ON APPEAL FROM THE VAT AND DUTIES TRIBUNAL
Royal Courts of Justice
Strand
London WC2A 2LL
Before
MR JUSTICE LAWRENCE COLLINS
Between
CROWN & CUSHION HOTELS LTD
Appellant
And
HM COMMISSIONERS OF CUSTOMS & EXCISE
Respondents
Mr James M Fraser (Company Secretary) for the Appellant
Mr Richard Wormald (instructed by the Solicitor for HM Customs & Excise) for the Respondents
JUDGMENT
I Introduction
Crown & Cushion Hotel (Chipping Norton) Ltd ("the Appellant") is a company which owns five hotels. At one time it was owned by Mr Fraser, who appeared on its behalf. Its shares are now held in trust for his daughters. Mr Fraser is now the company secretary and runs the business with the assistance of one of his daughters.
The Appellant no longer runs the hotels itself, but leases them, with all the equipment necessary to carry on their running as hotels, to others. One of the hotels which it owns and leases is the Crown & Cushion Hotel in Chipping Norton, Oxfordshire ("the hotel"). It was run by the Appellant as a business until 1997, but since August 29, 1997, the Appellant has let the hotel (on a ten year tenancy agreement) to M Eden Ltd (Eden Ltd"). Eden Ltd is a company which was formed by Mrs Eden, who was previously the manager of the hotel, and her husband. The initial rental was £267,800 p.a.
The tenancy agreement provided for the rent to be increased by about £10,000 per annum if the hotel obtained a three star AA or RAC rating for six months and had attained a turnover of at least £472,000 in that period. The schedule of inventory attached to the agreement included a Rolls-Royce Silver Spirit, which had been acquired by the Appellant in 1996 to replace a similar car. For the purposes of the appeal to the Tribunal it was common ground that the Appellant was responsible for repair and replacement of the Silver Spirit during the term of the tenancy, but in fact the agreement itself (whatever may have been the practice and understanding) provided for the Appellant to take responsibility for repair and replacement of consumable items (as described in the agreement) and for Eden Ltd to keep in good repair and replace the items of inventory.
The hotel had a profitable wedding reception business, and the Silver Spirit was used in connection with that business. It was sold by the Appellant for £8,800 in 1998. According to the Tribunal the car was then eight years old, but this may have been a slip for eighteen years. The Appellant replaced it with a Rolls-Royce Spur which it bought from the well known dealers HR Owen for £72,191 on which £12,633.51 VAT was charged.
In July 2001 the Commissioners disallowed the input tax credit, and by a decision on reconsideration of February 27, 2002 the decision contained in the notices of assessment was upheld. Among the grounds relied on in correspondence by the Commissioners were that it had not been demonstrated that any consideration for the leasing of the car was equal to or in excess of that which would be payable if it were a commercial transaction conducted at arms length; and by obtaining insurance covering private use and doing nothing to prevent private use, the Appellant must be regarded as having made the car available for private use.
II The legislation
The point arose out of the interpretation and application of the Value Added Tax (Input Tax) Order 1992, S.I. 1992 No. 3222 (as amended) ("the 1992 Order"). The system of input tax deduction under Article 17 of the Sixth Council Directive (77/388) is intended to ensure that all economic activities are taxed in a wholly neutral way so that a taxable person is relieved of the burden of VAT incurred in the course of trading activities. But Article 17(6) permits Member States to retain existing exclusions under national law during the transitional phase.
Article 7 of the 1992 Order excludes input deduction for cars unless they are "qualifying" cars, in these terms:
"7(1) Subject to paragraph (2) to (2H) below tax charged on-
the supply (including a letting on hire) to a taxable person;
...
of a motor car shall be excluded from any credit under section 25 of the Act.
7(2) Paragraph (1) above does not apply where-
the motor car is-
a qualifying motor car
supplied (including a letting on hire) to .... a taxable person; and
the relevant conditions are satisfied;
(2A) Subject to paragraph (2B) and 2(C) below, for the purposes of paragraph (2) (a) and (b) above a motor car is a qualifying motor car if-
it has never been supplied ... in circumstances in which the VAT on that supply ... was wholly excluded from credit as input tax by virtue of paragraph (1) above; or
...
(2E) For the purposes of paragraph (2)(a) above the relevant condition is that the ... supply ... is to a taxable person who intends to use the motor car either-
exclusively for the purposes of a business carried on by him, but this is subject to paragraph (2G) below ...
...
(2G) A taxable person shall not be taken to intend to use a motor car exclusively for the purposes of a business carried out by him if he intends to-
let it on hire to any person either for no consideration or for a consideration which is less that than which would be payable in money if it were a commercial transaction conducted at arms length,
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."
Article 7(2G)(b) was considered in Customs & Excise Commissioners v Upton [2002] EWCA Civ 520, [2002] STC 640, where Mr Upton claimed an input tax deduction for the VAT paid by him as the purchaser of a Lamborghini Diablo which he claimed he had acquired solely for business use. The colourful facts of the case revealed that he used the car exclusively for his business of the supply and servicing of cigarette vending machines in clubs; he had no private life worth mentioning; he did not use the car for social purposes, because he had previous convictions for drink driving and was anxious to avoid any further periods of disqualification. Before he bought the car he inquired whether it would be possible to insure for business use only, but the broker told him that all insurance policies covered private use without extra charge, and he acquiesced in the car being insured for both private and business use. The Tribunal found that he bought the Lamborghini for one use and one reason only, to impress customers and stay ahead of the competition. He did not intend to use it privately and had not done so, and it was unthinkable that he would do so. But it was held that he had intended to make it available for private use. The Court of Appeal affirmed the decision of Sir Andrew Morritt V-C that a car is available for private use if no step is taken to exclude the necessary consequence of ownership, and therefore a car may be made "available" if it is available in fact and the owner does nothing to prevent its private use by himself, even if he never intends to use it privately.
III Findings of the Tribunal
The following relevant facts were found by the Tribunal:
the contractual arrangements between the parties arising from the taking over of the day to day running of the hotel by Eden Ltd included the leasing of equipment and assets in the hotel as set out in the detailed inventory to the tenancy agreement, which included the Silver Spirit;
the Appellant was required to replace equipment hired to Eden Ltd under the terms of the letting agreement as varied orally and by implication;
at the date the letting agreement was signed it had been the practice of the management of the hotel for many years, as mentioned in its brochure, to include the hire of a Rolls-Royce as a wedding car at no additional charge to customers who booked a wedding reception for a minimum of a hundred guests;
the Rolls-Royce then used for this purpose was among the equipment leased to Eden Ltd under the agreement, so that Eden Ltd could continue this practice;
the hire charge for the Silver Spirit was included in the property and equipment rent payable under the agreement;
until January 3, 2002, where a wedding reception was booked for less than a hundred guests, the Silver Spirit (or the replacement Spur) could be hired from Eden Ltd for £60, including VAT;
the Silver Spirit was by 1998 considered unroadworthy, and was sold for £8,800 in that year;
the Appellant purchased the Spur new from HR Owen for £85,000 (inclusive of VAT), and became the registered keeper as from November 15, 1998;
Mrs Eden required the Silver Spirit to be replaced because her company wished to continue its profitable wedding reception business, but she did not insist upon a new Rolls-Royce, which was provided by the Appellant voluntarily. But she did want a prestigious vehicle in keeping with her wedding business, and she also wanted a car which might reasonably be expected to remain reliable for the remaining nine years of the term of the agreement;
no alteration was made to the inventory in the agreement and no further rent was paid for the supply of the Spur;
under the terms of the agreement Eden Ltd was responsible for insuring the Spur (like the Silver Spirit);
as a favour to Mrs Eden, Mr Fraser insured the Spur in his own name, in order to allow Eden Ltd to take advantage of his no claims record;
when arranging the insurance Mr Fraser did not request cover for domestic and social use, although this was automatically provided by the insurance company, Norwich Union;
the Appellant's brokers had obtained insurance cover for the Spur on the basis that Mr Fraser alone drove the Rolls-Royce for the weddings, but since this was not the case, they arranged new insurance cover with effect from January 3, 2002, to include the use of the Spur as a wedding car, and that insurance was in the name of Eden Ltd;
Mr Fraser had occasionally driven the Spur for wedding parties when an authorised driver was not available, and two other individuals, David Eden and Richard Eden, were also authorised to drive the car for wedding parties;
the Spur was not available for private use. It had not been allocated to any individual, and was kept locked in a garage of the hotel and was under the control of Mrs Eden and Eden Ltd;
the Inland Revenue treated the Spur as an item of plant and machinery in the books of the Appellant, and full capital allowances were claimed with no restriction, and the Inland Revenue had accepted that there was no car benefit or fuel benefit attributable to any individual in respect of the car;
during the first twelve months of trading by Eden Ltd at the hotel the Appellant had spent approximately £150,000 in capital costs in replacing carpets and other equipment and assets to upgrade the hotel to three star and no additional rent had been paid for that.
The conclusions of the Tribunal on Article 7(2G)(a) were as follows:
As regards the requirement under Article 7(2G)(a) the Tribunal regarded the appropriate test as that in Customs and Excise Notice 700/64, and which stated in paragraph 17 entitled "Cars obtained for the purpose of an in-house leasing": "You are entitled to recover input tax on a car you buy or import to use for the purpose of leasing only if your letting will be at an arms length transaction value. In other words the value must be equivalent to what would apply if the lessee was to lease or hire the car on the open market."
Although the written terms of the agreement left a great deal to be desired because the parties did not use legal representatives, it could be construed as imposing an obligation upon the Appellant to supply equipment and assets as set out in the inventory, and the Appellant was required to replace equipment hired to Eden Ltd when appropriate.
There was no contractual term as to how such replacements were to take place. No evidence was given to the Tribunal as to other examples of replacement of equipment and assets over the first twelve months of the ten year term of the agreement. Mention was made of about £150,000 for replacements including 20,000 for new carpets, but what other items were supplied was not certain, and the cost of the car did not appear to be included in the figure.
It was therefore necessary to look at the commerciality of the replacement of the Silver Spirit.
There was an original Silver Spirit acquired new by Mr Fraser in or about 1985. This was replaced in 1996 by a slightly older vehicle (presumably bought new before 1985), which was sold for £8,800 in 1998. On the balance of probabilities, taking into account inflation which was low between 1996 and 1998, a replacement would have cost only a relatively small increase of a few thousand extra pounds above the £8,800.
Mr Fraser arranged for the Appellant to acquire a new Rolls-Royce for £85,000. There was no evidence of any written or oral agreement relating to replacement. There was no increase in the overall rent of about £265,000 per annum as a result of the acquisition of such an expensive car. The Appellant was registered as the keeper of the car at the time of its purchase and remains so registered. There was no agreement, oral or written, between the Appellant and Eden Ltd as to the Spur's initial valuation, depreciation, estimated valuation at the end of the period of hire or mileage.
If the provision of the Spur had been akin to a commercial transaction conducted at arms length, the Tribunal would have expected there to be a separate financial agreement between the Appellant and Eden Ltd to recognise the input of the large enhanced value of the Spur. It was over nine times more than the sum obtained for the Rolls-Royce it replaced. That high increase in value would be reflected in an increase in the rental figure commensurate with the sum involved after taking into account a replacement of much less value.
Another second-hand Rolls-Royce could have been obtained as a replacement at a much more modest figure or even a new prestigious car like a Jaguar or similar mark. The figure would not have exceeded one-third of the value of the Spur.
When the agreement was entered into, there was no indication that the Silver Spirit was to become unroadworthy, and that was discovered over a year later.
The hotel business had an interest in having a prestigious motor car available for wedding activities. The use of the car for transportation was included in the financial package and until recently a charge of £60 was made if the number of guests at the reception was under a hundred in number. The supply by the Appellant of a very expensive Rolls-Royce as a replacement was not warranted in these circumstances.
Taking all the factors into consideration, there was not a commercial transaction conducted at arms length.
As regards the test under Article 7(2G)(b), the Tribunal's findings were these:
The main problem facing the Appellant was the insurance cover for the Spur. Initially, when the vehicle was acquired in November 1998, Mr Fraser took out motor insurance cover with the Norwich Union in his name. The insurance policy cover became effective on January 29, 1999 when two additional drivers were added.
The use of the vehicle was limited under the policy to use for social, domestic and pleasure purposes, and use by the policyholder or the policyholder's spouse in person in connection with his or her business. Specifically excluded was the "use for hiring ..."
On January 3, 2002, insurance was taken out by Eden Ltd with Norwich Union for the Spur.
Although the control of the vehicle was undoubtedly during the term of the agreement exclusively with Eden Ltd, through its insurance cover restrictions the Spur was not covered for its wedding business or at all as far as Eden Ltd was concerned from November 1998 until January 2002.
Applying Upton, the Tribunal's view was that the Appellant was deemed to intend to make the motor car available for private use. Clearly this was not what the Appellant intended since the inclusion of the phrase "use for social, domestic and pleasure purposes" was required by the Norwich Union. Mr Fraser should have arranged at the outset, when the Spur was acquired, for the insurance to be arranged with Eden Ltd direct as occurred in January 2002, and he should have arranged for the Appellant to enter into a specific hiring agreement with Eden Ltd.
IV The Appellant's argument
Mr Fraser appeared in person for the Appellant. Because he had not been sent a copy of the Commissioners' skeleton argument in advance of the appeal, I gave him an opportunity to make further written submissions after the hearing. In the course of the hearing and especially in his written submissions following the hearing, he drew attention to the following factual matters additional to those in the decision. First, he had sought to replace the Silver Spirit with a secondhand Rolls-Royce, but had been offered a new Spur by HR Owen at £40,000 below list price, because it was discontinued old stock. Second, the Spur was the most economical he could buy to last the remaining nine years of the agreement. Third, there had been an increase of £35,371 (plus VAT) in the annual rent since March 1999. Fourth, other equipment and inventory had been replaced with items which were much more expensive than those they replaced, and input tax had not been disallowed. No material was placed before me to show that these matters were placed in evidence before the Tribunal.
Complaints were made about the procedure before the Tribunal: (a) Mr Fraser said that the Commissioners' skeleton argument was served only minutes before the hearing, and Mr Fraser was not able to understand the evidence; (b) the Commissioners served their Tribunal papers two non-working days prior to the Tribunal hearing, and required the Appellant to produce its skeleton argument two non-working days before the hearing, which wrong-footed the Appellant; (c) the chairman did not mention that the transaction was not arms length, and had he mentioned it, the Appellant would have shown that the rent and increases were at arms length.
The Tribunal erred in failing to take account of the fact that the rental under the Agreement was itself the commercial arms length transaction, and gave the false impression that Mr Fraser bought the Spur for his own use. It was wrong not to treat the £267,800 rent and £35,371 increase as a proper arms length transaction. The Spur was not bought for, or available for, private use.
V The Respondents' argument
The facts found by the Tribunal were fairly and reasonably found, flowing naturally from the evidence heard. There is no reason to characterise them as perverse or unreasonable.
The relevant factual matrix was: (a) the car was purchased by the Appellant in February 1998; (b) the Appellant was registered as the keeper of the car at the time of its purchase; (c) the car was purchased by the Appellant for the use of Eden Ltd during the course of its business as a company trading as a hotel; (d) the Appellant was obliged to purchase the car for use by Eden Ltd under the terms of a lease agreement; (e) no separate contract for the hire or use of the car existed outside the lease agreement, and in particular: (i) there was no written contract of any kind; (ii) no agreement was reached between the Appellant and Eden Ltd as to the car's initial valuation, depreciation, valuation at the end of the period of hire (or at the end of the term of lease), mileage or insurance; (iii) there was no separate consideration payable by Eden Ltd to the Appellant; (iv) no invoices were issued by the Appellant either periodically, or at all; (v) no payments were received by the Appellant either periodically or at all; (vi) no payments were made by Eden Ltd either periodically or at all.
So far as availability for private use was concerned (a) at all material times the car was insured in the name of Mr Fraser; (b) the insurance policy did not in fact cover use of the car for hiring (as it was being used) or by any person except Mr Fraser and his spouse outside use for simply social, domestic and pleasure purposes; (c) the car was kept physically in a garage on the premises of the hotel; (d) the keys to the car were kept by Mrs Eden at the hotel and were apparently secured in a safe; (e) Mr Fraser did not as a matter of fact drive the car merely for social, domestic or pleasure purposes; occasionally he would drive it for a wedding as a favour to Mrs Eden and/or during the course of other hotel business.
The Commissioners submit that the Tribunal was correct in the way it applied its mind to the test under 7(2G)(a). It is clear that in purchasing the car the Appellant did intend to let it on hire either for no consideration or for a consideration which was less that than which would be payable in money if it were a commercial transaction conducted at arms length. There was no evidence before the Tribunal that the car was let on hire for a commercial consideration. No express articulation was given as to either the quantum of Eden Ltd's consideration as to it on the one hand, or the value of the car, the extent of its use, or any such concern on the other. In fact the car cost £85,000.
The car was not let on hire in a way akin to a commercial transaction conducted at arms length, because no written contract existed at all as would be usual in an arms length agreement; no invoicing payments took place, periodically or otherwise as would be invariably found in an arms length transaction.
The car remained registered and insured in the name of Mr Fraser. It could not, in fact, legally be driven by Mrs Eden or by anyone other than Mr Fraser or his spouse, for business purposes.
Accordingly the Tribunal was entitled to conclude that if the provision of the Spur had been akin to a commercial transaction conducted at arms length, there would have been a separate financial agreement between the Appellant and Eden Ltd to recognise the enhanced value of the Spur, which cost more than nine times the sum obtained for the Rolls-Royce it replaced.
As regards the test under 7(2G)(b), the Tribunal correctly followed the guidance in Upton in addressing the "availability test": where there was no legal or physical restraint preventing the private use of the car, then it followed that is deemed to be intended to be "made available" for private use. During the material time: (a) the car was insured for private use by Mr Fraser; (b) the car was not insured for use for hiring; (c) no specific hiring agreement existed between the Appellant and Eden Ltd.
Accordingly the Tribunal was entitled to conclude that the Appellant was deemed to intend to make the motor car available for private use, even though the Appellant did not intend to do so.
VI Conclusions
This appeal is limited to questions of law (Tribunals and Inquiries Act 1992, section 11(1)) and the question therefore is whether the Tribunal misdirected itself, or came to a conclusion on the facts to which no reasonable Tribunal could have come. I do not consider that there is any basis for the objections which Mr Fraser has taken on the procedure before the Tribunal. Although he appeared in person on behalf of the Appellant, he had previously had the benefit of professional advice, and the issues had been thoroughly canvassed in correspondence.
The question on Article 7(2G)(a) was whether the car was let on hire to Eden Ltd for a consideration which was less than that which would be payable in money if it were a commercial transaction conducted at arms length. It is to be noted that there is no requirement that there actually be a commercial transaction conducted at arms length. Customs and Excise Notice 700/64 correctly concentrates on the transaction value, and states that the value must be equivalent to what would apply on the open market, and it is this approach which the Tribunal correctly adopted. The Tribunal also asked it itself correctly what financial agreement would have been made for the provision of the Spur if its provision had been akin to a commercial transaction. The only passage in which the Tribunal appears to adopt a different approach is para 50, where it concludes that there was not a commercial transaction at arms length. That is not the test, but I do not consider that this paragraph in any way vitiates what I believe to the correct approach of the Tribunal as a whole, which was to consider whether, in the unusual facts of this case, the consideration was less than that which would have been payable if it were a commercial transaction conducted at arms length.
I am satisfied that there was evidence on which the Tribunal could reasonably have come to the conclusion that the consideration was less than that which would have been payable if it were a commercial transaction conducted at arms length. The reality of the matter was that in 1998 the Appellant introduced, without additional charge, into the inventory a car which was almost ten times more valuable than the car it replaced without exacting any additional rental. A purely commercial arms length approach would have led the Appellant to provide the cheapest possible car consistent with its obligation to maintain and replace the inventory, including a Rolls-Royce suitable for the wedding requirements of the hotel.
The Tribunal was therefore justified in relying on these factors in particular: the Appellant was required to replace equipment hired to Eden Ltd when appropriate; a replacement would have cost only a relatively small increase of a few thousand extra pounds above the £8,800; there was no increase in the overall rent as a result of the acquisition of such an expensive car; if the provision of the Spur had been akin to a commercial transaction conducted at arms length, there would have been a separate financial agreement between the Appellant and Eden Ltd to recognise the input of the large enhanced value of the Spur which would be reflected in an increase in the rental figure commensurate with the sum involved; another second-hand Rolls-Royce could have been obtained as a replacement at a much more modest figure, which would not have exceeded one-third of the value of the Spur; the supply by the Appellant of a very expensive Rolls-Royce as a replacement was not warranted in these circumstances.
This conclusion is sufficient to dispose of the appeal, but I will state my conclusions also on Article 7(2G)(b), where the issue was whether the Appellant intended to make the car available for private use. The question is whether this case differs in any material respect from Upton, where Mr Upton plainly had no intention of making private use of the car, but was held to have intended to make it available for private use because no steps had been taken by him to exclude the necessary consequence of ownership. In Upton (para 22) Peter Gibson LJ said:
"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."
Buxton LJ at paragraphs 29-30, 34 said:
"He had sole control over the car. It was not to be disabled or in any other way put beyond use: quite the reverse, since the whole purpose of buying it was so that it could be used, albeit in the business and not privately ... 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 ... It ... 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 912 at 918), called the necessary consequence of his ownership, then that necessary consequence indeed followed: that the car was available for his use."
Neuberger J emphasised (at para 37) that one of the critical factors was that there was no suggestion that, at the time of its acquisition, Mr Upton intended to take any steps which would either legally or physically prevent him from putting the car to private use; and he also emphasised (at para 41) the absence of physical or legal restraint as to a particular use. A legal impediment to private use might be sufficient, e.g. where the car was only insured for business use.
In this case, as in Upton, the car was insured for private use, but by contractual agreement it was part of the inventory of the hotel, and kept under lock and key in the hotel garage. In these circumstances it is impossible to see how the Appellant intended to make it available to any person (i.e. to Mr Fraser) for private use. It simply was not available for private use, because it was part of the inventory of the hotel and under the control of the hotel, and not in any sense available to Mr Fraser or the Appellant for private use, notwithstanding that from time to time he might be the driver of it for the purposes of the hotel's business.
It is true that in Upton the Court of Appeal placed considerable weight on the fact that the Lamborghini was insured for private use, but in that case there was no legal or physical impediment to Mr Upton using the car for private use. But in the present case I consider that the Tribunal placed undue weight on the fact that the insurance was initially in the name of Mr Fraser, and that it excluded use for hiring, and insufficient weight on the fact (as it found) that the control of the vehicle was undoubtedly during the term of the agreement exclusively with Eden Ltd. The insurance policy itself could of course be evidence that the car was available for private use, but the policy itself could not make the car available for private use. Here the evidence is that the car was not available for private use, even if Eden Ltd did not at the outset have appropriate insurance cover. The Appellant had contractually excluded any use by Mr Fraser, and the car was under the exclusive control of the hotel and its staff. In these circumstances the Tribunal should have held that the Appellant had not intended to make the Spur available for private use.
In my judgment, therefore, the Appellant succeeds on its argument on Article 7(2G)(b), but in the result the appeal is dismissed.