18808
VALUE ADDED TAX – Exclusion of input tax credit for VAT charged on the supply of a motor car to a taxable person – art.7 VAT (Input Tax) Order 1992 (SI 1992/3222) – whether “relevant condition” satisfied, that taxable person intends to use the motor car exclusively for the purposes of a business carried on by him – whether taxpayer not taken so to intend on the basis that he intends to let the car on hire for a consideration which is less than that which would be payable in money if it were a commercial transaction conducted at arms length – art. 7(2G)(a) of SI 1992/3222 – held that the Appellant intended to and did let the cars on hire for a consideration which was less than an arms length consideration – appeal dismissed

LONDON TRIBUNAL CENTRE

	ACL LEASING LIMITED	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			     Tribunal: 	MR. JOHN WALTERS, Q.C.  (Chairman)
					MR. M HOSSAIN, F.C.A.,F.C.I.B.								 

Sitting in public in London on 1st July 2004

The Appellant  was not present and not represented

Mr. A. Edwards, of Counsel, instructed by the Slicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	The Appellant, ACL Leasing & Finance Limited, appeals against a decision of the Commissioners to disallow input tax claims relative to the supply to the Appellant of two motor cars, a Mercedes SL55 AMG, registration GF52 EBK, and a Mercedes ML 270cdi, registration 15 EC. The Appellant acquired these cars new, and let the first of them to a Mr. F. Mehanna, and the second of them to a Mrs. E. Corcoran.  
2.	The Appellant was not present or represented at the appeal. 
3.	The Tribunal decided to proceed to consider the appeal in the absence of the Appellant in accordance with rule 26(2) of the VAT Tribunals Rules 1986 (“the Tribunals Rules”).
4.	Mr. Edwards, for the Commissioners, submitted, first, that we should strike out the appeal under rule 18(1)(a) of the Tribunals Rules which provides that a tribunal shall strike out an appeal where no appeal against the disputed decision lies to a tribunal.  This submission was made on the basis that the decision appealed against, as referred to in the Appellant’s grounds of appeal is not appealable.
5.	Those grounds of appeal allege that Mr. D. Piercy, an Officer of the Commissioners (who gave evidence before the Tribunal) has gone back on agreements made at a meeting relative to repayment of VAT.  That in itself would not raise an appeal which the Tribunal has jurisdiction to consider.
6.	Mr. Edwards submitted, secondly, that the Tribunal should make directions to require production of the documents set out in the Appellant’s List of Documents dated 16 July 2003.  Copies of these documents had been requested in the letters dated 18 August 2003 and 17 September 2003 from the Commissioners’ Solicitor’s Office to Williams Accountancy and Taxation Consultants of Tonbridge, representing the Appellant.  The representatives (as Williams Consulting (Southern) Limited) wrote in reply on 2 December 2003 saying they “[trusted] you safely received the copies of the documents …”.  To this the Solicitor’s Office replied on 8 January 2004 stating that they had not received the documents and asking to be provided with a further copy.  This produced no response.  The Solicitor’s Office wrote (and faxed) again on 25 June 2004 asking for the documents to be faxed urgently, and, there having been no response, on 28 June 2004 repeating the request.  A letter from the Solicitor’s Office to the Proper Officer of this Tribunal dated 29 June 2004 explains that Mr. Williams of Williams Consulting (Southern) Ltd. had telephoned the Solicitor’s Office on 29 June 2004 (two days before the hearing date) to explain that he no longer acted for the Appellant and had not done so since February 2004, that he had no instructions from the Appellant and was unable to assist regarding supplying copy documents.
7.	Mr. Edwards explained to the Tribunal that the substance of the appeal concerned the application of article 7(2G)(a) of the VAT (Input Tax) Order 1992 (SI 1992/3222) (“the Order”).  
8.	Article 7 of the Order generally (and subject to exceptions) excludes tax charged on the supply to a taxable person of a motor car from input tax credit under s 25 VAT Act 1994 (see: article 7(1)). 
9.	One of the circumstances in which article 7(1) of the Order does not apply is where the motor car is a “qualifying” motor car (which it is agreed each of the cars featuring in this appeal is), which is supplied to a taxable person and the “relevant condition” is satisfied (see: article 7(2)(a)).  These conditions are cumulative and so far as is relevant for the purposes of this appeal, the “relevant condition” is that the supply is to a taxable person who intends to use the motor car exclusively for the purposes of a business carried on by him, but subject to paragraph (2G) (see: article 7(2E)(a)).
10.	The provision of article 7(2G) which the Commissioners submit is not complied with in this case is (as mentioned above) article 7(2G)(a), which provides that 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 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.
11.	In these circumstances, the Tribunal understood that the substance of the appeal is whether the two motor vehicles referred to at paragraph 1 above (or either of them) were (or was) let on hire either for no consideration or for a consideration which was less than an arms length monetary consideration.
12.	Calculations produced to the Commissioners (Mr. Piercy) by Mr. Williams (as appendices to his letter dated 12 December 2002) showing the basis of the hire charges made for each of the two cars were before the Tribunal.
13.	In these circumstances, the Tribunal considered that it was in a position to deal with the substance of the appeal at the hearing. We therefore dismissed Mr. Edwards’s application to strike out the appeal under rule 18(1)(a) of the Tribunals Rules on the basis that we could direct that the notice of appeal be amended in such manner as would correctly describe the substance of the decision appealed against (see: rule 14(1) of the Tribunals Rules) – this would constitute the appeal as an appeal with respect to the amount of any input tax which may be credited to a person, as to which an appeal lies to the Tribunal under s 83(c) VAT Act 1994 – and that we could waive any breach or non-observance of our direction (see: rule 19(5) of the Tribunals Rules).
14.	We also declined to make directions to require production of the documents set out in the Appellant’s List of Documents dated 16 July 2003, because it seemed to us that the letter dated 12 December 2002 (referred to above at paragraph 12) provided the evidence necessary to consider fairly the Appellant’s case that article 7(2G)(a) of the Order did not preclude the credit of the relevant input tax.  We also had regard to the fact that ample opportunity had already been afforded to the Appellant to supply copies of the documents concerned.
15.	We went on to consider the substance of the appeal.
16.	The first car, the Mercedes SL55 AMG, registration GF52 EBK, was supplied to the Appellant by Mercedes-Benz of Maidstone under their invoice number 101786.  It is in the amount of £97,515, including VAT of £14,496.69.  This invoice shows a tax point of 25 September 2002, but the Tribunal was told (and we accept) that the tax point should have been in November 2002, when the vehicle was actually delivered to the managing director of the Appellant, Mr. K. Corcoran, in Germany. According to Mr. Williams’s letter dated 12 December 2002, while in Germany collecting this vehicle, Mr. Corcoran also arranged for its speed restrictor to be removed, and this removal enhanced the retail value of the car.  The fact of the delivery of the car in November 2002 had been established by the Commissioners by reference to Mercedes-Benz of Maidstone and had been agreed by the Appellant. The paper work was regularised by the issue of a new vehicle credit note and a further invoice (numbered 101929) showing a tax point of19 November 2002.  (We mention that there was in our papers a further invoice, numbered 101786 like the first invoice.  This further invoice showed a tax point of 31 October 2002.  No point appeared to arise on this document.)
17.	The second car, the Mercedes ML 270cdi, registration 15 EC, was also supplied to the Appellant by Mercedes-Benz of Maidstone, this time under their invoice number 101535, which is in the amount of £36,245 including VAT of £5,358.  The tax point shown on the invoice is 20 September 2002.
18.	As stated above, the first car was let to a Mr. F. Mehanna, and the second to Mrs. E Corcoran, who, we were told, is the Company Secretary of the Appellant.  The lettings in each case were for five years.
19.	The calculations of the lettings of the two cars produced by Mr. Williams to Mr. Piercy showed a stated purchase price and “agreed sale price after 5 years”, deducting the latter from the former to arrive at a figure representing depreciation over the five years of the letting.  To this figure of depreciation a 5% profit per annum (total 25%) was applied and the hire charge fixed as a monthly amount of one-sixtieth of the aggregate of the found amount of depreciation and the 25% calculated profit.  In the case of the first car, let to Mr. Mehanna, this produced a hire charge of £167.04 per month exclusive of VAT; in the case of the second car let to Mrs. Corcoran, it produced a hire charge of £221.28 exclusive of VAT.
20.	We pause to note that it is extremely remarkable that the first car, purchased for over £97,000 should be let for a monthly charge of £167.04, while the second car, which cost less than £37,000, should be let for a monthly charge of £221.28.
21.	The arithmetical reason for this feature is that the found amount of depreciation in the case of the first (more expensive) car is £8,018.31, whereas the found amount of depreciation in the case of the second (cheaper) car is £10,621.27.
22.	We found that this feature suggested that the hire charges did not approximate to a consideration which would be payable in money if it were a commercial transaction conducted at arms length (in terms of article 7(2G)(a) of the Order).
23.	A further noteworthy fact is that the calculation of hire charges starts with stated purchase prices approximate to the net of VAT purchase prices payable, in each case, to Mercedes-Benz of Maidstone.  However we were shown copies of trade papers which showed that a new Mercedes SL55 AMG Kompressor Derestricted would sell retail for £119,995, and a new Mercedes ML 270cdi would sell for £37,995.  These prices were inclusive of VAT. 
24.	This indicated that although the calculation for the hire charge relative to the second car (the Mercedes ML 270cdi) assumed a purchase price which approximated to the current retail value of the car as new, the calculation relative to the first car (the Mercedes SL55 AMG) did not, and assumed a purchase price significantly lower than the current retail value of the car as new. 
25.	A note of a meeting between Mr. Piercy and Mr. Corcoran, Mr. Williams and Mr. Chandler, an accountant acting for the Appellant, on 8 January 2003, indicated that Mr. Corcoran had said that Mr. Mehanna was not a relative or close associate.  He was a London hairdresser.  Mr. Corcoran stated that Mr. Mehanna was not offered a special deal in exchange for favours or any bartering arrangement (that is, that there was no consideration given for the letting other than the monetary hire charge).  Mr. Corcoran stated that he realised that the leasing rentals were low but that was the way he did business.  In relation to the second car leased to Mrs. E. Corcoran, Mr. Corcoran said at the meeting that he would recalculate the payments to a more commercial total (to adopt the wording in Mr. Piercy’s note with our papers).  This was confirmed by a letter from Mr. Williams to Mr. Piercy dated 22 January 2003, in which he said that he “[was] currently trying to establish an open market value for the vehicle lease [referring to the Mercedes ML 270cdi], at which point I presume the contract will be renegotiated or the vehicle returned to stock”.  On 23 January there was apparently a phone call from Mr. Williams to Mr. Piercy in which he said that he had received quotations for a commercial lease of the car leased to Mrs. Corcoran at rents between £399 and £499 per month. This compares to the agreed hire charge (supported by the calculations referred to above) of £221.28 exclusive of VAT.  On 3 February 2003, Mr. Williams wrote to Mr. Piercy “[proposing] an arm’s length value of £370 per month” in relation to the Mercedes ML 270cdi.
26.	It was in reply to this letter that Mr. Piercy wrote to Mr. Williams on 11 February 2003 disallowing £14,496.69 input tax relating to the first car (the Mercedes SL55 AMG) and £5,358.73 input tax relating to the second car (the Mercedes ML 270cdi) – these being the amounts of VAT shown on the invoices from Mercedes-Benz of Maidstone.  This letter (and the follow-up letter dated 26 March 2003, giving statutory authority for the disallowance) contained the decisions against which the appeal properly lies under s 83(c) VAT Act 1994.
27.	Internal consultation with the Commissioners’ expert in this area (a Mr. Paul Gilbey) indicated to Mr. Piercy that an “S” class Mercedes (though not as exclusive as the first car, an “S” class AMG) would command a rental of about £1,000 per month (compared with the rental charged by the Appellant of £168).  Also, he would expect a residual value after four years as 10,000 miles per annum of £25,850, as opposed to the residual value after five years of £75,000, with no mileage restriction, incorporated in the Appellant’s calculation.
28.	In relation to the second car, the Mercedes ML 270cdi, Mr. Gilbey’s view was that an arm’s length lease incorporating a 12,000 miles per annum mileage restriction would show a hire charge of £603 per month and a residual value of the vehicle after four years of £11,250 – compared with £20,000 shown in the Appellant’s calculation.

Decision

29.	The Tribunal’s decision on the basis of the evidence is that the Appellant has failed to show that article 7(2G)(a) of the Order has been complied with in relation to the two cars in issue.  That is, we are satisfied, and find as a fact, that the Appellant let both cars respectively for considerations which were less than the consideration which would have been payable in money if the lettings were each respectively commercial transactions conducted at arms length.  Mr. Edwards cited the decision of Lawrence Collins J. in Crown & Cushion Hotel v Commissioners of Customs & Excise [2003] STC 1090, in which the Judge confirms that this is the appropriate test – see: ibid.  at [25].
30.	The appeal is therefore dismissed.
31.	This Decision gives the Tribunal’s reasons for the dismissal of the appeal which was announced at the conclusion of the hearing.
32.	Mr. Edwards, for the Commissioners, asked for an award of costs of £600 in his clients’ favour and pursuant to rule 29(1)(a) of the Tribunals Rules we direct that the Appellant shall pay to the Commissioners within 28 days of the Release date of this Decision that amount on account of the Commissioners’ costs of and incidental to and consequent upon the appeal. 

JOHN WALTERS Q.C.
CHAIRMAN

RELEASED: 21 October 2004

LON/03/586