Input VAT on HP company overheads passed on to customers

Wed 24 Oct 2018

In the case of VWFS (case c-153/17) the CJEU has held that even where overhead costs of a hire purchase (HP) business are passed on to the customer as part of the finance charge for the transaction, when calculating the input VAT recovery on overheads of a HP business, the portion of the price relating to the cost of the goods being financed must be taken into account.  The CJEU indicated it was up to the referring court to determine the appropriate partial exemption (or apportionment) method for this.  However it also held that Member States may not apply a method of apportionment which does not take account of the initial value of the goods when supplied that being financed in a hire purchase transaction.

Background

VW Financial Services (UK) Ltd (VWFS) sought to recover input VAT on overheads according the proportion of taxable turnover (which included the selling price of goods financed) to total turnover. This gave a proportion of 50%, permitting 50% input VAT recovery.  HMRC however considered the overheads related mostly to the provision of exempt finance and so input VAT recovery should be largely restricted.

First tier Tribunal and Court of Appeal agreed with VWFS’s approach, while the Upper Tribunal agreed with HMRC’s approach. The Supreme Court referred the matter to the CJEU.

The CJEU’s Advocate General (AG) considered that the whole transaction should be taxable, rather than be treated as separate exempt and taxable supplies. Had the AG’s opinion been followed by the CJEU this would have caused a complete review of the way HP transactions are treated for VAT purposes in the UK.

 Comment

The CJEU’s decision helpfully confirms the separate supply of taxable goods and exempt services (finance) in a HP transaction. In particular it commented “deferred payment of the purchase price of goods, in return for payment of interest, may be regarded as a grant of credit, which constitutes an exempt transaction under that provision, provided that the payment of interest does not constitute part of the consideration obtained for the supply of goods or services, but consideration for the grant of that credit.”

The CJEU noted that “In this case, it is apparent from the order for reference that the general costs at issue in the main proceedings have a direct and immediate link with the activities of VWFS as a whole, and not merely with some of them. In that regard, the fact that VWFS decided to include those costs not in the price of the taxable transactions, but solely in the price of the exempt transactions, can have no effect whatsoever on such a finding of fact.”

The above points are in VWFS’s favour. However The CJEU has left it to the referring court to determine the appropriate partial exemption methodology.  Whether the Supreme Court will specify how the partial exemption calculation is to be performed other than on a proportion of turnover, remains to be seen.

For a further discussion of the VAT implications of this decision, please get in touch with a member of the Mazars indirect tax team.