Vehicle Hire Purchase Agreements – An opportunity for Protective VAT Claims for Car Dealers?

The ongoing Volkswagen Financial Services (UK) Ltd (“VWFS”) case refers to the UK’s VAT treatment of vehicle hire purchase (“HP”) transactions, stating currently that there are two distinct supplies – one of a taxable supply of goods (the motor vehicle) and one of an exempt supply of credit (the finance). Therefore, where input tax is incurred in making a HP supply, the taxpayer believes that this 50/50 split should apply with half of the input tax recoverable.

HMRC disagree with this attribution of input tax and have argued that, because VWFS derive their profits from the exempt element rather than the taxable vehicle sale, VAT on overhead costs should be attributable to the exempt supply i.e. no recovery on such costs.

The question around the correct VAT treatment has been referred to the European Court of Justice and we await the decision. However, on 3 May 2018 Advocate General Szpunar released his opinion on this matter and has held that the current split into two transactions (taxable goods, exempt finance) is incorrect in the first instance. The AG made it clear that these transactions should instead be treated as a single taxable supply, meaning that VAT incurred on associated costs should be recoverable in full.

Of course, the European Court of Justice does not have to follow the AG’s opinion but if it does this will produce a significant change to the current VAT treatment and will affect a wide range of businesses, in particular those within the automotive sector.

If you would like to discuss this case further or have any questions about the potential implications on your business, please get in touch with us on 01633 415390 or emailus@centurionvat.com.

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