Thanks to Volkswagen Financial Services UK Limited (VWFS) pursuing a very hard fought argument all the way to the Court of Justice of the European Union (CJEU case reference C-153/17) we now have clarity on overhead VAT claims for partial exemption where goods are sold under HP agreements.
HMRC had challenged VWFS’ claim for any overhead input VAT as the company only made a profit from the finance charges and not on the cars included in the HP agreements. VWFS argued that some overhead input VAT must be recoverable as it actually bought and sold cars that were covered by the HP agreements. On that basis how could all VAT claims be related to exempt supplies and blocked from recovery?
VWFS bought the cars from VW dealers at the same time as the HP car sale was finalised. VWFS argued that absence of profit on the car itself did not mean overheads were not used to some extent in relation to these VATable supplies. HMRC argued against VWFS being entitled to any overhead VAT recovery and thankfully CJEU disagreed.
HMRC have now issued a policy paper RCB 08/20 clarifying their stance but have retained the right to reject claims where a business cannot prove its use of overheads in transferring the assets as well as granting credit. Here we find the quick-sand surrounding the situation so anyone involved in HP agreements needs to give careful thought to how they can evidence this dual use of their overhead costs.
How should HP companies handle overhead VAT claims?
If a business can prove its dual overhead use then it needs to calculate the proportion of overhead VAT recovery based on a ratio according to their own actual trading values. Gone are the days of being able to use fixed percentages for costs related to HP sales. The ratio should be a fraction of the credit value (not the asset) over the sum of credit + plus interest + plus fees. HP businesses need to take care to not use any other calculation if their VAT claims are to remain secure.
While HMRC’s clarity for overhead VAT claims for Partial Exemption is welcome, as ever the devil is in the detail and no one should make any assumptions about their right to reclaim overhead VAT. If you are in any doubt about anything VAT related, please give us a call and we will always be happy to help. Please remember sooner is always better.