eldiablo's advocatee

Can a baker delivering flour in his D-type Jag claim that his 'business car' is tax deductable? Logic dictates that probably such a car would not be solely used for business purposes and hence VAT would not be recoverable. However a recent tribunal decided otherwise.

A tribunal was called to decide whether or not VAT was recoverable on a Lamborghini Diablo. The car was being run by the owner of a business that supplies and operates cigarette vending machines in nightclubs.

C M Upton*, trading as Fagomatic, claimed that it was being used solely for business purposes adding that he used the car for making nocturnal deliveries to his status-conscious customers and that its use had increased his turnover.

Customs and Excise refused to deduct input tax on the Lamborghini because, they claimed, the owner intended to make the car available for private use. The owner's car insurance did not exclude private use but no extra charge was made to cover this possibility. The tribunal supported the businessman because they felt there was insufficient evidence to establish that he intended to use the car privately.

Since VAT was introduced in the UK in 1973, the recovery of VAT on the purchase of most business cars has been restricted. EC VAT rules permit member states to apply national restrictions of this kind. Most member states have similar restrictions.

Three test cases were brought to court in 1995 claiming that the UK's restrictions were incompatible with EC law. But the VAT tribunal and high court dismissed the appeals and the court of appeal referred the cases to the European court.

The EC court, in turn, concluded that the second council VAT directive authorised member states to introduce or maintain exclusions from the right to deduct the VAT on the purchase of motorcars used by a taxable person for the purposes of their taxable transactions.

This rule applied even though the cars were essential tools in the business of the taxable person concerned, or could not, in a specific case, be used for private purposes by the taxable person concerned. It all hung on the proper construction of the Article 17(6) of the Sixth VAT Directive, apparently, a ruling that would normally disapply luxuries as business expenditure. This appears to have an interesting interpretation in the case of the Diablo and Fagomatic.

The implications are far-reaching. If I am able to claim the VAT back on my Mercedes by proving that it's main purpose is to take a briefcase of papers round to my clients, you can bet your life I'll be doing so. My view is that if a Lamborghini Diablo is a delivery van I'm a monkey's uncle, but if that's what the VAT Tribunal says, so be it! This proves that where the finer points of interpretation are concerned there are occasions when it's worth taking the VATman on.