HMRC recently lost a first tier tribunal case on the recovery of VAT on the purchase of six cars.
Although most VAT registered businesses are able to recover the VAT on the purchase of commercial vehicles the rules for the recovery on a car state two conditions must be met:
- the vehicle must be used exclusively for business purposes and
- it is not made available for private use.
In the case of Zone Contractors Ltd the court accepted that six cars were not available for private use which allowed the business to successfully recover the VAT on the six cars.
The business had a strongly worded contract of employment that prevented employees from using company cars for private travel. This was the crucial factor in this case and allowed the business to recover over £27,000 in input VAT 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. The tribunal also rejected HMRC's argument that the company had failed to demonstrate that the cars were not available for private use.
Other factors which were relevant:
- The Tribunal was satisfied that all employees signed a contract when they first joined the company, which included the following 'It is hereby strictly forbidden for the Employee to use the Company vehicle for any personal use inside/outside their employment hours'.
- The six cars were always kept overnight at the company's offices or were left on site.
- Zone Contractors carry out groundwork projects and the vehicles were appropriate for for site based work.
- The taxpayer also successfully counteracted HMRC's argument that the insurance cover of the vehicles included use for 'social, domestic and pleasure' (SDP), and was not just restricted to business use. But the tribunal accepted it was impossible to have a business only policy without the SDP clause.
- HMRC also put forward an 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.
- The intended use of the car at the time it is purchased is crucial. The private use issue means that either a legal restriction to prevent such use or a physical restriction must be in place.
HMRC may appeal against the decision.
Internet link: Tribunal decision