conolly submits that the ease with which a company resolution could be revoked does not mean that there must have been an intention to make the car available for private use. Mr Conolly also contends that it is not necessary for this case to be remitted to the tribunal to deal with the tribunal’s error regarding the existence of other named drivers.

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.

The main issue in this appeal requires the court to determine on the true interpretation of art 7(2G) when it may properly be said that a person “intends to . . . make [a motorcar] available … for private use”. On this, I agree with the judge that the submissions of Customs & Excise must be rejected. I would do so for the reasons which he gave in paras 22 to 36 of his judgment, which I have summarised above, and for the additional reasons set out below.

The judge did not (expressly at least) seek to analyse the overall scheme in art 7. In my judgment, the overall scheme of legislation is a matter which the court should consider expressly on a question of interpretation for this reason. The courts have in the last few decades changed their approach to statutory interpretation. Their approach is now less literal than it used to be. A more purposive approach is now often used. This entails that the judge will have a greater role in interpretation than he would have under a purely literal approach since having found the purpose the judge will need to consider whether such purpose is furthered or hindered the interpretation that he favours. That approach will enable the courts further to ensure that an enactment achieves what the legislature intended. But to adopt a purposive approach the court needs to understand as best it can from the words Parliament has used the purpose or policy behind the provisions that the court has to interpret. It may well be that in this case, the judge, as probably often happens, did this silently but it is desirable in the interests of the application of the case in subsequent cases for the court to state the view that it has formed of Parliament’s purpose so it can be seen what part the judge’s perception of the purpose of the statute played in his conclusion.

I made some preliminary observations about the scheme in the relevant provisions of art.7 in paragraphs 5 to 7 above. As I there explained, the scheme of those provisions is to exclude the right to deduct VAT paid on the purchase of a motor car to which the 1992 Order applies. Art 7(2) then creates an exception to that exclusion and art 7(2G) creates an exception to that exception. The taxpayer has a high threshold to cross if he wishes to bring himself first within the exception and then within the exception to the exception. For this purpose he must show that the intention is to use the car exclusively for business use. Then he must bring himself within the exception to that exception and for this purpose he has to show not that he does not intend to use the car for private use (which would probably add nothing to art 7(2E)) but it is not his intention even to make it available for private use. 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.

In my judgment a purposive approach of this kind to art 7 is helpful for at least two reasons. First it provides additional support for the approach of the tribunal and the judge that claims to deduct input tax in cases like this, where there is a close connection between the user of the car and the taxpayer, should be carefully scrutinised. That approach is consistent with the purpose of art 7 being to restrict relief to cases where it can be demonstrated to be wholly justified. Secondly, in my judgment it assists in responding to Mr Paines’ submission that the concept of availability in art 7(2G) is concerned with physical availability only. The question is whether this is the meaning of “available” in the context of art 7(2G). It is relevant to answering that question to consider to what extent the narrow meaning which Mr Paines proposes is required by the purpose of the relevant provisions as identified above. 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.

So with the above considerations in mind I turn to consider the meaning of “available” in art 7(2G). This point was not considered in detail by the judge because the argument on this point has received greater emphasis in this court than before the judge. Nor was this point decided in the Upton case. The judge and the tribunal in this case clearly thought that unavailability for private use could be achieved by appropriate contractual provisions as well as by physical constraints. I agree. However, for the reasons given by Neuberger J in the Upton case, it is difficult to see that physical restraints such as parking the car in a locked car park out of business hours could of themselves be effective in the case of a car acquired for use by a sole trader, or, I would add, a sole director.

In my judgment, Parliament has not in art 7(2G) said that to show that there is no intention to make a car available for private use the taxpayer has to show that it is not physically so available. Parliament has neither said that any particular circumstance constitutes making a car “available”, nor has it excluded any evidence from the determination of whether a car is or is not made available. It is therefore, a question of fact for the tribunal as to whether in all the circumstances the taxpayer intended not to make the car available for private use by whatever means. There is no thus reason why a car cannot be made unavailable for private use by suitable contractual restraints, that is effective restraints.

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 vLee’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.

It follows that I agree with the judge that that the terms of the insurance for the car did not mean that an intention not to make the car available for private use could not be shown. I further agree with what the judge said about the possible use of the car in emergencies. It follows from the tribunal’s findings that it does not matter that in theory Mr Phillips could have revoked the board resolution at any time.

Accordingly, I reject Customs & Excise submissions on the first part of this appeal.

Mr Paines contends that the tribunal was in error in not dealing with the point that the insurance for the car covered not merely Mr and Mrs Phillips as named drivers but also two other members of the family. He submits that the tribunal gave no consideration to the effect of this evidence on its decision. It threw doubt on the effectiveness of the restrictions imposed as to private use.

The appeal to the High Court and thence to this court can only be on a question of law so the only question is whether no reasonable tribunal could have reached the conclusion which it did on this question of fact: see Edwards v Bairstow[1956] AC 14. If the answer to that point is no, the next question is whether the point was material to the tribunal’s decision. If it was, the case must be remitted to the tribunal because this court cannot make these findings of fact in place of the tribunal: c.f. Hitch v Stone (Inspector of Taxes) [2001] STC 214.

The judge dealt with this point at the end of his judgment:

I agree with the judge that it is not appropriate to remit this case to the tribunal in the light of this error. The tribunal may have been aware of the fact that there were other named drivers since it finds that the persons to drive the car under the terms of the insurance “included” Mrs Phillips and anyone driving with her permission. The explanation for their names on the cover note may be that the company wanted them so that they could drive Mr Phillips if necessary or share the driving with him. But, even if the tribunal was mistaken about this issue, on the judge’s analysis with which I have agreed the terms of the insurance are really immaterial. This is not a case, like the Upton case, where the tribunal considered that the intention of the taxpayer should be presumed from the terms of the insurance. Moreover the other two named drivers could not have got access to the keys of the car without Mr Phillips’ permission and since the tribunal were satisfied that he regarded himself as bound by the board resolution I do not consider that the fact that there were two additional named drivers about whom inquiries were not pursued would affect the tribunal’s conclusion. Accordingly I would dismiss this ground of appeal also.

For the reasons given above, I would dismiss this appeal.

I agree.

I also agree.