Volkswagen Financial Services (UK) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 09 November 2018 |
| Neutral Citation | [2018] UKFTT 663 (TC) |
| Date | 09 November 2018 |
| Court | First-tier Tribunal (Tax Chamber) |
[2018] UKFTT 0663 (TC)
Judge Harriet Morgan
Mrs Amanda Brown, of KPMG LLP, appeared for the appellant
Mr Peter Mantle, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Whether the margin scheme applies to sales of vehicles made by a financier following the recovery of possession of the vehicles on the termination of hire purchase transactions – If not, whether the sales are treated as neither supplies of goods nor services under the Value Added Tax (Cars) Order 1992/3122, art. 4(1)(a) – Compatibility of the exclusion from the article under art. 4(1AA) of that order with EU Law – Appeal dismissed.
The First-tier Tribunal (FTT) considered whether, when it sold repossessed motor cars, Volkswagon Financial Services (UK) Ltd (VWFS) should account for VAT on the full selling price or whether such sales were taxed under the margin scheme or could be disregarded all together.
VWFS sells cars to consumers under hire purchase agreements. When a consumer decides to purchase a car from a dealer, the dealer sells the car to VWFS and VWFS then sells the car to the consumer who will pay for it in instalments. If VWFS repossesses the car before the hire purchase contract has come to an end the vehicle is sold, usually at auction. Such repossessions may be voluntary (the hire purchase agreement permits early termination, subject to conditions) or compulsory (e.g if the instalments are not paid as required).
The dealers sold the cars to VWFS for the net price plus VAT, which VWFS recovered, and then VWFS accounted for output tax on the supply of the car to the consumer. Because the time of supply is when the car is ‘bought“” by the consumer, VWFS accounts for all of the output tax due upfront. If, due to termination of the agreement, it does not receive the full sales price an adjustment is made in its VAT account to reflect that it did not receive full payment.
VWFS argued that it should not be required to account for VAT on the full price of the vehicle achieved at auction. It made two arguments in support of this proposition:
- The vehicles are initially sold to consumers who cannot recover the VAT incurred, and this results in VAT becoming embedded in the supply chain. Under the basic principles of the Principle VAT Directive, this embedded VAT should be relieved through the use of the margin scheme when the cars are reintroduced into the commercial supply chain.
- Article 4(1)(a) of SI 1992/3122 states that the sale of a car which has been repossessed by a person under the terms of a finance agreement is neither a supply of goods nor services. VWFS should be entitled to rely on this Article. Although art. 4(1AA) of the same order states that, with effect from September 2006, art. 4(1)(a) does not apply when the car is sold by someone who has adjusted the VAT due on the initial sale (as VWFS did), art. 4(1AA) is contrary to EU law.
VWFS sought to rely on the judgement of the High Court in C & E Commrs v General Motors Acceptance Corporation (UK) plc [2004] BVC 611. Although the reasoning of the High Court was helpful to VWFS's argument, the FTT pointed out that this was obiter dicta which was not binding on it and the case had been superseded by the introduction of art. 4(1AA) in 2006 and also subsequent case law.
The FTT undertook a detailed analysis of the various transactions involved from a dealer first selling a car to VWFS (for a theoretical £100 plus £20 VAT) to that car being repossessed and sold at auction. The FTT's analysis determined that, although the consumer could not recover VAT incurred on their HP payments or on the price achieved at auction, because VWFS could adjust the VAT declared on the initial HP sale, it accounted for sales VAT on the value it received for the car, i.e if the HP consumer paid £60 in instalments (£50 + £10 VAT) and the repossessed car were sold for £60 (£50 + £10 VAT), VWFS accounted for VAT totalling £20. If the full selling price of the repossessed car were not subject to VAT, VWFS would account for less than £20 on a gross income of £120.
VWFS presented a long and detailed argument but the FTT was not persuaded that accounting for VAT on this basis was in any way contrary to the underlying principles of the tax.
At para. 144 the FTT states “according to the principles underpinning the VAT regime and the aims behind the margin scheme it cannot have been the intention that the margin scheme should apply to give the result VWFS argue for and it would be contrary to these principles for the de-supply provision to apply”. Later in the decision, at para. 228, the FTT states “VWFS's analysis is out of kilter with the legal, commercial and economic reality of the HP transaction”.
The FTT concluded that “(1) the margin scheme does not apply to resales [of repossessed cars] by VWFS and (2) VWFS is not entitled to rely on the de-supply provision [in art. 4(1)(a) of SI 1992/3122] on the basis that the 2006 exclusion [contained in article 4(1AA)] is unenforceable”.
This is a long, complicated and detailed decision, because VWFS presented a complex, technical argument. However, it turned on a simple point, VWFS was unable to identify any point at which it had suffered a VAT loss as a result of being required to account for VAT on resales of repossessed vehicles in the normal way.
The FTT undertook an analysis of a fictious car sold to a consumer for £120 and “role-played” the VAT consequences of the competing VAT treatments. This exercise demonstrated that if any of VWFS's interpretations applied it would not account for VAT on the entire consideration it received. It was only when the “HMRC scenario” was played out that VWFS paid VAT equalling 1/6th of the payments it receives from consumers – and as, arguably, this outcome is the underlying aim of the Principle VAT Directive, VWFS's argument was fatally undermined.
We wait to see whether VWFS will appeal on the basis that the FTT adopted an incorrect approach.
[1] Volkswagen Financial Services (UK) Limited (“VWFS”) provides finance to members of the public for the purchase of motor vehicles under hire purchase agreements and personal contract plan agreements (together “finance agreements”). VWFS accounts for VAT in respect of these arrangements on the basis that it makes supplies of goods to its customers in return for the full capital amount due under the finance agreements (under article 14 of Directive 2006/112/EC (“PVD”) as enacted in UK law in para 2 of Schedule 4 of the Value Added Tax Act 1994 (“VATA”)). The VAT initially accounted for is subject to subsequent adjustment on early termination of the finance agreements as set out below. I refer to transactions made under such finance agreements and the corresponding supplies of goods as “HP transactions” and “HP supplies” respectively.
[2] VWFS appealed against HMRC's decision to reject its claims for a refund of over £24 million of output tax which it considered it had overpaid on sales of vehicles to third parties (typically at auction) which were either voluntarily returned to it or repossessed on the early termination of the finance agreements (“resales”). The claims were made under s 80 of the Value Added Tax Act 1994 (“VATA”) in relation to resales made by VWFS in the period from 1 July 2010 to 30 June 2014. The tribunal was asked to determine whether in principle VWFS is entitled to a refund and not, at this stage, the amount of any such refund.
[3] I refer to the facts and circumstances of this case in the present tense for convenience; the position as described relates to the relevant period to which the appeal relates unless expressly stated otherwise.
[4] VWFS has accounted for VAT on the full sales price received on the resales. HMRC maintains that is the correct position. VWFS now contends, however, that a refund is due on the basis that:
- VAT is due on the resales only by reference to VWFS' profit margin under the margin scheme for dealers in second-hand goods (as provided for in articles 312 to 315 PVD as enacted in the UK in article 8 of the Value Added Tax (Cars) Order 1992/3122 (the Cars Order)). Broadly, under the margin scheme VAT is charged only on the difference between the price paid by the dealer for the goods and the price received on the onward sale. On VWFS' view as to how the scheme applies, it would not usually be required to charge to VAT on the resales.
- If the margin scheme is held not to apply, no VAT is due on the resales under article 4(1)(a) of the Cars Order (the de-supply provision) which provides that a disposal of a used motor car by a person who repossessed it under the terms of a finance agreement, where the motor car is in the same condition as it was in when it was repossessed is neither a supply of goods nor services.
[5] The de-supply provision is subject to an exclusion introduced in 2006 (under article 4(1AA) of the Cars Order (the “2006 exclusion”)). This provides that the de-supply provision does not apply where the financier can obtain, as VWFS can in this case, an adjustment which takes account of the VAT on the initial supply under the finance agreement as a result of repossession. Where the 2006 exclusion applies, therefore, the financier remains liable to account for VAT on the full sales proceeds received on resales unless some other form of relief applies.
[6] It was common ground that VWFS correctly claims a VAT adjustment on early termination of the HP transactions by recognising, as a reduction in the consideration for the HP supply, an amount equal to (a) the capital instalments no longer due after the termination date (where the customer terminates voluntarily) or (b) the net sales proceeds received on the resale which are set off against the amount owed by the customer (in a default scenario). This adjustment is provided...
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Volkswagen Financial Services (UK) Ltd v R & C Commissioners
...the customer to VWFS. Appeal dismissed. Summary This was an appeal against the FTT decision of Volkswagen Financial Services (UK) Ltd [2018] TC 06811 in relation to the resale of vehicles repossessed when finance agreements were terminated early. When a customer wished to purchase a vehicle......