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HMRC internal manual

VAT Input Tax

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Legal history: cases about business purpose

Please note that the following material is not a full summary of the case - it merely highlights the principle referred to in the appropriate section of this manual.

Bakcsi 2002 STC 802

The taxpayer bought a car from a private individual and used it for both business and private purposes. The taxpayer subsequently sold the car. The Court ruled that where a taxable person uses a capital item:

  • for both business and private purposes; and
  • has incorporated that item wholly into their business assets

the sale of that item is wholly subject to VAT.

The fact that the item was bought second-hand from a private individual and therefore the taxpayer could not recover input tax on its purchase was irrelevant. The Court observed that a taxable person who acquires a capital item for mixed purposes may keep it entirely within their private assets and thereby exclude it entirely from the VAT system.

Ian Flockton Developments Ltd 1987 STC 394

A company which made plastic storage tanks claimed input tax on the training and upkeep of a racehorse. It said it had bought the horse to promote the company. The principal director of the company gave evidence that this was the sole object which he had in mind when he decided to buy the horse.

The tribunal accepted the director’s evidence but held that it should apply an objective test. It felt that the company ought not to have had any commercial belief that the purchase and running of the racehorse could have been for the purpose of its business.

The Queen’s Bench held that the tribunal had been wrong to substitute an objective test for the test of what was actually in the mind of the witness at the time of the expenditure. On the facts found by the tribunal the company’s sole object in buying the horse was to promote its business. Stuart-Smith J observed that this finding was a surprising one but held that it was a finding of fact with which the court could not interfere. Recovery of input tax was therefore allowed.

The way HMRC policy reflects this decision is set out at VIT10400.

Kingsnorth Developments Ltd VTD 12544

The company paid legal fees to defend its chairman against charges of fraudulent trading. The charges related to a time when the chairman had been principal director of another firm. That firm had gone into liquidation. The tribunal confirmed that input tax could not be claimed. This was because, on the evidence, the legal services could not properly be said to have been used for the purposes of the business of the company.

Schemepanel Trading Ltd 1996 STC 871

The company claimed input tax that related to supplies made before it had registered. The Court had to rule on the interpretation of VAT Act 1994 section 24. It held that the law restricts the definition of input tax to tax on supplies made to a taxable person who was also a taxable person when they used those supplies. The disputed supplies received by the company were the cost components of supplies made by it which were not chargeable to tax. They were effectively outside the VAT system and did not confer a right to deduct input tax.