AG Opinion: UK VAT Rules for Hire Purchase Breach EU Law

10 May 2018
Author: Sabina Manea

Advocate General (AG) Szpunar has concluded in C-153/17 HMRC v VolkswagenFinancial Services (UK) Ltd that the UK’s treatment of hire purchase contracts for the purposes of VAT is not consistent with EU legislation.

Under UK law, hire purchase contracts are treated as two distinct transactions for VAT purposes: the taxable supply of a vehicle and the tax-exempt supply of credit. The UK Supreme Court asked the Court of Justice of the European Union (CJEU) whether the lessor could deduct input VAT on its overhead costs incurred for the purposes of the hire purchase transaction. The uncertainty arose because those costs were used for the purposes of the taxable supply of goods, but were in fact covered by the revenue from the VAT-exempt credit supply. HMRC’s method of calculating VAT in such a scenario – whereby the price of the vehicle (i.e. the taxable supply of goods) was excluded from the calculation of the value of the hire purchase transaction – meant input VAT could not be deducted.

For the AG, the situation brought into conflict the principle that any transaction subject to VAT should be taxed unless expressly exempt, and the principle that VAT must be neutral for all operators other than the consumer. The AG was of the view that the UK practice of splitting hire purchase transactions into a taxable part and an exempt part was an incorrect transposition into UK law of Directive 2006/112 on the common system of VAT. The AG concluded that neither obtaining credit nor hiring or purchasing a vehicle were an end in itself for a lessee entering a hire purchase agreement; the purpose was to use the vehicle under conditions specific to such an agreement.


Consequently, the AG viewed the provision of credit and the provision of the vehicle as a single transaction for VAT purposes, specifically a single taxable supply of services. As such, the AG felt that hire purchase agreements should be taxed in their entirety, and the supplier should be allowed to deduct all the input VAT on the goods and services used for the purpose of those supplies.

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