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VAT claim on company cars allowed

19th Sep 2016
Independent VAT Consultant
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Neil Warren considers the case of Zone Contractors Ltd, where the court accepted that six cars were not available for private use.

Contract terms

A strongly worded contract of employment that prevented employees from using company cars for private travel was the crucial factor in the first-tier tribunal victory for Zone Contractors Ltd (TC5330), regarding input tax claims totalling £27,151 on the purchase of six new cars.

The tribunal was satisfied that the cars were wholly used for business purposes and were not available for private use. HMRC’s view was that the company had failed to demonstrate that the cars were not available for private use, despite the wording in the employment contracts. The tribunal rejected this argument.

Two tests in law

The law concerning input tax recovery on cars is contained in Article 7 of the Value Added Tax (Input Tax) Order 1992 (the ‘order’). The order requires two conditions to be met:

  • the vehicle must be used exclusively for business purposes; and
  • it is not made available for private use.

The two tests are independent and the issue of ‘availability for private use’ is very different to the test of ‘actual private use’.

Did Zone restrict availability of private use?

The Tribunal was satisfied that all employees, including directors, signed a contract when they first joined the company, which included the following paragraph:

Company vehicles – the use of Company vehicles is strictly for the purpose of performing the Employers [sic] trade or business by the Employee. It is hereby strictly forbidden for the Employee to use the Company vehicle for any personal use inside/outside their employment hours. Any Employee found to be contravening this will be subject to Disciplinary Procedures. The Company vehicle must be returned to the nominated address after use as instructed by the Director.

The tribunal noted that the six vehicles in dispute were always kept overnight at the company’s offices or, alternatively, were left on site. The company’s main activity was ground work projects (mainly roads), so the vehicles were resilient for site-based work.

The judge said: “The Tribunal considers that the terms of the contract are explicit and binding”.

What about insurance cover?

The taxpayer also batted off HMRC’s argument that the insurance cover of the vehicles included use for ‘social, domestic and pleasure’ (SDP), so it was not just restricted to business use. But the tribunal accepted that SDP use was the starting point of vehicle insurance cover, with business use then added as an extra. So it was impossible to have a business only policy without the SDP clause.

De minimis private use

HMRC also put forward the valid argument that private use of a car would include detours to buy “cigarettes or lunch while out on a business journey or even going off site to collect lunch”. The tribunal concluded that such use could be ignored as de minimis and added that if such use of cars was relevant, it would be virtually impossible for any car to qualify for input tax deduction under Article 7.

Tips for companies or their advisers

The key issue to consider is the intended use of the car at the time it is purchased. Is there an intention for it to be made available for private use? A subsequent change in the intention is not the key issue, which is why the tribunal was not particularly interested in reviewing mileage logs for the cars.

In summary, the private use issue requires either a legal restriction to prevent such use (as with the contract of employment wording in the Zone case) or a physical restriction.

Conclusion

The issue of whether VAT can be claimed on motor cars bought by a business has kept the courts busy for many years. This may not be the end of the road for this case, as HMRC may appeal.

Replies (5)

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By nogammonsinanundoubledgame
20th Sep 2016 08:34

Is there any legal avenue for Fagomatic to go back to law and have its ruling overturned, given that it failed at the court of appeal, so I understand, purely on the grounds that the insurance allowed for SDP, which is now ruled as insufficient grounds for dismissal?

With kind regards

Clint Westwood

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By Les Howard
20th Sep 2016 18:52

I don't think Fagomatic can be revisited. It was a sole trader, so no contract of employment. The car was available to the taxpayer for his private use.

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By rememberscarborough
22nd Sep 2016 09:50

Does HMRC believe that it's above the law? This company has done everything to make sure that the cars comply with the VAT regulations yet they still waste huge amounts of time and money going after the one company that does know what it's doing.

Lazy at best but you wonder if they're trying to be vindictive considering all the other "friends" of HMRC who get away with far, far more....

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By Marie Stein
22nd Sep 2016 13:26

Thank goodness, at last, a sensible decision for company car owners! The Tribunal's decision to ignore "de minimis" use is so refreshing and we can hope that HMRC will take note of this approach. However, I'm sure that HMRC will try to find a way to get round this decision. I doubt that the subject is in any "closed".

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By Carolynne
22nd Sep 2016 16:34

If the Directors of the company have no written employment contract but are on the payroll, therefore mitigating their falling under the rules of national minimum wage.

Could anyone clarify, if something of this nature was written and signed by the Directors, could it then imply that they have a contract of employment and therefore fall under the rules of NMW where previously they were not?

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