Customs & Excise v Elm Milk Ltd

Deduction of input tax on a motor car is exceptional. Under Article 7 of the Value Added Tax (Input Tax) Order 1992, the taxpayer must intend exclusive business use and must not intend even to make the car available for private use. Availability is not confined to physical availability. Effective contractual or other legal restraints may suffice, and the issue is one of fact assessed in all the circumstances. A genuine employment restriction binding a sole director may be effective despite company control, permissive insurance, possible revocation or exceptional private use. Intention is assessed when the car is supplied, although later use may provide relevant evidence.

Elm Milk Ltd, a family company with one director, bought a Mercedes for business use. Its board resolution and the director’s employment terms prohibited private use. The company claimed input-tax recovery.

The Value Added Tax and Duties Tribunal allowed the claim. Park J dismissed Customs & Excise’s appeal: [2005] EWHC 366 (Ch). Customs & Excise appealed to the Court of Appeal, challenging the interpretation of Article 7(2G), the relevance of contractual restrictions and insurance, and the tribunal’s failure to address additional named drivers. The central issue was whether the company intended to make the car available for private use.

The appeal was dismissed unanimously. Lady Justice Arden gave the principal judgment, with Lord Justice Moore-Bick and Lord Justice Ward agreeing.

1. The compatibility of Article 7 with Community law was accepted on the basis of Royscot Leasing Ltd v Customs & Excise [2000] 1 WLR 1151. Member states may exclude business-related expenditure on cars because of the difficulty of policing private and business use.

2. The scheme of the Value Added Tax (Input Tax) Order 1992 begins with exclusion of input tax on motor cars. Article 7(2E) creates an exception where exclusive business use is intended. Article 7(2G) creates an exception to that exception, requiring the taxpayer to show no intention even to make the car available for private use. The conditions require rigorous scrutiny and cannot be waived by the Commissioners.

3. Article 7(2G) does not restrict availability to physical availability. Parliament prescribed no exclusive means of proving unavailability and excluded no relevant evidence. Whether effective contractual restraints prevent availability for private use is a question of fact. Physical arrangements alone may be ineffective for a sole trader or sole director who retains control of the car and keys.

4. A company can bind its sole director by an employment contract, even where he controls the company, as established by Lee v Lee’s Air Farming Ltd [1961] AC 12. The tribunal accepted that the board resolution was genuine and intended to be obeyed. The possibility of revocation did not establish an intention to make the car available. Permissive insurance, possible emergency use and additional named drivers did not conclusively defeat the contractual restriction.

5. On the subsidiary ground, an appeal from the tribunal lies only on a question of law. The factual conclusion could be disturbed only if no reasonable tribunal could have reached it: Edwards v Bairstow [1956] AC 14. Although a material error normally requires remittal because the appellate court cannot make findings of fact, the error concerning additional drivers was immaterial. The existing findings made the tribunal’s conclusion inevitable, so remittal would serve no purpose.

• Court of Appeal (Civil Division): In [2006] EWCA Civ 164, dismissed Customs & Excise’s appeal.
• High Court (Chancery Division): Park J dismissed the appeal from the tribunal in [2005] EWHC 366 (Ch).
• Value Added Tax and Duties Tribunal: Allowed Elm Milk Ltd’s appeal against refusal of input-tax recovery.