19853

VALUE ADDED TAX — input tax — acquisition of car for letting on hire — customer providing substantial “security deposit” — deposit used as part payment for car — whether deposit truly a security deposit or part consideration for the hire — found to be a security deposit — appeal allowed.

MANCHESTER TRIBUNAL CENTRE

CROSS BORDER LEASE MANAGEMENT LTD
Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS
Respondents

				Tribunal:	Colin Bishopp (Chairman) 
						Peter Whitehead 

Sitting in public in Birmingham on 11 October 2006 

John Norwood, director, for the Appellant 
James Puzey, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents 

© CROWN COPYRIGHT 2006

DECISION

1.	In this appeal Cross Border Lease Management Limited disputes the Commissioner’s decision, communicated to it by a letter of 23 March 2006, to amend its VAT return for the period 09/05. Amendments were proposed for a variety of reasons and the original dispute between the parties related to a number of items. However, most of them have been resolved in one way or another and there remains only one area of dispute, namely the Respondents’ contention that the Appellant must account for additional output tax of £29,787.23 on its supply of a Mercedes Maclaren SLR motor car.
2.	Before us the Appellant was represented by John Norwood, its only director and, we understood, the beneficial owner of all of its shares and the Respondents by James Puzey of counsel. We heard evidence from Mr Norwood, from Jason Clay, to whom the Appellant let the vehicle by way of hire, and from Gillian Sells, the assessing officer, and we were provided with a bundle of documents.
3.	The Appellant’s business is, essentially, the acquisition of high value motor cars and their letting to customers. The particular vehicle with which we are concerned was acquired by the Appellant on 8 September 2005 from V12 Power Limited for £300,000 inclusive of VAT. The £300,000 was provided, as to £20,000 by Mr Clay, as to £80,000 by a borrowing which the Appellant made from SC Marine Limited, and as to the remaining £200,000 by what was described as a security deposit also paid by Mr Clay. As the arrangements were originally presented to the Respondents, it appeared that Mr Clay had provided the aggregate of the two sums, that is £220,000, in cash but it transpired as he gave his evidence that the source of the £220,000 was in fact a Rolls-Royce car which V12 Power accepted in part exchange for the Mercedes.
4.	On the next day, 9 September, the Appellant entered into an agreement with Mr Clay by which the vehicle was leased to Mr Clay for a period of 24 months in exchange for quarterly payments of £5,999.99, inclusive of VAT. Mr Clay is in addition required to insure the car, pay its other running expenses and keep it in good condition. It is a requirement of the agreement that at the end of the period of hire he should return it without damage, other than normal wear and tear, and that he should drive it no more than 20,000 miles. Provided he does so, he and Mr Norwood both told us at the hearing, the security deposit of £200,000 will be returned to him, in full. If there should be any damage, the cost of putting it right will be met out of the security deposit and, should he exceed the 20,000 mile limit, deductions will also be made at prescribed amounts per mile. At the time of the hearing, the 24 months had not expired and Mr Clay was still in possession of the car which he had, he told us, in fact driven very little.
5.	The parties are agreed that, even though the payment by Mr Clay of £20,000, and the reasons why he made that payment, are not recorded in any written agreement between him and the Appellant, that sum—which he and Mr Norwood told us is not returnable to Mr Clay in any circumstances—does represent part of the consideration for a taxable supply, that is the lease of the car, from the Appellant to him. The Appellant has, we understand, accounted for output tax on that sum, as well as on the quarterly payments which have been made so far. The Respondents also accept that the £20,000 genuinely represents part of the consideration paid by the Appellant to V12 Motors for the purchase of the car. They have some misgivings about the Appellant’s relationship with SC Marine, both generally and in the context of this particular borrowing but, despite those misgivings, they accept too that the £80,000 was obtained by the Appellant and applied to the acquisition of the car. They do not, however, accept that the remaining £200,000 is no more than a security deposit. It is, they say, part of the consideration for the supply of the car to Mr Clay and the Appellant must account for output tax on the £200,000, subject to adjustment when the car is returned and a repayment is made to Mr Clay. The tax in dispute, £29,787.23, is the VAT fraction of £200,000.
6.	It has to be said that the documentation produced by the Appellant to the Respondents and, indeed, to us leaves a great deal to be desired. The written agreement with Mr Clay not only makes no mention of the £20,000 initial payment, but also prescribes nine rather than eight quarterly payments, although both Mr Norwood and Mr Clay told us that they had in fact agreed on only eight payments. It also says nothing whatever about the £200,000. Although Mr Norwood’s letters to the Commissioners, during the course of the investigation into the return, are somewhat ambiguous, in our view the earlier letters clearly indicate that the amount which will be returned to Mr Clay at the conclusion of the hire is dependent on the price which the Appellant can obtain for the car and not merely upon its being returned in good condition and with no more than 20,000 miles recorded, though no doubt breach of either condition would affect the resale value of the car. The agreement with SC Marine, too, is very strange in that it records that the £80,000 which was used in part payment for the car was to be consolidated with an existing debt of £220,000 which the agreement records as having been assigned by SC Marine Services Limited to itself. Mr Norwood told us that the aggregate of £300,000 represented security for SC Marine Services Limited, against the value of the car, although he accepted that the agreement did not say as much. The loan agreement provides for the making of 24 monthly payments of £2,000, by quarterly instalments of £5,999.99 (that is, precisely the same amount as Mr Clay was to pay) although, again, the agreement lists nine rather than eight due dates of payment. Of course, even nine payments of £5,999.99 would not discharge the £80,000 borrowed but the agreement says nothing about the discharge of the balance, nor does it indicate whether the payments due to be made are inclusive of interest and, if so, on what basis and at what rate the interest is to be calculated. 
7.	Were we deciding this appeal on the basis of the documentation alone, it is unlikely that we would be able to find in the Appellant’s favour: there is simply too little reliable material on which we could determine the true nature of the relationship between the Appellant and Mr Clay, while there is sufficient material to raise, at the very least, a significant doubt about the claim that the £200,000 represents no more than a security deposit. It certainly cannot be said that the Respondents came unreasonably to the view that such a large sum, two thirds of the cost of the car, was unlikely to be a deposit against its safe return, in good condition and without excessive mileage. Indeed, Mr Norwood’s earlier letters to the Respondents, ambiguous though they are, are not altogether easy to reconcile with the contentions he later advanced.
8.	We were, however, rather impressed by the evidence we heard from Mr Clay. He told us that he has for many years been passionate about motor cars and he is in the fortunate position of having the financial means to gratify his passion. He explained that, over the years, imprudent purchases and sales had led to his losing substantial sums of money on the cars he acquired and he recognised that he should be more cautious in future. Although the cost to him of using this car for a period of two years was substantial—even disregarding the running costs and the risk that not all of the £200,000 deposit would be returnable he had committed himself to pay some £68,000—the arrangement was nevertheless attractive to him because it put a cap on the amount he would spend. He had lost more than that sum in the space of six months on a Ferrari which he had bought and later sold for considerably less than the purchase price. By way of further example of his recent dealings he mentioned the Rolls-Royce which had been used in part payment for the Mercedes. He had, he said, bought it on impulse only to find that his wife disliked it so much that she refused to allow him to keep it on the drive of their house and he was forced to dispose of it. He was not concerned, he told us, that he would receive no interest on the £200,000 but he did expect to receive the capital, in full, provided he returned the car in accordance with the terms of the agreement. He had not agreed that the amount he received should be adjusted depending upon the resale price obtained for the vehicle; it was the Appellant alone which took the risk that the value of the car would fall significantly, but equally the Appellant would gain if it rose. 
9.	Within the correspondence there is a suggestion that the likely resale value of the car, at the expiry of the two year hire period, would be as little as £58,500. It did not become clear to us from where that figure was derived. Mr Norwood told us that it was absurdly low; cars of this kind are made in very limited numbers and retain their value and he was confident that, provided Mr Clay adhered to the terms of the agreement, it could be sold for a sum close to its acquisition cost. Out of the proceeds of sale he would be able to pay off the residue of the £80,000 loan, as well as Mr Clay’s £200,000 security deposit, and he would still be left with a profit. Mrs Sells agreed when she was giving her evidence that, provided the car was sold for a sum not greatly less than £300,000, the Appellant would indeed make a profit. 
10.	We have already commented upon the inadequacy of, and the inaccuracies in, the Appellant’s documentation. Its arrangements with SC Marine, in particular, seem to us to raise a number of questions which Mr Norwood did not answer and it does not surprise us that the Respondents have continuing concerns. Nevertheless, those questions are not before us. The only issue we are required to determine is whether the £200,000 which Mr Clay paid, albeit as part of the value of a Rolls-Royce car which he handed to V12 Motors, is properly to be regarded as part of the consideration paid to the Appellant for the supply on hire of the Mercedes car, subject to adjustment at the end of the 24 month term of the hire agreement, as the Respondents maintain, or is no more than a security deposit, as the Appellant contends. Mr Puzey referred us to a number of authorities on the subject of consideration. We accept the principle to be derived from them, that consideration is to be given a wide meaning and that payments made by a third party, or by an indirect route as here, should not be artificially excluded from identification as the consideration, or part of the consideration, for a transaction. The same authorities show that the essential question is one of fact, namely, what, objectively determined, was the arrangement between the parties? 
11.	It is conspicuous that Mr Clay did not pay the £200,000 to the Appellant to be kept, even if only notionally, on one side for the duration of the agreement and returned, subject to adjustment if the condition or mileage of the car warranted it, at the conclusion of the hire period, but that instead he paid the money, or rather traded in another car, to the supplying dealer. Mr Puzey made the point that, without the £200,000 provided by Mr Clay, the Appellant could not have financed the purchase of the car. As a proposition that is probably true—at least, Mr Norwood did not suggest otherwise—but the question is not what was the consideration for the acquisition by the Appellant of the car, but what was the consideration for its supply on hire to Mr Clay. 
12.	Undoubtedly the arrangements in this case were unusual, and it is no cause for wonder that the Respondents were doubtful about them, but we are not persuaded that their unusual nature is determinative. Had Mr Clay simply paid cash of £220,000 to the Appellant, £20,000 as the first rental payment and £200,000 as the security deposit, there would be no reason (contractual conditions aside) why the Appellant should not use all of that money in part payment for the Mercedes. That is the effect of what was done. The important and, in our view decisive, point is that we are quite sure Mr Clay was telling us the truth when he said that he expected the entirety of his £200,000 to be returned at the conclusion of the 24 months, even though, as he agreed, he recognised the risk that the Appellant would not be able to find the money—he shared Mr Norwood’s optimism that the car would fetch a good price but, he said, if there were a difficulty he would take another car from the Appellant and recover his money indirectly. He was positive that the risk of excessive depreciation in the value of the car was not his. We accept Mr Clay as a witness of truth and are satisfied, therefore, that the £200,000 represents what it was claimed to represent, that is a deposit against the safe return of the car in good condition.
13.	For those reasons, even though the arrangements are unusual, and the Appellant’s documentation is lamentable, we are satisfied that this arrangement was, in substance, the same as an ordinary car leasing agreement by which a lessor acquires a vehicle, lets it to a customer for a certain period, and then either lets it to another customer or sells it. The arrangement by which Mr Clay also provided a very large security deposit, too, may be extremely unusual but, as we have indicated, we accept his evidence that that is what he did. The Appellant is, therefore, required to account for output tax only on the £20,000 initial payment and the quarterly rental instalments paid by Mr Clay and, in due course, on the price of the car when it is eventually sold. 
14.	The appeal must, therefore, be allowed. 

COLIN BISHOPP 
CHAIRMAN
Release Date: 30 October 2006
MAN/06/237