Volkswagen Financial Services (UK) Ltd v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 August 2011 |
| Neutral Citation | [2011] UKFTT 556 (TC) |
| Date | 18 August 2011 |
| Court | First-tier Tribunal (Tax Chamber) |
[2011] UKFTT 556 (TC)
Judge Roger Berner (Chairman); Mrs Elizabeth Bridge (Member)
Nicola Shaw 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 Respondents
The following cases were referred to in the decision:
Abbey National plc v C & E CommrsECASVAT (Case C-408/98) [2001] BVC 581
Banbury Visionplus Ltd v R & C Commrs VAT[2006] BVC 552
BLP Group plc v C & E Commrs ECASVAT(Case C-4/94) [1995] BVC 159
Cibo Participations SA v Directeur régional des impôts du Nord-Pas-de-Calais VAT(Case C-16/00) [2002] BVC 605
C & E Commrs v Midland Bank plc ECASVAT(Case C-98/98) [2000] BVC 229
Kretztechnik AG v Finanzamt Linz ECASVAT(Case C-465/03) [2006] BVC 66
Levob Verzekeringen BV v Staatssecretaris van Financiën ECASVAT(Case C-41/04) [2007] BVC 155
Mayflower Theatre Trust Ltd v R & C Commrs VAT[2007] BVC 190
NCC Construction Danmark A/S v Skatteministeriet ECASVAT(Case C-174/08) [2010] BVC 1,093
R & C Commrs v London Clubs Management Ltd VAT[2010] BVC 1,563
Rompelman v Minister van Financiën ECAS(Case No. 268/83) (1985) 2 BVC 200,157
Skatteverket v AB SKFVAT (Case-29/08) [2011] BVC 359
St Helen's School Northwood Ltd v R & C Commrs VAT[2007] BVC 58
Partial exemption - Special method - Hire purchase transactions - Taxable supplies of goods and exempt supplies of credit - Whether methodology attributing part of residual input tax to taxable supplies of goods fair and reasonable - Whether residual input tax partly a cost component of taxable supplies of goods; - EC Directive 2006/112, the 2006 VAT directive, eu-directive 2006/112 article 167art. 167 to 177; Value Added Tax Regulations 1995 (SI 1995/2518), regs. 101 and 102.
The issue was the determination of a fair and reasonable apportionment of residual input tax on costs incurred in the retail sector of the appellant's business. Specifically, the dispute related to the recovery of residual input tax in respect of hire purchase (HP) transactions involving both a taxable supply of the vehicle being financed and an exempt supply of finance.
In sectors of the appellant's business other than the retail sector, a partial exemption special method operated, with effect from 1 October 2007, to apportion residual input tax on the basis of the value of taxable transactions in the sector as a proportion of the value of total transactions. However, no agreement could be reached on an appropriate formula for the retail sector. The issue was postponed, pending resolution, by providing in the partial exemption method that residual input tax was to be deductible in respect of the retail sector "to the extent that it is incurred on goods or services which are used to make taxable supplies, expressed as a proportion of the whole use or intended use". An assessment was issued by the commissioners in the sum of £498,866 for periods 10/07 to 3/08, which was the subject of this appeal.
The appellant's preferred methodology in achieving the required input tax apportionment was to quantify the ratio of taxable transactions to total transactions, counting every HP agreement as two transactions (one taxable and one exempt), every leasing transaction as two transactions (both taxable) and every fixed price service and maintenance contract as one taxable transaction. This produced deductible input tax of 50% of the residual input tax on HP transactions. The commissioners rejected the appellant's proposal on the grounds that it was contrary to their published policy and to fundamental principles of VAT law. Their preferred method was to allocate input tax between HP transactions, leasing transactions and service and maintenance contracts on a "contracts count" basis and then to apportion the residual input tax using the value of taxable and exempt outputs in each sub-sector. In relation to HP transactions, however, no account was to be taken of the value of the vehicle, which substantially eliminated the taxable value of the transactions and resulted in most of the residual input tax apportioned to those transactions being irrecoverable.
The commissioners submitted that the issue was whether the methodology put forward by the appellant was fair and reasonable. They argued that the input tax incurred in making the HP transaction should either be passed on to the consumer as part of the supply of the vehicle, in respect of which value the appellant had a liability to account for output tax, or be consumed by the appellant as the final consumer in making the supply of exempt credit. They further submitted that the appellant's methodology produced a third category of input tax which was incurred in making the supply of goods, which was not passed on to the consumer as part of the value of the supply of goods, but was passed on as part of the value of the supply of exempt credit with, nonetheless, a right to deduct. According to the commissioners, this was illogical and artificial as it assumed that one element of a single transaction comprising two component VAT supplies cross-subsidised the remainder of the same transaction. The appellant submitted that the commissioners' logic was based on the fallacious argument that an input must be a cost component of the price of an onward taxable transaction before it can be recovered.
Held, allowing the company's appeal:
1.The overhead costs were cost components of each of the supplies that made up the transactions, so that the individual supplies comprised in the HP transactions must be recognised in order to allow recovery to the extent that a cost component of the whole transaction could be regarded as a cost component of a taxable supply. Any method that had the effect of treating the overhead costs as solely cost components of a particular element of the transactions to the exclusion of another element could not be fair and reasonable.
2.It would not be consistent with the principle of fiscal neutrality for a trader who had incurred costs in making taxable supplies not to be able to deduct the referable input tax merely because the price charged for those taxable supplies did not reflect, or wholly reflect, that input tax, or because the trader had chosen to recover such costs through other pricing means. It was not a breach of that principle for a methodology that attributed residual input tax on overhead costs to both the taxable and exempt supply components of the HP transactions to be regarded as fair and reasonable.
3.In considering a fair and reasonable method of attributing the input tax referable to overheads, the consequence of the appellant being in a continuing repayment position should not compel the exclusion of the taxable supply of the vehicle from the equation, when the proper analysis was that input tax on overhead costs was a cost component of the HP transactions and therefore, in part, a cost component of the taxable supply.
4.A partial exemption special method that provided for the partial attribution of the residual input tax incurred by the appellant to the taxable supplies of vehicles that it made under the HP transactions was fair and reasonable, whereas one that did not so provide was not fair and reasonable.
1.Volkswagen Financial Services (UK) Limited ("VWFS") appeals against an assessment to VAT in the sum of £498,866 for periods 10/07 to 3/08 issued by HMRC on 16 June 2008 and a decision letter dated 30 September 2008 by which, upon reconsideration of the assessment, HMRC upheld it.
2.The dispute between the parties concerns what is a fair and reasonable apportionment of residual input tax on costs incurred by VWFS in a particular sector of its business, the Retail sector, which is one of a number of sectors included in VWFS's approved partial exemption special method ("PESM"). Specifically, the dispute relates to the recovery of residual input tax in respect of hire purchase transactions which, it is accepted, involve both a taxable supply of the vehicle being financed, and an exempt supply of finance.
3.Whereas in relation to sectors of VWFS's business other than Retail the PESM operated in respect of residual input tax according to a formula taking the value of taxable transactions made by a particular sector in the relevant period as a proportion of the value of total transactions, no agreement could be reached on an appropriate formula for Retail. Instead, the issue was effectively postponed, to be subject to resolution of the dispute, by providing in the PESM that residual input tax was to be recoverable for the Retail sector:
to the extent that it is incurred on goods or services which are used to make taxable supplies, expressed as a proportion of the whole use or intended use.
4.This formulation does not of course answer the question how the proportion of use is to be ascertained. The parties put forward different methodologies for the Retail sector, which each claims is fair and reasonable. VWFS's preferred methodology is to quantify the ratio of taxable transactions to total transactions, counting every HP agreement as two transactions (one taxable, one exempt), every leasing transaction as two transactions (both taxable) and every fixed price service and maintenance contract as one (taxable) transaction. On this basis, 50% of the residual input tax referable to HP transactions is recoverable.
5.HMRC take a different approach. Their preferred method is to allocate input tax between HP transactions, leasing transactions and service and maintenance contracts on a contracts count basis and then to apportion the tax using the value of taxable and exempt outputs in each sub-sector. In relation to HP transactions, however, no account is taken of the value of the vehicle. This substantially eliminates the taxable value of the HP transactions, and results in most of the residual input tax apportioned to those transactions...
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