Volkswagen Financial Services (UK) Ltd v Commissioners for HM Revenue and Customs

JurisdictionEngland & Wales
JudgeLord Carnwath,Lord Neuberger,Lord Kerr,Lord Reed,Lord Gill
Judgment Date05 April 2017
Neutral Citation[2017] UKSC 26
CourtSupreme Court
Date05 April 2017

[2017] UKSC 26

THE SUPREME COURT

Hilary Term

On appeal from: [2015] EWCA Civ 832

before

Lord Neuberger, President

Lord Kerr

Lord Reed

Lord Carnwath

Lord Gill (Scotland)

Volkswagen Financial Services (UK) Ltd
(Respondent)
and
Commissioners for Her Majesty's Revenue and Customs
(Appellant)

Appellant

Owain Thomas QC

Amy Mannion

(Instructed by HM Revenue and Customs Solicitor's Office)

Respondent

Nicola Shaw QC

Michael Jones

(Instructed by KPMG LLP (UK))

Heard on 3 November 2016

Lord Carnwath

(with whom Lord Neuberger, Lord Kerr, Lord ReedandLord Gillagree)

1

The respondent ("VWFS") is a member of the Volkswagen Group, and is used (through its "retail" sector) to provide hire purchase ("HP") finance for the sale of vehicles manufactured by the group. When a customer of a VW dealership wishes to purchase a vehicle using finance from VWFS, the vehicle is acquired by VWFS as part of the finance arrangements from the dealer and then supplied by it to the customer on deferred payment terms under an HP contract. The vehicles are sold on to the customer at the same price as they are purchased from the dealer.

2

This appeal is concerned with the treatment of general business overheads, not directly attributable to particular supplies. The legal and factual background is set out in detail in the judgment of Patten LJ and need not be repeated. As he explained the issue arises in the context of a so-called "partial exemption special method" ("PESM") agreed with HMRC for the valuation of the proportion of residual input tax attributable to HP transactions. The issue is whether any of the residual input tax paid by VWFS in respect of such general overheads (so far as apportioned to the retail sector) is deductible against the output tax paid on the taxable supply of vehicles to customers. HMRC's primary contention is that the overheads are all attributable to the exempt supplies of finance and the input tax is therefore irrecoverable. VWFS contends that the residual input tax should be split in proportion to the ratio of taxable transactions to the whole, which has the effect of splitting the residual input tax 50/50 for HP transactions. That issue was decided in favour of VWFS by the First-tier Tribunal ("FTT"), and by the Court of Appeal, although the Upper Tribunal had supported HMRC's approach.

3

That remains the main issue in the appeal, but is one on which the court has decided that a reference to the CJEU is necessary to reach a conclusion. The present judgment is concerned with a secondary issue. Mr Thomas argues that HMRC had a fall-back position on the amount of the apportionment, which the FTT had failed to consider. As Patten LJ explained:

"… The First-tier Tribunal proceeded on the basis that the only dispute about methodology was whether any part of the residual input tax was attributable to and could be set-off against the taxable supplies of vehicles made in the retail sector of VWFS's business. But HMRC contend that they did challenge the apportionment formula contained in the proposed PESM on wider grounds and that a lower figure than 50% should be attributed to the taxable supplies of vehicles as part of the hire purchase contracts in terms of the use made of the allocated inputs." (para 13)

4

Patten LJ expressed some surprise (which I share) that, in an appeal where both sides were represented by experienced counsel, such an issue had not been capable of resolution by agreement between them, or by reference to their written submissions or notes of the hearing. However, the court had been asked to resolve the issue on the available material. That included:

i) HMRC's skeleton argument before the tribunal which had described the issue as being whether VWFS' method "produces a fair and reasonable attribution" of residual input tax in the retail sector, but without putting forward a positive alternative to HMRC's preferred methodology, or suggesting a different apportionment.

ii) HMRC had relied upon two witness statements made by Mr Jonathan Cannon, the second of which commented on the differences between the two approaches. He observed that VWFS's approach was "realistic, perhaps more so than the HMRC's approach", but was open to two particular concerns, which he identified. Again he did not put forward an alternative...

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