Tribunal Ruling Clarifies VAT Liabilities in Vehicle Conversions

Citation: [2024] UKFTT 79 (TC)
Judgment on

Introduction

The case of Three Shires Trailers Limited v The Commissioners for HM Revenue and Customs [2024] UKFTT 79 (TC) provides a focused examination of VAT liabilities concerning the conversion of commercial vehicles to “cars” within the context of the Value Added Tax (Cars) Order 1992 and accompanying legislation. This tribunal decision intricately discusses the delineation between “qualifying” and “non-qualifying” cars, including the conditions for self-supply and implications for the recovery of input VAT and assessment of output VAT.

Key Facts

In this case, Three Shires Trailers Limited (the Appellant) appealed against HMRC’s decision which resulted in a reduced VAT repayment and imposed additional output tax due to the alleged self-supply of two Land Rover Discovery vehicles, following their conversion from commercial vehicles to non-qualifying cars.

The key facts ascertained by the tribunal were as follows:

  • The Appellant legitimately purchased two commercial vehicles and subsequently installed temporary seats and cleared the originally blacked-out windows.
  • The intention was solely business-related, enabling transportation to trade fairs and delivery of trailers, with no private use permitted or occurring.
  • HMRC initially disallowed input tax following these modifications, suggesting the vehicles had, in essence, become non-qualifying cars, triggering the VAT liability through self-supply.
  • The Appellant reverted the vehicles to their original state following this dispute, however HMRC maintained its position on the output tax.

The tribunal’s analysis hinged upon several interlaced legal principles:

  1. Article 5 of the Value Added Tax (Cars) Order 1992: This principal governs the condition of self-supply, whereby a vehicle, once converted into a motor car and thus subjected to VAT, cannot later be reclassified to evade resulting tax liabilities.

  2. Definition of “Motor Car”: Essential to this case is the statutory description outlined in the Order, categorizing vehicles in accordance with their structural alterations and use.

  3. Article 7 of the Value Added Tax (Input Tax) Order 1992: It delineates the grounds on which input tax on motor cars is recoverable, importantly defining what constitutes a ‘qualifying motor car’. It also sets the criteria for when input tax cannot be reclaimed, specifically if the car is intended for any private use.

Applying these principles, the central issue revolved around whether the additions to the vehicles, constituting a conversion to ‘cars’ for VAT purposes, met the criteria of ‘qualifying cars’, thus precluding the input VAT from being blocked and negating the self-supply charge.

Outcomes

In dispelling the asserted VAT liability, the tribunal established that:

  • Installation of temporary seating and window adjustments did not disqualify the vehicles from being considered as ‘commercial vehicles’ for VAT purposes.
  • The vehicles remained ‘qualifying cars,’ based on inherent intentions and use, which aligned with the criteria set out in Article 7, precluding any application of input tax block.
  • No private use had occurred, and as such, there was no VAT liability through self-supply.

Accordingly, the tribunal allowed the appeal, recognizing the right of the Appellant to recover input VAT and negating additional output VAT charges associated with the vehicles’ modifications.

Conclusion

The Three Shires Trailers Limited case underscores the nuanced application of the Value Added Tax (Cars) Order 1992 and related statutes, particularly in the realm of input and output VAT as it relates to vehicle use and conversion. The tribunal’s decision pivots on the determination of intended use and the characteristics of a ‘qualifying car,’ offering a valuable precedent for similar VAT disputes concerning vehicle conversions. By upholding the appeal, the tribunal reinforces the necessity for a congruent and just application of tax laws, ensuring that businesses are not unduly penalized for operational decisions that do not fundamentally alter the nature of their assets for VAT purposes.