VAT partial exemption methods an HP sales – Revenue & Customs Brief 8(2020) sets out HMRC’s new view
HMRC has published Revenue and Customs Brief 8(2020) that sets out their view of how VAT partial exemption methods should look following the Volkswagen Financial Services (UK) Ltd case (C-153/17 Volkswagen Financial Services (UK) Ltd). That company sold cars on hire purchase (‘HP’) arrangements and the case examined a partial exemption method which calculated recoverable input tax using a transaction count method. Under that method, each HP contract was counted as one taxable transaction (the car) and one VAT exempt transaction (the finance), meaning that the company’s residual input tax would be apportioned 50% to taxable supplies.
The case was referred to CJEU which found that:
- The company’s overheads were a component of the HP sale of goods;
- The company had a right to deduct VAT on overheads that relate in part to the sale of the car, even if they are allocated to the provision of HP finance for accounting purposes, and;
- Member States must recognise the value of the cars in any apportionment method.
HMRC’s views following the case (as set out in this Revenue & Customs Brief) are that:
- business selling goods on HP are entitled to reclaim VAT on overhead costs provided the method is fair and reasonable;
- the method will depend upon the type of HP arrangement;
- output values (of the goods sold and the HP finance) should be used for apportionment purposes, unless another method produces a more precise apportionment, but;
- as an alternative apportionment method is not obviously available, sellers of goods via HP arrangements should use a method that relies on the output values of both.
Essentially, HMRC doesn’t appear to accept that a transaction count method is an acceptable apportionment method for businesses selling goods through HP, and they have asked business to contact them if they have made historic claims for additional VAT, never claimed VAT on overheads relating to HP sales, revised their partial exemption methods following the Volkswagen Financial Services (UK) Ltd case, or applied to do so.
Businesses involved in HP sales of goods including those selling cars and commercial vehicles, white goods and furniture should re-examine their partial exemption method to establish whether the new principles established by the case and now interpreted by HMRC, has any impact (positive or negative) for their VAT recovery position. At the very least they must establish if they have an obligation to respond to HMRC’s request to contact them.
Should you find yourself in this position or if you would like to better understand how this Revenue & Customs Brief might affect you, please do get in touch with your usual contact in the Centurion VAT team. Alternatively email firstname.lastname@example.org will ensure a response from our team.
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