CARS - 28.09.2018

Reclaiming VAT on business cars

Blocked input tax

In general, input tax you incur on a car you purchase for use in your business is subject to a block, i.e. you can’t recover it.

However, there is an exception to this block if the car meets two conditions, namely it is:

1. Used exclusively for business purposes.
2. Not made available for private use.

Tip. These are similar to the requirements for a pool car to be exempt for income tax purposes.

The first condition is self-explanatory, but the second is more difficult. In practice, you may struggle to satisfy a HMRC inspector that it has been met. A 2016 First-tier Tribunal (FTT) case illustrates just how petulant HMRC can be when applying the strict letter of the law.

The conditions in the spotlight

Zone Contractors Ltd (Z) purchased six cars, and provided these to its employees for use in its construction business. It submitted a claim to recover the input tax on them on the basis that the two conditions discussed above had been met, but HMRC denied the claim.

HMRC’s argument was that the second condition (no private usage) had not been satisfied. In practice the employees occasionally took detours, for example to purchase lunch. Z appealed to the FTT, saying that such minimal incidental journeys were inevitable. The FTT agreed with Z, saying that if that sort of minimal usage were not allowed, the rules would have blocked recovery wholesale.

Clutching at straws

This appears to be a good application of common sense by the FTT judge. HMRC then tried a somewhat desperate last-gasp tactic. It argued that because the insurance policy Z took out for the cars covered usage for social, domestic and pleasure (SDP) in addition to business, permitted private usage was implied to be allowed. The FTT rubbished this claim, pointing out that the vast majority of business insurance policies include SDP coverage as a matter of course.

Get it right

Unfortunately, we are aware of a number of businesses which have had similar claims rejected. The key is in proving that private use is not permitted. So how can you ensure you get it right?

What was crucial to Z’s argument was that it required each employee to sign an agreement which included a clause making clear that private use of the cars was strictly prohibited, and anyone found contravening that agreement would be subject to disciplinary procedures. It is also evident that the cars were required, and were in practice, returned to the company address, not taken home by any employee.

Tip. Our opinion is that you should include a clause like this in either the employment contract or a specific pool car usage agreement requiring a signature by the employee (see The next step ). It is probably insufficient to have it in a general policy document.

For an employee pool car agreement, visit http://tipsandadvice-vat.co.uk/download (VA 08.11.02).