Whether UK VAT de-supply rules contrary to EU law
Whether UK VAT de-supply rules contrary to EU law
Wed 05 Dec 2018
The First tier Tribunal has rejected VWFS’s contention that the UK VAT de-supply rules, introduced in 2006 following the judgment in GMAC were contrary to EU law. The case involves a claim for repayment of £24m VAT for the period from 1 July 2010 to 30 June 2014, so it will be interesting to see if this case gets appealed further.
For a further discussion of the implications of VAT on finance transactions and the implications of this case for your business, please get in touch with a member of the Mazars indirect tax team.
Background
The VAT (Cars) Order 1992/3125 provides that were a car is repossessed under a finance agreement and resold in the same condition as when it was repossessed is not a supply for VAT purposes. Following the GMAC case ([2004] EWHC 192 ) a restriction was placed on this ‘de-supply’ provision where a refund of the HP financier’s input VAT was obtained as a result of cars repossessed on or after 1 September 2006. The onwards sale of a car on which full input VAT recovery was obtained on initial purchase by the finance company, and has since been repossessed as a result of the HP finance arrangement, has generally been treated in the UK as a fully taxable sale and not a sale to which VAT is only applied by reference to the difference between sales and purchase price that is a profit (a margin scheme sale).
VWFS considered that either the onward sale of the car should be treated as a margin scheme sale (as it has been used by and recovered from a person who would not have been entitled to recover input VAT on its purchase), or that the 2006 UK legislative restriction to the ‘de-supply’ provision is incompatible with EU law.
In order for the margin scheme to apply, the person from whom the car was repossessed would have had to make a supply of the car to VWFS. The FTT considered that where VWFS repossessed the vehicle from the person who took out the HP finance arrangement, could not be regarded as supplying the car to VWFS.
In relation to the Incompatibility with EU law of the UK exception to the de-supply provision, the FTT considered that the more recent cases of GMAC UK (Judgment of the Court) [2014] EUECJ C-589/12 and NLB Leasing doo v Republic of Slovenia (Case C-209/14) demonstrated where full VAT was not accounted on goods consumed in a supply, this was not in accordance with the principal VAT directive. If the de-supply provision had applied in the case of a repossessed car as recognised in the 2006 GMAC decision, the financier would have recovered more input VAT than would ordinarily be justified by the net sale proceeds they had received from the vehicle.
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