As a general rule VAT on the purchase of a car is specifically blocked. However, if a car is intended for use for business purposes and it is not intended to be made available for private use the VAT may be recovered under the normal rules. Over the years HMRC has made it very clear that businesses have to show that a car can never be used for non-business purposes before allowing recovery of the VAT. HMRC have insisted that it must be shown that cars are physically locked in compounds overnight or that comprehensive mileage logs are kept to show that there has been absolutely no non-business use.
The Elm Milk case (Customs and Excise Commissioners v Elm Milk Ltd  EWCA Civ 164 showed that this was not necessarily the case and that a legal restriction on private use such as a company resolution could be sufficient to establish that a car was not “available for private use”. Nevertheless, HMRC has continued to set the bar of proof so high that it has been almost impossible for some businesses to claim the VAT.
The recent decision in Zone Contractors Limited v Revenue and Customs Commissioners ( UKFTT 0594 (TC), TC05330) has re-emphasised the principles established in the Elm Milk case. Zone Contractors Limited is a supplier of groundworks on civil engineering projects. It provided all-terrain type cars to its employees to be used for getting around on construction sites, typically road construction sites, which could be spread over several miles. The cars were usually returned overnight to the company’s offices in Birmingham and London but were sometimes kept on the construction site. There were also a couple of saloon cars that were used to visit the offices of main contractors, suppliers etc. The company’s standard contract of employment explicitly stated that company vehicles were to be used only for the company’s business purposes and personal use was strictly forbidden. The directors were the main users of the cars but used their own vehicles for travelling to and from work. The company had claimed VAT on the purchase of the cars and HMRC had assessed to recover the VAT on the basis that the company could not show that the cars were not available for private use. The only evidence that HMRC would accept that there had been no private use was detailed mileage logs, which it seems the company may not have been keeping. In HMRC’s view even stopping off on a work journey to collect refreshments meant that the car had been used for private purposes. Moreover, HMRC’s view was that the insurance policy for vehicles covered “domestic and pleasure” use and so the cars were available for those purposes.
The Tribunal decided that the existence of the legal restriction (in the contracts of employment) on the use of the cars meant that the mileage logs were not required (although they might be needed for other purposes). As has been found in previous cases, cars are almost always automatically insured for domestic and pleasure use and insurance companies generally refuse to insure a car just for business use; therefore, the Tribunal placed no significance on the terms of the insurance policy. The Tribunal also commented that it was not the purpose of the legislation to impose a condition that it was almost impossible to fulfil and so allowed that there could be de minimis non-business use, such as stopping to pick up lunch, that would not mean that the car was available for private use.
This decision is very welcome but businesses wishing to claim VAT on cars which are only used for business should note that no evidence was brought showing how the terms in the contract of employment were policed and enforced and HMRC may require this in similar cases. The company cars were kept on sites that were many miles from the directors’ homes and the directors had their own private vehicles, and so it was easier to argue that there was less opportunity and no need for the cars to be used for private journeys.
For the definition of a car and other information on claiming VAT on motor expenses see VAT Notice 700/64: motoring expenses.