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Julie Butler FCA of Butler & Co considers the VAT and capital allowances treatment of certain vehicles particularly in the context of farming businesses. 

Introduction

For the VAT registered farmer it is possible to claim input VAT on vans and this includes “twin cab pick-ups”. However, motor cars have to have no private usage in order to qualify for the input VAT claim and the claim is "all or nothing". The problem is that it is difficult to move away from the stricter test of simply being “available for private use” as opposed to the car actually being “used for private purposes”.

There have been three recent cases involving farmers, input VAT claims and cars and they all failed. The VAT planning point (linked to possible capital allowances advantages) has to be to advise farmers on the clear VAT advantages of vans and distinct disadvantages of cars, whether too smelly to take off the farm or not in the eyes of the VAT Inspector.

The Smelly and Adapted Car

The first case was the argument that the smell of the vehicle from farm use made it obviously unavailable for private use. John Andrew Thomas Faith, the taxpayer claimed that the vehicle, although purchased as a motor car, had been adapted to give it the appearance and functionality of a van. The tribunal questioned both of these statements, saying that despite the alterations, the vehicle was still classified as a motor car for VAT purposes, and that the ‘smell’ of the vehicle was insufficient to put the vehicle beyond being ‘available’ for private use. The input VAT could not be claimed. The input VAT could have been claimed on a van.

The Available and Adapted Discovery

It is not enough that the motor car is unlikely to be used for private use – it was not incapable of being used privately.  There were no physical or legal restrictions – in this second case, not even the smell.  It would appear a car can have no private use but nevertheless if private use is available the input VAT claim is not allowed. In Alex Paton & Son, HMRC disallowed the taxpayer’s claim to recover VAT on a Land Rover Discovery. The taxpayer appealed to the tribunal on the grounds that the vehicle was used solely for a business purpose, and had been especially adapted to allow for the taxpayer’s disability.

The main issue of the case was of availability. The relevant legislation, VAT (Input TAX) Order SI 1992 No 3222 articles 7(2E)(a) and 7(2G)(b), demand that the vehicle is not just for the purpose of business use only, but is also incapable of private use.  Article 7(2G)(b) says,

‘A taxable person shall not be taken to intend to use a motor car exclusively for the purposes of a business…if he intends to…make it available otherwise than by letting it on hire to any person’. 

Most cases fail on the grounds that the vehicle is available, even if not intended, for private use and if this is proven no input VAT can be claimed.

The tribunal decided that the farmer had not taken sufficient steps to ensure that the vehicle was incapable of private use. While the taxpayer had attempted to obtain business use only insurance, the insurance company in question declined to provide it.  The input VAT claim on the Discovery was disallowed.

More Availability

In Robert & Lillian Waddell, the taxpayer tried to reclaim VAT on his new vehicle.  Once again, the tribunal refused the appeal on the grounds that the vehicle was available for private use. Input tax is blocked simply if the vehicle is ‘available for private use’ rather than ‘actually used for private purposes’.

Farmers Argue Loudly for No Private Life

For all those who act for farmers they will be able to hear the farmers' strongly-held views on the subject of "no private life": Farming is a way of life, the hours are so long that there is no private life, the work is hard and long, no VAT Inspector would want to travel in their vehicle in their grey suits…

Presenting the argument in a loud voice does not make a stronger case. The Court of Appeal holds that no private use is 'unrealistic'.

No Private Use is 'Unreal'

There comes a point where the advice to farmers is that if their aim is to claim input VAT on the motor vehicle then play the game by the rules as, correctly applied, they can work in the taxpayer’s favour. Input VAT can be claimed on a van so buy a van if this is the “driver” (please excuse the pun).

In The Court of Appeal in the case of CCE v Upton (trading as Fagomatic) [2002] STC 640, ‘…the concept of a taxpayer... [having to take] ...any positive action to make his own property available for his own private use is unreal’. If the vehicle is the taxpayer's own private property, the chances are the taxpayer will find it impossible to prove that it will not be used privately, and therefore the taxpayer cannot reclaim VAT on it.

Capital Allowances

The van does also qualify for 40% First Year Allowances where the motor car does not.  Likewise a van can qualify for the Annual Investment Allowance (AIA).

The Finance Act 2009 includes some important amendments to the capital allowances code for equipment and vehicles.

First, there is a 40% First Year Allowance for purchases made in 2009/10 (the year 1 April 2009 to 31 March 2010 for companies and the 2009/10 tax year for unincorporated businesses).  This sits on top of the £50,000 AIA.

Summary

Long live the van and the twin cab for the farming business – there are both input VAT and Capital Allowance advantages.