Neil Warren considers the case of Zone Contractors Ltd, where the court accepted that six cars were not available for private use.
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.
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.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.