In HMRC v Volkswagen Financial Services (UK) Ltd [2018] C-153/17, the Court of Justice of the European Union (CJEU) ruled that HMRC cannot treat VAT on costs as solely relating to exempt finance charges when a car is bought on HP.

  • VWFS is used to provide Hire Purchase (HP) finance for sales of VWs.
  • When a vehicle is purchased by HP from VW, VWFS acquire the car from the VW dealer as part of the arrangements.
  • VWFS then sell the vehicle for the same price and interest is charged in accordance with the HP agreement.
  • VWFS is Partially Exempt It has taxable supplies, in the form of the vehicle it sells for the same price as its cost, and exempt supplies, being the finance charges.

The case relates to how to calculate the recoverable VAT on residual overhead costs:

  • HMRC contend that the residual costs should be apportioned between the value of taxable and exempt supplies but excluding the sale of the vehicle. This is on the basis that the interest is set to cover all costs and provide profit and the car purchase and sale are always equal.
  • VWFS were of the view that the split should be on a transaction basis, i.e. the sale of each car has two transactions, the taxable supply of the car itself and the exempt supply of credit. VWFS contend that 50% of residual VAT is recoverable.

The First-Tier Tribunal allowed VWFS’ appeal. The Upper Tribunal found for HMRC and the Court of Appeal for VWFS.

The Supreme Court referred to the CJEU.

The CJEU ruled as follows:

  • Despite the fact VWFS do not include residual costs it incurs in calculating the vehicle sale price does not affect the decision.
  • The costs are, to some extent, incurred for the purpose of supplying the vehicle and are not directly and immediately linked only to the supply of exempt credit.
  • The fact that the sale of the car itself would be made at a loss if some of the costs are allocated to it is irrelevant. A loss-making business is still a business for VAT purposes.
  • The costs concern goods and services used to effect both transactions and must be apportioned.
  • Ignoring the sale of the car would not result in a more precise partial exemption method than using the turnover based method. It is not therefore a viable special method.

The costs are a component of the sale of the vehicle and therefore the sale of the car cannot be ignored. The UK courts must now decide the outcome of the case based on this ruling.


Partial exemption & input VAT

External link HMRC v Volkswagen Financial Services (UK) Ltd [2018] C-153/17