British Credit Trust Limited (‘BCT’): VAT refund opportunities on repossession costs and VAT adjustments after defaults
In a First Tier Tribunal (‘FTT’) decision released on 1 August 2014, BCT failed to recover input tax and account for output tax on cars it supplied under HP agreements. As a result it submitted two claims both relating to the repossession of cars.
- A reclaim for the VAT on legal and other repossession costs incurred when its customers defaulted on HP agreements
- A VAT accounting adjustment and, where appropriate, to claim bad debt relief when its customers failed to pay the full amount due under the HP agreement.
HMRC argued that the VAT incurred on repossession costs related to both taxable supplies (of the cars) and VAT exempt finance, and hence that it was only partly recoverable. However, the FTT decided that the costs were directly and immediately linked to the sales of the cars after they were repossessed and accordingly the VAT incurred was recoverable. HMRC further argued that BCT had failed to account for input tax and output tax on the cars subject to the HP contracts when the cars were purchased and sold on HP and only made corrections at a later date meaning that it was not entitled to make adjustments or claim bad debt relief. The FTT agreed that HMRC was right to reject an initial claim, made before the VAT accounting was corrected, but that the subsequent claim made after the entries were corrected on the company’s VAT account was a new and effective claim that should have been met.
HMRC argued that the costs incurred when the cars were purchased and sold on HP, were related to taxable and exempt supplies and as a result the costs should be treated as residual. The FTT concluded that the costs had no link to the original contract and were wholly attributable to the sales of the cars after they were repossessed (i.e. when sold at auction) and accordingly the VAT incurred was recoverable in full.
Why is this important?
This decision (although not binding) will be of interest to businesses with the same or similar activities that have treated input tax on repossession costs as residual. Where this is the case, such businesses may be entitled to submit a retrospective claim to recover under claimed input tax.
To read the full decision please follow this link http://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03863.html