A common urban tax myth perpetuated in pubs across the land, having been dispensed by such Oracles of taxation as Dave’s Brother or Terry the tiler is that VAT is entirely recoverable on new cars.
Having responded to clients on many occasions around this assumption, my trusty draft on the legislation set out in Article 7 of the Value Added Tax (Input Tax) Order SI 1992/3222 clarified the position succinctly, the main thrust of which sets out:
- …intention should be to use the vehicle wholly for business purposes; and
- it should not be available for private use.
These two points will typically disallow recovery for most businesses excluding say taxi drivers, car hire businesses or driving schools and until recently this was supported by case law, namely Fagomatic 2002.
This case involved a salesman purchasing a Lamborghini to deliver cigarettes to his vending machines. Originally Mr Upton managed to convince a lower tier tribunal that his car was simply a delivery vehicle and never used for private use, this was promptly overturned at the court of Appeal.
Recent triumphs however may provide a glimmer of hope for VAT reclaims on cars for many other businesses.
Lesson 1: Employment Contracts
The Zone Contractors Ltd case concerned a groundworks company that reclaimed £27,151 VAT on six new vehicles.
The key to victory in this case was the fact that each employee had a clause in their employment contract restricting any private use of any company vehicle.
Before we all get too excited at the chance of a silver bullet here, they were also able to demonstrate not only this important legal restriction but also a physical restriction on the availability for private use as the vehicles were also always kept on site or at company offices.
Lesson 2: Insurance
Jane Borton overturned a HMRC assessment for £5000 on the recovery of VAT on her new Land Rover.
She maintained the vehicle was exclusively used for the purpose of her business, and this was entirely supported by the fact the insurance cover on the vehicle was for Business Use only.
This is interesting as the insurance cover in Zona Contracts was for business use Social Domestic and Pleasure. It was determined in this case that the SDP cover was the starting point for any policy, even if there was no intention to use the vehicle for SDP purposes.
Lesson 3: Enforceable Legal Restriction
Venda Valet Ltd, it’s important to mention that this case failed in its endeavour to recover £7,833 VAT on a new Mercedes car, however the lesson we can learn is that although the directors had a verbal agreement there would be no private use, and the car was kept at the company premises overnight, the agreement was deemed non-binding.
The arrangement was:
- the car was locked at the company premises when not being used;
- the two directors were the only people authorised to use it;
- the car keys were kept in a safe when the vehicle was not being used;
- a tracker was fitted to the vehicle to monitor its use; and
- there was no insurance policy in place that prevented
The employment contracts in the Zona case however were legally binding and there could be summary dismissal for breach.
Structured correctly, certain businesses that previously would potentially not have had a claim on input tax could now stand a chance.
Employment contracts should reflect the commercial reality in order to be successful in this space. Physical restrictions still apply as does the level of insurance cover.
If you are considering purchasing vehicles for your business it is essential you get the correct advice as an error can you leave you out of pocket.
Call us today to arrange a free consultation, we can ensure you are operating your limited company and personal taxation in the most optimal way.