Independent VAT Consultant
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VAT claimable on family’s ‘business cars’

A tax tribunal has ruled that input tax could be refunded on three new cars, which the taxpayer claimed were acquired for and used exclusively on business trips.

13th Sep 2019
Independent VAT Consultant
Columnist
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A basic rule of VAT, in place since the 1970s, is that input tax cannot be claimed on the cost of buying a new car unless it is exclusively used for business purposes and it is not intended to be made available for private use (Article 7, Value Added Tax (Input Tax) Order 1992).

This means there is no problem claiming input tax if the car is a tool of trade, eg for a driving school, taxi driver or car hire business. There also is no problem with claiming VAT for a genuine pool car that is available to all employees and not kept overnight at the home of any specific employee (VAT Notice 700/64, para 3.7).

Apart from those circumstances, opportunities to claim input tax on the purchase of a car are few and far between.

Prestige cars

Barry Graham (TC07313) traded in the computer industry, earning daily fees of between £3,000 and £5,000. He even had a contract in place to pay his adult children £1,000 per day for any work they did for his business. The nature of his business involves a considerable number of business trips to see clients.

He decided that his business needed to own prestige cars to show he was running a successful venture. On his March 2017 VAT return, he claimed input tax of £20,805 in relation to three cars: an Audi A8, Mini Cooper S and a Porsche Cayenne. HMRC challenged the claim and disallowed input tax on the basis that the vehicles were available for private use. Graham appealed to the FTT.

Taxpayer arguments

The taxpayer claimed that the cars were used exclusively for business purposes by him, his wife and children, and were never made available for private purposes. That had always been the intention.

Each family member had a separate car for their private journeys and the keys of the business cars were kept in a locked safe and only retrieved for business trips. A mileage log proved that 93% of trips were carried out for long business journeys, with the other 7% being for shorter trips, which Mr Graham said he could also analyse if necessary. There was also a contract in place with his daughter which “expressly forbid” private use of the cars.  

The decision

The FTT appeal was allowed.

The main factors in the taxpayer’s favour were the fact that each individual owned a separate car which they used for private purposes, plus a persuasive argument from Graham that private use was completely blocked for all three cars. He was described as an ‘honest witness’ in the case report.

The court dismissed the fact that the three cars in the Graham case were only insured for social domestic and pleasure purposes, seeing this as an oversight on the part of Graham’s wife, who was ill at the time she dealt with the insurance policies.

Learning points

Despite this verdict, the odds of a taxpayer winning appeals concerning input tax on cars are very slim indeed.

The last major taxpayer success in the courts was the case of Zone Contractors Ltd (TC05330), (see VAT claim on company cars allowed) where the arguments were helped by the fact that the employees had strict contracts of employment in place that prevented private use of the vehicles, and the cars were kept overnight either on-site or at the company offices (rather than at the home address of individual employees).

It is fair to say that it is harder for an unincorporated business to win the input tax argument than a limited company, where everyone is an employee.

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