Case report on VAT recovery on new car, private plates

The right to recover VAT on costs incurred by a business is underpinned by the need to demonstrate, not just that the VAT costs would support a taxable business activity but whether they are used exclusively for the purpose of business. VAT on costs that are not used exclusively for business purposes would fail to qualify for recovery under Article 7 (2) (E) 1992/3222 Value Added Tax (Input Tax) Order 1992.

The recent case report of a business trading as Church Farm related to HMRC refusal of an input tax claim on Church Farm’s VAT return for October 2020 which included VAT for two vehicles, a personalised number plate and clothing which amounted to VAT of £28,374.14.

The taxpayer represented themselves at the First Tier Tribunal and, clearly from the case report, had done a lot of research (supported by their accountant) into the VAT case law relating to the deduction of VAT on cars and number plates in the context of whether these were genuine business cost on which the VAT was capable of being recovered.

Indeed, whilst the VAT was claimed on the October 2020 VAT return the case report outlines a timeline of correspondence, they had entered into with HMRC prior to the submission of the return to establish the position of the recoverability, or not, of the input tax concerned, see extract below (MF and BF are the directors of the business; CF refers to Church Farm business VAT registration and RP is the HMRC Officer involved);

• On 29th October 2020, MF wrote to HMRC/RP explaining that CF was preparing its October 2020 VAT return and wanted to advise that new cars were included in the return and referred to HMRC guidance.
• This email also stated, “You will note we now have an ERS licence from the council that allows us to use the cars for business purposes”. The attachment was a Private Hire Operators Licence issued by Cotswold District Council dated 26 October 2020 and the licence holder was BF.
• By email dated 30 October 2020, MF wrote to RP enclosing an email from CF’s accountant dated 27 October 2020, which advised that it was usual that no VAT can be recovered on the purchase of a car due to private use restrictions. It said “however, you may be able to claim all the VAT on a new car if it’s mainly used as a taxi, for driving instruction and for self-drive hire”

The details of the case go on but the point of interest for us, however, was in the response from the HMRC Officer to this correspondence which all took place before the VAT return was submitted, which was:

• RP replied, on 30 October 2020, advising that claiming input tax on new cars is “generally blocked” but advising MF to consider the HMRC guidance and determine whether any car purchased met the criteria to allow input tax to be claimed.

Therefore, leaving it to the taxpayer in effect to “consider the HMRC guidance” and “determine” whether it met the criteria to be claimed. The taxpayer duly did consider the guidance and case law and felt a claim was justified, only to end up in a courtroom (virtually in this instance) to argue their case to an independent tribunal, as on the 10 December 2020, HMRC had issued a formal reduction notice for the October 2020 VAT return refusing the input tax claimed on that return of £28,374.14 and reducing it by that amount.

It leaves the feeling that if HMRC had been more able to give a clear opinion at the start of the process, when the taxpayer approached them for their view on the matter, then at least the taxpayer would have been able to make a decision as to whether they felt they had a strong case to argue and would be prepared to appeal against that decision at that point.

This lack of commitment from HMRC when approached for a decision on any aspect of VAT is increasingly common, we find these days, but it merely serves to create uncertainty for the taxpayer and increases – no doubt – the stress and costs they will incur as a result. We all accept that VAT is a complicated tax and all types of factors need to be taken into account when reviewing the issues our clients face, but a degree more certainty from HMRC in their own approach to a matter would be a welcome step.

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