VAT on Motor Car Purchase: When is recovery of blocked VAT unblocked?
A recent tax tribunal case has brought some good news for businesses purchasing cars for business use and provided some clarification to the restrictions and requirements to qualify. Historically it has proven difficult to satisfy HMRC of their intention to not make motor cars available for private use. In addition, the tribunal addressed the question of de-minimis use, finding that minimal personal use, such as use of the car merely to enjoy or collect lunch whilst on a business journey, would not prejudice otherwise wholly business use.
In the case of Zone Contractors Ltd, the First-tier Tribunal (FTT) ruled that the restrictions imposed on the use of its motor cars were sufficient to prove that the company did not intend to make the vehicles available for private use. The claim was made that the input tax deduction was legitimate on the grounds that the cars were intended for use solely for business purposes and that any private use was prohibited. To support this assertion, the company informed HMRC that the terms of employment pursuant to which all staff were employed explicitly included an absolute prohibition of private use of company vehicles. Additionally, the cars were kept either on site or at the company offices overnight and were, therefore, not available for private journeys. The keys were generally kept in the company’s Birmingham office, although, on occasions, the vehicles might be left in London or on site. However, when in Birmingham the keys would be stored on hooks in the office. Each of the directors owned their own private car and these were used to commute to and from the office.
The main factor to the decision was the terms of the employment contract. These were explicit and binding in prohibiting employees from using company vehicles for private purposes. All members of staff, including the directors, signed the contract terms. The FTT, therefore, found that the staff were subject to a legal restriction on the private use of company vehicles. Further, the cars were intended to be stored overnight such that they were not available for the most common form of private use, namely travel to and from work.
The FTT rejected HMRC’s assertion that unless a taxpayer maintains mileage logs to evidence that there is, as a matter of fact, no actual private use, recovery of input tax recovery is not possible. It may be the case that mileage logs are either the best form of evidence or potentially even critical. However, the Court of Appeal made clear that legal restrictions are sufficient, particularly if supported by physical restrictions, such as requiring the cars to be stored overnight at company premises.
In the judgment of the FTT, the appellant had demonstrated that it did not have an intention to make the motor cars available for private use. Accordingly, it was entitled to the input tax it sought to recover.