Advocate General Opinions concerning VAT on (i) abortive acquisitions and (ii) hire purchase transactions

Tue 08 May 2018

The CJEU has issued two Advocate General opinions on areas of VAT that may be relevant for UK businesses. The first concerns a case referred from Ireland involving Ryan Air and the ability to recover input VAT on abortive acquisition costs.  The second concerns the appropriate partial exemption method for recovery of input VAT on overhead costs of a hire purchase business – in this case VW Financial Services which sells cars on hire purchase.

Recovery of input VAT on abortive acquisition costs

C-249/17 Ryan Air – In 2006 the airline Ryanair made a bid to take over the Irish airline Aer Lingus. Although the takeover failed for reasons of competition law, Ryanair had already incurred considerable costs for consultancy and other services in connection with the planned takeover.  The question asked was whether the intention to provide management services in the event of a successful acquisition and the link between these costs and the economic activity was sufficient to justify input VAT recovery when the attempted acquisition fails.  The opinion was that in Ryan Air’s case the conditions for input VAT recovery were met.

HMRC recently updated their guidance on input VAT recovery of holding companies in the light of the CJEU decision in Larentia & Minerva (see VIT40600). That guidance does indicate that intention to make economic supplies is sufficient to justify input VAT recovery, but only discusses this in the context of an actual acquisition.

It will be interesting to see if the CJEU opinion is followed by the Court when it issues its judgement. If it is, it would be helpful if HMRC’s guidance was updated to cover the issues concerned with abortive acquisition costs.

Hire purchase transactions and input VAT recovery on overheads

In 2015 The Court of Appeal referred points on the operation of VAT requirements to input VAT recovery of the hire purchase business of VW FS to the CJEU.  The opinion of the CJEU’s Advocate General (AG, Case C-153/17 VWFS) has now been issued and is critical of the UK approach of splitting the VAT treatment of HP transactions between taxable and exempt supplies.

VATA 1994 s.31 and Sch9 group 5 provides that ‘The provision of the facility of instalment credit finance in a hire-purchase, conditional sale or credit sale agreement, for which a separate charge is made and disclosed to the recipient of the supply of goods’, is a VAT exempt supply. Where a finance business provides taxable goods on hire purchase terms it is therefore, in the UK’s view, providing both taxable (the goods) and exempt (the HP finance) supplies.  To determine input VAT recovery on overheads in such a situation requires the operation of a partial exempt method to allocate the overhead costs to taxable and exempt supplies, with recovery being available on the portion allocated to taxable supplies.

In the AG’s view the whole supply should be treated as a single, complex, taxable transaction.  The suggestion is that the Court will need to reformulate the questions referred and also provide advice on the tax treatment of HP transactions. If the Court follows the AG’s opinion, this would be a significant VAT development for the hire purchase finance sector, changing the way these businesses need to consider their market pricing.  The CJEU’s judgement and HMRC’s reaction will be important for HP businesses when they are available.

Whether the outcome of this case is beneficial to any business, or whether any VAT reclaims are possible is likely to depend on individual circumstances. For a discussion of the VAT issues arising from either of these opinions, please get in touch with a member of the Mazars VAT team.