The Supreme Court has made a reference to the Court of Justice of the European Union (“Court of Justice”) concerning the allowable proportion of residual input tax (i.e., general business overheads not directly attributable to particular supplies) attributed to hire purchase transactions. The background to the dispute is that Volkswagen Financial Services (“VFS”) provided hire purchase (“HP”) finance for the sale of vehicles manufactured by the Volkswagen Group. HP supplies comprise exempt supplies of finance and taxable supplies of cars. In December 2007 HMRC agreed to a new updated version of a (sectorised) partial exemption special method (“PESM”) for determining the deductible proportion of residual input tax, but HMRC disagreed with VFS’s proposed methodology for its retail sector, under which its HP supplies fall. VFS argued for a transaction-count method, which had the effect of splitting the residual input tax 50/50 (because each HP supply consisted of two separate supplies, as indicated above). HMRC maintained that overheads were all attributable to the exempt supplies of finance. VFS’s argument was successful in the First-tier Tribunal (“FTT”) and Court of Appeal.
HMRC’s position is based upon an argument that the overhead costs have been incorporated only into the price of the exempt supplies of finance (in a typical HP transaction there will be no mark-up on the taxable supply of the vehicle).
The questions referred to the Court of Justice ask (1) whether a taxable person has a right to deduct any of the input VAT on general overhead costs attributed to HP transactions where they have been incorporated only into the price of the exempt supplies of finance and (2) whether it can be legitimate in principle to ignore the value of the taxable supplies of cars or their value for the purposes of arriving at a PESM (provided for by Article 173(2) of Council Directive 2006/112/EC).
These are questions of fundamental importance on how the concept of “direct and immediate link” should be construed. The Supreme Court also decided a secondary issue between the parties concerning HMRC’s alternative argument that it had a fall-back position on the amount of apportionment (lower than 50%) that the FTT had failed to consider. That latter ground of appeal was dismissed. The Court held that if HMRC believed that the judge had misunderstood their position and failed to deal with a significant issues, they should have raised it upon receiving the decision. There may, the Court said, be some circumstances where a more inquisitorial approach is appropriate, but they did not apply in this case.
This article appears in the JHA April 2017 Tax Newsletter, which also features:
