Zone Contractors Ltd v Revenue and Customs (VAT - CARS : Input tax)

Factual and Procedural Background

This matter concerns an appeal brought by Appellant, a civil engineering contracting business, against a decision by Respondents to issue an assessment for £27,151 to recover input tax on the purchase of six motor cars. The Respondents disallowed the input tax on the basis that the Appellant failed to provide sufficient evidence that the cars were purchased exclusively for business use and were not made available for private use.

The Respondents conducted a routine control visit in March and April 2013, identifying the input tax claims related to cars, which are generally subject to statutory restrictions on VAT recovery when private use is possible. The Appellant claimed the cars were solely for business use, supported by employment contracts prohibiting private use and assertions that cars were kept on-site or at company offices overnight. Despite documentation provided over more than a year, the Respondents maintained that the Appellant failed to demonstrate adequate monitoring or control of vehicle use.

Following this, on 10 February 2014, the Respondents issued assessments to recover the input tax considered overclaimed. The appeal proceeded before the Tribunal, which heard evidence from officers of both parties and examined documentary evidence, including employment contracts, mileage logs, and insurance documents.

Legal Issues Presented

1. Whether the Appellant met the conditions under Article 7(2E) and 7(2G) of the Value Added Tax (Input Tax) Order 1992, specifically whether the Appellant intended to use the motor cars exclusively for business purposes.
2. Whether the Appellant intended not to make the motor cars available for private use, thus satisfying the statutory exception permitting input tax recovery on motor cars.
3. The evidential threshold and nature of proof required to demonstrate both the positive intention to use the cars for business and the negative intention to prevent private use.

Arguments of the Parties

Appellant's Arguments

• The cars were intended exclusively for business use.
• Employment contracts explicitly prohibited any private use of company vehicles, with disciplinary procedures for breaches.
• The cars were kept overnight either on-site or at company offices, restricting private use.
• The directors had private vehicles for commuting and personal use, reducing any need to use company cars privately.
• Mileage logs and other documentation supported the claim that private use was prohibited.

Respondents' Arguments

• The Appellant failed to provide sufficient evidence that employees were legally bound by the employment contracts restricting private use, as no signed contracts were initially provided.
• Lack of effective monitoring or control of vehicle use, such as contemporaneous mileage logs, undermined the claim.
• Private use could include minimal de minimis activities, such as stopping for lunch, which were not effectively prevented or monitored.
• Insurance policies covering social, domestic, and pleasure use suggested private use was permitted.
• Compared the case unfavorably with precedent cases where strict measures, such as board resolutions, were present to prevent private use.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal carefully applied the statutory framework under sections 24-26 of the Value Added Taxes Act 1994 and Article 7 of the Value Added Tax (Input Tax) Order 1992, focusing on the dual intention requirement: the taxpayer must intend to use the cars exclusively for business purposes and must not intend to make them available for private use.

The Tribunal found the employment contract terms explicit and binding, with an absolute prohibition on private use and a requirement to return vehicles to a nominated address overnight. The evidence, particularly from the Financial Controller, was credible and unchallenged regarding employee signatures on contracts and the storage of vehicles overnight at company premises, which physically restricted private use.

The Tribunal rejected the Respondents' insistence that contemporaneous mileage logs were essential, noting that legal restrictions combined with physical controls can suffice to demonstrate non-availability for private use. The late production and questionable provenance of mileage logs led the Tribunal to disregard them, but this did not undermine the overall finding due to the contractual and physical restrictions in place.

The Tribunal also dismissed the Respondents' reliance on insurance documentation, explaining that social, domestic, and pleasure coverage is standard and does not negate the intention to restrict private use.

Comparing the facts with the leading case Elm Milk, the Tribunal found the Appellant’s position at least as strong, if not stronger, than the precedent. The Tribunal concluded that the Appellant satisfied the statutory conditions for input tax recovery.

Holding and Implications

The Tribunal ALLOWED THE APPEAL, concluding that the Appellant was entitled to recover the input tax claimed on the purchase of the motor cars. Consequently, the assessments issued by the Respondents on 10 February 2014 for £27,151, together with associated interest and penalties, were to be withdrawn.

The decision directly affects the parties by reversing the Respondents' assessment and permitting input tax recovery. The Tribunal did not establish new legal precedent but applied established principles, particularly from Elm Milk, reinforcing the evidential standards required to demonstrate exclusive business use and non-availability for private use under Article 7.