VAT: Buying a car through the business

Most accountants and tax advisers have been asked the seemingly unanswerable question: I purchased a car solely for business purposes – can I claim the VAT? Before reclaiming VAT on a vehicle purchase, you must determine whether the vehicle is a car because there are rules governing the process of reclaiming VAT on car purchases and leases. This blog will give you a detailed overview of whether the VAT can be reclaimed on newly purchased cars or not with the help of case laws.

1. VAT – is it a van or a car?
2. Coca Cola Case – is it a van for tax purposes?
3. Buying a new car
4. Leasing a vehicle
5. Input tax claims on purchase of new cars
6. Other case laws – Reclaiming VAT

VAT – is it a van or a car?

It is critical to establish whether a vehicle is a van or a car for VAT input tax claims. Input VAT is usually blocked on the purchase of a car unless used exclusively for business purposes, whereas it can be reclaimed when you buy commercial vehicles (which include vans).

When an employer provides a car for private use, VAT fuel scale charges are applicable; however, it is not applicable in the case of commercial vehicles.

A van is defined as a vehicle with three or more wheels that is not a car for VAT purposes. A car is designed primarily to transport passengers; it features rear windows or space for them, as well as a roof behind the driver.

1. Commercial vehicles that are primarily used to carry goods and have a payload of at least 1 tonne.
2. Vehicles weighing more than 3 tonnes.
3. Buses, ambulances, breakdown vehicles, hearses, ice cream vans, and caravans are all examples of commercial vehicles.
4. Vehicles capable of carrying a single person (the driver) or more than twelve (including driver)

Also See: How to claim VAT on mileage expenses?

Coca Cola Case – is it a van for tax purposes?

On 10 and 11 June 2020, the Court of Appeal heard the ongoing dispute between HMRC and Coca-Cola European Partners Great Britain Limited (Coca-Cola) and two of its workers (Noel Payne and Christopher Garbett) (Cases Nos. A3/2019/1203 and A3/2019/1215). The dispute concerns vehicles provided to Coca-Cola employees and whether they should be classified as vans or cars for benefit-in-kind purposes.

Combination or combi vans resemble a van basically but include at least one additional row of seats, doors, or windows behind the driver, allowing it to carry more passengers. For example - Coca-Cola offered employees a Vauxhall Vivaro or a first or second-generation VW Transporter T5 Kombi van, a company vehicle for business and personal use.

It should be noted that the Coca-Cola provided Vauxhall Vivaro, which had been modified in a variety of ways, including the addition of the second row of seats capable of accommodating two passengers. In addition, in the event of sudden braking, a window was placed next to these seats, and a bulkhead was added behind them to prevent cargo from entering the passenger compartment.

Although the VW Kombi vehicles came equipped with rear seats, the driver was needed to install racking when the vehicle was used for business purposes. For the Kombi version 2 required the removal of the rear seat to accommodate the racking.

HMRC determined that the vehicles did not qualify as goods vehicles under section 115(2) and hence were not vans. As a result, the department categorised them as automobiles, issued notifications to Mr Garbett and Mr Payne for 2016-17 PAYE coding, and charged Coca-Cola class 1A National Insurance contributions. The corporation and its employees filed an appeal.

At a 2017 hearing, the First-tier Tribunal determined that the VW Kombi was more like a minibus than a van and maybe regarded a car for benefit-in-kind purposes. However, the judge determined that the Vauxhall Vivaro vehicle passed the test and should be classified as a van. The dispute was appealed to the Upper Tribunal, which upheld the lower tribunals ruling two years earlier in 2019. Finally, The Appeal Court judges disagreed with the lower courts findings, concluding that none of the cars in question met the definition of a van and that, for benefit-in-kind purposes, the charge to employees should be computed in accordance with the corporate car rules.

Although the above is not relevant to VAT, as for VAT purposes, the definition of a van is different from income tax, but the principles explained in the case may still have a wide application when considering whether a vehicle is a van or a car.

A list of cars derived vans and combi vans can be found here.

Also See: List Of Business Expenses You Can Claim As A Limited Company

Buying a new car

When a business purchases a car, special rules block the VAT recovery. Businesses may still be able to reclaim 100% of the VAT on a new car if it is used exclusively for business purposes. However, the car must not be used or made available for private purposes, and you must be able to demonstrate that it is not, for example, by referring to your employees contract.

Private use includes travel between home and work except if it is a temporary place of work. Additionally, you may be able to recover all the VAT on a new car if it is primarily used:

1. As a taxi service
2. For driving instruction
3. For self-drive hire

Leasing a vehicle

Generally, if you lease a car, you can claim 50% of the VAT. You may be eligible to claim the entire VAT if the vehicle is used exclusively for business purposes and is not available for private use or if the vehicle is primarily used for the following purposes:

1. As a taxi
2. For the purpose of driving instruction

Input tax claims on the purchase of new cars

As stated earlier, VAT recovery on the purchase of cars is usually blocked. However, a claim is possible if two stringent conditions which HMRC strictly enforces are met.

Conditions

The VAT rules permit a business to reclaim VAT on the cost of a car only if:

• The vehicle is used exclusively for business purposes and
• is not made available for private use.

This means that claiming input tax should be straightforward if the car is used as a trade tool, such as by a driving school, taxi driver, or car hire business. Additionally, there is no difficulty claiming VAT on a genuine pool car that is available to all employees and is not kept overnight at the residence of any particular employee.

Case Law – Barry Graham

Barry Graham, who worked in the computer industry, successfully argued his case at the First-tier Tribunal (FTT) for the VAT recovery on the purchase of three prestige cars (an Audi A8, a Mini Cooper S, and a Porsche Cayenne) which Barry claimed were purchased exclusively for business trips by him, and for their son and daughter, who were also employed by the business. However, HMRC objected to Grahams VAT reclaim on the cars in this case on the grounds that they were available for private use.

Exclusively used for a business purpose, not private

Graham argued that the cars were used exclusively for business purposes and never made available for personal use. The following evidence was presented in support of the argument:

1. Each family member had their own car of similar quality for private travel.
2. Graham’s son and daughter were bound by an employment contract that specifically prohibited them from using the cars for private purposes.
3. The car keys were kept in a locked safe, the combination to which was only known to Graham.
4. A mileage log revealed that 93 per cent of car trips were long business trips, and Graham could account for the remaining short trips without much effort.

The tribunal determined that the automobiles were not made available for private use and therefore allowed the VAT recovery. It rejected HMRC's argument that the car insurance allowed private use, because it was impossible to obtain business cover only.

Other Case laws – Reclaiming VAT

Gerald David Jones case was the first tribunal case to address the issue of recovering VAT when a car is purchased for business purposes with insignificant private use. The case involved a farmer who used a car for the farm business and another vehicle for personal use. Although the tribunal acknowledged that the car in question was not used for private motoring, it determined that this was irrelevant: the car was available for private use, which meant that the VAT could not be reclaimed on its purchase.

As per the chairman’s view, it is near to impossible that someone who acquires a motor vehicle that is freely usable on roads for private purposes would not keep the possibility of such use in the back of their mind at that time.The tribunal applied this policy in several appeals, including PC & AM Wood (14804), in which the tribunal applied the principle established by the European Court of Justice in Enkler v Finanzamt Hamburg and concluded that the critical point is that the consumer always has the option of using the asset whenever they consider it is necessary or desirable.

Taking the reference of Webb Plant Hire Ltd case (15162), the tribunal determined that a person actions are presumed to have intended the natural consequences. Thus, when a person purchases a car, they must intend to use it for any purpose, including private use. This is an extreme view by any standard, and it has been largely discredited in subsequent appeals. On multiple occasions, the tribunal has asked the appellant that if any of your family members become ill, whether the person would use the car and transport the family member to the hospital. If the answer is affirmative, the vehicle must be considered available for private use. It is only unavailable if the car is out of reach of the owner.According to customs, a car is out of reach if there are sufficient legal or physical obstacles preventing it from being used privately. Another way to keep a car out of reach for private use is to insure it exclusively for business purposes.

In case you have a query or want specialist advice from our VAT experts, kindly call us on 03330886686, or e-mail us on enquiry@dnsaccountants.co.uk

“This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction”.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.