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VAT Input Tax on cars – Board Resolution


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Last year a VAT Tribunal case was heard, concerning a company (Elm Milk Ltd) which claimed input tax of £5,790 on an E class Mercedes.

The company minuted its intention to purchase the car, and to make it available to a named Director, but that the car was not available for the Director’s private use. Within his written contract of employment was a clause prohibiting him from using the car for private purposes.

Company car


The Tribunal accepted this argument, and allowed the company’s appeal.

HMRC appealed to the High Court Chancery Division. The good news is that the Court upheld the company’s case.

The difficulty faced is art 7(2G)(b) of the Input tax Order 1992 (SI 1992/3222), which states that “a taxable person shall not be taken to intend to use a motor car exclusively for the purposes of a business carried on by him if he intends to … make it available … to any person … for private use..”

This was the hurdle which has previously proved insurmountable. See, for example, C&E Comrs v Upton (T/A Fagomatic) [2001] STC 912. Indeed, the Court of Appeal, in that case, suggested that it would be almost impossible for a sole trader (as Mr Upton was) to escape the disqualifying condition of art 7(2G)(b).

It seems, in this case, that the company had previously lost input tax on a car, and was therefore conscious not to do so again. The Directors considered the options open to it.

The key, according to the Court, was to create either a legal or a physical impediment to private use. They were not able to secure a business-only insurance policy; the keys were kept at the company offices rather than the Director’s private house (although they were only 50 yards apart!). The decisive aspect was the Board Resolution and the employee contract.

As an aside, the Court said that “this case is not an Open Sesame which will facilitate wholesale circumvention of the general prohibition of recovery of VAT on cars.” Additionally, if the car were required for emergency private use, the input tax recovery would not be blocked, since the company would not criticise the employee for using the car in such a situation.

I have already applied the reasoning of this case to secure input tax recovery for small companies. Clearly the facts have to be genuine, and capable of examination by HMRC. Adequate evidence should also be retained, including relevant correspondence. {C&E Comrs v Elm Milk Ltd [2005] STC 776}

When it comes to a sole trader, then claiming input tax on a car is extremely difficult. I would look for a business-only insurance policy, an alternative car for private purposes, and the business car kept overnight at the business premises.

There are of course other ways to buy a car. For example, where a car is leased, then 50% of the VAT can be claimed, assuming a mixture of private and business use. Further, lease costs can be set against income tax - There is more to life than reclaiming VAT!

June 2005

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