HMRC takes a very tough line when enforcing the rules which prevent businesses reclaiming VAT paid on car purchases. So how was one company able to get around them and could you do the same?

VAT block

Special rules block the recovery of VAT when you buy a car for use in your business. A claim is possible where two tough conditions, which HMRC enforces rigorously, are met. Zone Contractors Ltd (Z) was successful in arguing its case at the First-tier Tribunal (FTT) for the recovery of VAT it paid on the purchase of six cars, which it provided to its employees for use in its construction business.

What are the conditions?

The legislation only allows you to reclaim VAT on the cost of a car where: it’s used exclusively for business purposes and it is not made available for private use. The first condition is self-explanatory, but the second can be interpreted more than one way. Certainly HMRC and Z had differing views.

Actual usage

The cars were always parked overnight at the company’s premises or left at the site where the employees were working. This seemed to meet the first condition, but HMRC said that in practice the employees took detours to buy cigarettes or lunch while out on a business journey. The FTT said that such minimal journeys were inevitable and decided that this must have been understood when the rules were written. Minimal use of that sort must be allowed or the rules would have simply blocked VAT recovery without exception.


Importantly, the company made each employee sign an agreement which included a clause saying “It is hereby strictly forbidden for the Employee to use the Company vehicle for any personal use inside/outside their employment hours. Any Employee found to be contravening this will be subject to Disciplinary Procedures. The Company vehicle must be returned to the nominated address after use as instructed by the Director.”

Tip 1. A clause similar to that used by Z is vital if you are to stand any chance of successfully reclaiming VAT on the cost of a car. Plus, it should be in place at the time of purchase for each employee (including directors) who might drive the car.

Tip 2. The clause should be included in the employee’s employment contract or an agreement for use of the car. It’s probably not strong enough to just include it in a policy statement which doesn’t require the employee’s signature.

HMRC’s last stand

HMRC’s last ditch argument at the FTT was to say that the insurance for the cars included use for “social, domestic and pleasure” (SDP), and so allowed for private use. HMRC often tries this tack. However, the FTT pointed out that even business insurance policies cover SDP as a matter of course and in practice can’t be excluded by the policyholder.

Tip. Z could have avoided any dispute over its claim if it had bought small vans instead of cars as the block on VAT recovery doesn’t apply to vans. Some vans are very suitable substitutes for cars.