Partial VAT recovery on hire purchase:Volkswagen Financial Services

The taxpayer (‘VWFS’) offers customers a hire purchase agreement. In UK, the hire purchase agreement is broken down by VWFS into 1) the supply of a car (taxable) and 2) the provision of a Loan (exempt). The question was how to apportion overhead costs. As a general rule, the VAT recovery entitlement for overhead costs must be determined by reference to turnover. VWFS had claimed that it should be entitled to recovery 50% of its overhead VAT on the basis that for each supply of a vehicle, there were two transactions – one taxable and another exempt, hence 1/2. HMRC considered that, as the vehicles were sold at cost, there should be no allocation of any overhead costs to the taxable supply of the vehicle. Instead they must be attributable wholly to the interest received on the supply of credit (exempty). HMRC’s determination, therefore was, that VWFS was entitled to no input VAT recovery on its overheads was, therefore, contrary to the Directive’s purpose.

The CJEU has issued its judgment in this case. Completely ignoring the previous Advocate General’s opinion. The Court considers that in VWFS’s case, there were two supplies. A Taxable supply of a vehicle and an exempt supply of finance. On that analysis, VWFS is entitled under the VAT Directive to apportion its overhead input tax. Generally, a business is required to use an apportionment method based on turnover values but, in some cases, the tax authority may allow or require the use of a different method provided that it produces a more accurate result.