If you are considering buying a car (or cars) through your limited company there are many associated costs and tax implications to consider. The most important of which is VAT.
To reclaim VAT on the purchase of a company car there are two tough conditions that you must meet:
- The car must be used exclusively for business services
- The car must not be made available for private use
These rigorous conditions prevent many from reclaiming VAT. However, due to the openness of these conditions they can be interpreted in different ways, and that is exactly what happened in a First-tier Tribunal (FFT) case with Zone Contractors Ltd and HMRC, which saw Zone Contractors Ltd successfully reclaim VAT on the purchase of six company cars.
In this case Zone Contractors Ltd stated that the cars were always parked over night at their premises. There was no arguing with the fact that this met condition a., but HMRC argued that employees took detours on business journeys, e.g. to collect lunch, preventing them from meeting condition b.
Do not use the car for private purposes
However, importantly for Zone Contractors Ltd (and you, should you wish to reclaim VAT on the purchase of your company cars), they had put in place measures to prevent their employees from using the cars for private purposes. Every Zone Contractor Ltd employee signed a contract, which formed part of their employment contract, declaring that they were aware that it is forbidden to use a company car for any personal use inside or outside of their employment hours and the car must always be returned to the company premises after use. The contract then went a step further to say that employees found breaking these rules would face disciplinary action.
In reality the cars were used for minor personal trips, but Zone Contractors Ltd was able to prove that this was not their intention.
After considering all of the evidence FTT ruled in favour of Zone Contractors Ltd, declaring that minor personal journeys were inevitable and HMRC must have been aware of this when the initial rules were put in place. Overall, FTT was satisfied that the cars were not available for private use.
In protest, HMRC argued Zone Contractors Ltd insured the cars for ‘social, domestic and pleasure’ and therefore condoned the use of personal journeys. The FTT did not class this as sufficient evidence due to most insurance policies, including business policies, including this clause as a matter of course.
HMRC may still appeal this decision.
The good news for you is that if you are in a similar position to that of Zone Contractors Ltd, you can potentially make a successful VAT claim. However, you must ensure you have put in place measures to show that you intend to comply with the rules. The key deciding factor in this case was the contract, which all employees signed when they first joined the company.
To discuss whether you are eligible to reclaim VAT on the purchase of a company car, please contact our tax specialist Neill Staff at firstname.lastname@example.org.
For further reading on company cars, see our article: Can I reclaim VAT on Mileage Expenses?