Volkswagen Financial Services (UK) Ltd v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lady Justice Sharp,Lady Justice King |
| Judgment Date | 28 July 2015 |
| Neutral Citation | [2015] EWCA Civ 832 |
| Court | Court of Appeal (Civil Division) |
| Date | 28 July 2015 |
| Docket Number | Case No: A3/2013/0076 |
[2015] EWCA Civ 832
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE VOS AND JUDGE TIMOTHY HERRINGTON
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Patten
Lady Justice Sharp
and
Lady Justice King
Case No: A3/2013/0076
Nicola Shaw QC and Michael Jones instructed by KPMG LLP for the Appellant
Owain Thomas instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondent
Hearing dates: 16 and 17 April 2015
Introduction
Volkswagen Financial Services (UK) Limited ("VWFS") is the representative member of the VWFS VAT group. It is a wholly owned subsidiary of Volkswagen Financial Services AG which is itself ultimately owned by Volkswagen AG. The Volkswagen Group owns and manufactures cars and commercial vehicles under the well-known VW, Audi, SEAT and Skoda marques. Many of the sales are financed through captive finance houses of which VWFS is one.
For the purposes of VAT, the business of VWFS is divided into a number of different sectors which are summarised in the agreed statement of facts prepared for the purpose of these proceedings. They are:
(1) Retail – (i) entering into hire purchase ("HP") agreements with customers in respect of Group Brand vehicles; (ii) entering into leasing agreements with customers in respect of Group Brand vehicles; and (iii) fixed price service and maintenance contracts on Group Brand vehicles;
(2) Wholesale – providing funding to dealers of Group Brand vehicles for the purchase of demonstrator vehicles and stock (new and used cars);
(3) Volkswagen Insurance Services ("VIS") – the arrangement of insurance for owners of Group Brand vehicles and dealers of Group Brand vehicles;
(4) Asset Backed Securitisation ("ABS") – servicing (and reporting on) securitised hire purchase contracts;
(5) Contract Disposals – the disposal of previously leased and/or repossessed Group Brand vehicles; and
(6) Catch All – miscellaneous items, such as the provisions of training programmes or the rental of signage to dealers of Group Brand vehicles.
VWFS does not operate a car dealership or sell cars for cash. 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 customer does not acquire title to the vehicle until all the payments under the agreement have been made. For the purposes of the Consumer Credit Act 1974, VWFS is deemed to be the supplier of the vehicle under the HP agreement and the customer has the benefit of various statutory warranties including the terms that the vehicle is of satisfactory quality and fit for purpose implied under s.10 of the Supply of Goods (Implied Terms) Act 1973. It is therefore primarily liable to the customer in this respect although with a secondary right of recourse to the dealer from whom it purchased the vehicle.
For VAT purposes VWFS is treated as making two separate supplies to a customer who purchases a car on finance. The first is a taxable supply of the car or other vehicle on which VWFS must account for output tax on the full price of the vehicle at the date of the contract. The second is an exempt supply of finance. In economic terms this has the effect that VWFS is required to account to HMRC for output tax on the price of the vehicle when sold but can only recover the VAT from the customer as part of the monthly payments made under the HP contract. The vehicles are sold on to the customer at the same price as they are purchased from the dealer. Nor is any finance provided by VWFS except in respect of VW Group brands.
In the course of its business VWFS incurs input tax as part of its expenditure. Some of this expenditure is directly attributable to the specific supplies made in the various sectors of its business described earlier. In those cases the input tax is deductible in the case of a taxable supply but irrecoverable if the supply is exempt: see VATA 1994 s.26. But other expenditure is not directly attributable to particular supplies (whether taxable or exempt). This includes expenditure on overheads such as (i) temporary staff, staff training and recruitment; (ii) hotel accommodation, staff meals and drinks; (iii) travel, parking, road tolls and car hire, service and repairs; (iv) marketing and corporate hospitality; (v) IT maintenance and enhancement; (vi) heating, lighting, cleaning, security and other premises costs; (vii) furniture leasing; (viii) couriers, stationary, printing, photocopying and archiving; and (ix) legal, tax and accounting expenses.
The issue on this appeal is whether any of the residual input tax paid by VWFS in respect of the general overheads of the business is deductible against the output tax paid on the taxable supply of vehicles to customers. In short, HMRC contend that the correct tax treatment of the residual input tax on overheads in this case is that the overheads are all attributable to the exempt supplies of finance and the input tax is therefore irrecoverable.
The statutory context in which this issue arises is not a matter of dispute. Article 2 of the First Council Directive of 11 April 1967 (67/227/EEC) ("the First Directive") states that:
"The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.
On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.
The common system of value added tax shall be applied up to and including the retail trade stage."
Article 168 of the Principal VAT Directive (2006/112/EC) (which replaces Article 17 of the Sixth Directive 77/388/EC) confirms the right of the taxable person to deduct input tax on expenditure "insofar as the goods and services are used for the purposes of the taxed transactions". Where the relevant goods and services are used for both taxable and exempt transactions then Article 173 provides that "only such proportion of the value added tax as is attributable to [taxable] transactions shall be deductible".
The standard method of making this apportionment prescribed by Article 173(1) is by reference to the ratio of taxable turnover to total turnover. But Article 173 permits member states to derogate from the standard method in particular cases. The provisions of the Principal VAT Directive in relation to the deduction of input tax have been implemented in the UK by s.26 VATA 1994 and regulations 101 and 102 of the Value Added Tax Regulations 1995 (SI/1995/2518). Section 26 provides for the amount of allowable input tax to be determined by regulations which are to secure "a fair and reasonable attribution of input tax to [taxable] supplies". Regulation 101 (so far as material) provides:
"(1) … the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.
(2) … In respect of each prescribed accounting period—
…
(b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,
(c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and
(d) there shall be attributed to taxable supplies such proportion of the residual input tax as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period,
(e) the attribution required by subparagraph (d) above may be made on the basis of the extent to which the goods or services are used or to be used by him in making taxable supplies, …"
The derogation from the standard method prescribed by regulation 101(2)(d) which is permitted by Article 173 is provided for by regulation 102 which allows HMRC to approve a special method of determining the allowable proportion of residual input tax. Between 1984 and 2000 HMRC and the Finance Houses Association operated an agreed partial exemption special method ("PESM") for the valuation of the proportion of residual input tax attributable to HP transactions. Under this PESM the finance houses were entitled to recover (in respect of HP transactions) all of the input tax incurred on the goods plus 15% of the residual input tax. In August 2000 VWFS agreed its own PESM with HMRC which also restricted the residual input tax recoverable in respect of the HP sector of its business to the 15% allowed for under the 1984 FA agreement. After various meetings to discuss the updating of the PESM, VWFS suggested, on 2 February 2007, a new PESM which apportions residual input tax between sectors 1–5 of its business (as described in [2] above) in proportion to the turnover of each sector but then applies the...
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