VAT - Defending Employee is NOT a Taxable Input

Employers whose employees drive company cars should check the wording of their insurance policies following a recent court decision.

An employee had been driving a company car after work and was involved in an accident, killing two people. He was charged with dangerous driving. The company that employed him carried insurance which paid the legal costs of the employee’s defence. These costs included £16,000 of VAT, not covered by the insurance policy, which the company attempted to reclaim. The VAT claim was refused on the basis that the supply of legal services was not made to the company, but to the employee. Accordingly, the VAT was not ‘input VAT’ and was therefore not deductible on the company’s VAT return.

Had the insurance policy been worded so that it would cover any VAT on fees which could not be reclaimed as input tax (which presumably would have involved the payment of a higher premium) the company would not have been left with an uninsured loss of £16,000.